Common Church Payroll Mistakes
Payroll taxes are the most common area in which I see that ministries find themselves in trouble with the Internal Revenue Service. Filing quarterly Form 941 is commonly done by ministry business administrators, but the most common issue I see is that they are filled out incorrectly due to the dual-tax status of some of their pastoral staff. I will try to unpack this complex issue as simply as I can; but just know that it is very confusing and a bit counter intuitive.
In order to be considered a “minister” and be subject to a dual-tax status and subsequently be eligible for some advantages such as housing allowances; a minister is someone who is “ordained, commissioned or licensed”. There are four other factors that tax courts have used to determine the “ministerial status” of a pastor, but the previous was the only condition required to be considered a “minister” for tax reporting purposes.
Ministers are considered employee for income tax purposes so they should be issued a W-2 for their annual compensation; however they are considered self-employed for social security purposes. That is to say that the church – employer is under no obligation to withhold federal taxes or social security from the pay checks of “ministers”. Ministers are required to make quarterly tax payment through the estimated tax reporting process. However in many cases; “ministers” elect to have a voluntary withholding taken out of their pay for federal taxes and additional withholding’s for the self-employment (SE) tax.
Additionally; the church – employer is under no obligation to withhold social security taxes from the pay of a “minister” if he/she meets the requirement described above. The “minister” is required to make social security contributions in a fashion consistent with any other self-employed person.
Make sure to check the box on Part 1 line 4 titled “In no wages, tips and other compensation are subject to social security or Medicare tax” if all payroll reported on the Form 941 are for “clergy”. I have seen ministries be assessed with unpaid tax bills that include penalties and interest even if all reported wages are for “clergy” and not subject to Social Security and Medicare withholding’s when this box is not checked.
I suggest that you contact a tax professional to discuss the accuracy of your quarterly Form 941 filings if you have any doubt about whether or not these forms have been filled out correctly.
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