Payroll can be tricky enough for most administrators, but it can be even harder for church administrators that actually have a lot more factors to consider than that of a regular business.
There are so many questions you might want to ask. How does the IRS categorize a church? Do clergy members count as employees? Does the church have to pay payroll taxes?
Throughout this article, you should have all of the answers to these questions as we break down all the information that you’ll need to know when it comes to taxes and the church.
It’s easy to get confused with this particular topic, especially when you take into consideration that tax for churches is completely different from anything else.
It has its own set of rules that don’t really apply to anything else and since it’s such a specific niche there also isn’t really a bounty of resources that are available to help.
Here are a couple of things you’ll need to be aware of:
- Most religious spaces/places of worship are referred to as a ‘church’ by the IRS. This will include any mosques and synagogues.
- The IRS will decide whether or not you class as a church with a set of 14 points of criteria – it is not necessary to meet all of the 14 points to be deemed a church.
- If the church meets five or more of the criteria from Publication 1828, Section 501 of the IRS code it can be deemed tax-exempt. (unrelated business will still be taxed.)
Does A Church Employee Need To Pay Tax?
Yes. If you work for a church, you should be paying income tax.
Churches are instructed to withhold income taxes from any employee who is not a minister. You should always report their income on a W-2 form just as you would for any employee in a different field of work.
Churches are excused from paying federal unemployment taxes for all of their workers.
If you are a minister, clergy member, or pastor, it can start to get a little more confusing. This is because most ministers tend to have a dual tax status.
This is because their payments qualify them as self-employed in terms of social security but a church employee in terms of their income tax.
Church Employees And FICA
In accordance with the guidance published by the Federal Insurance Contributions Act, churches must pay Medicare and Social Security taxes for non-clergy members, as well as withhold federal income from their wages.
Church Employees And Social Security Taxes
Since most clergy staff are seen as self-employed, the church is not responsible for minister FICA tax responsibilities.
The 7.65% FICA tax won’t be withheld from the minister’s pay, and when filling out their W-2 form, boxes 3-6 should be left blank.
While they may not pay the 7.65% FICA tax, they do still need to pay the 15.63% SECA tax.
If some particular public insurance policies are opposed by the belief of the church, a minister can file a form to the IRS to become exempt from self-employment taxes for their ministerial earnings.
However, once the exemption is granted the decision is irreversible. Once you opt-out there is no way to opt back into the policy.
Church Employees’ Taxes And Housing Allowances
Even a tax professional can get a little confused when it comes to housing allowances. It’s important to note that housing allowances that are a part of a minister’s pay can be excluded from their gross income.
Any housing allowance expenditure needs to be thoroughly outlined before it is actually spent and must all be used within the allotted year time frame.
You cannot claim any more than what was outlined initially at the beginning, even if you end up spending more than that sum.
The amount used to furnish the home and the home’s rental value may potentially be excused from a clergy employee’s gross income.
This will include anything such as utilities, furnishings, and the other accessories of the house. You can deduct any expenses that are related to running and maintaining your house.
A minister must meet the following requirements to qualify for housing allowance:
- A minister must be able to perform sacerdotal functions
- A minister must be regarded as crucial to the prevailing worship experience
- A minister must be acknowledged by a board resolution
- A minister must have written documentation
Church payroll can be very complicated so it’s not hard to see why people struggle to manage their taxes but it’s really important that you do get it right because there can be serious implications if you don’t.
So do churches pay employment taxes? Do employees of the churches pay taxes?
The answer as you should now know by now is yes depending on the employment and duties of the particular person.
This is why it’s really important to have someone on your payroll that understands all the complexities of tax compliance for the church.
The three biggest issues that tend to be found with church tax compliance is :
- The previous payroll partner was unable to document and remove housing allowances for their ministers correctly.
- Inaccurate tax reporting and filing for tax-exempt incomes versus UBITs.
- Difficulties with employee classifications for clergy people vs the rest of the workforce.
So hopefully now throughout this article, you’ve got a little more insight into how churches pay taxes, what exemptions churches have from tax, how much tax they pay, and when these taxes need to be paid.
It can be quite difficult to keep up with all these taxes so if you are part of the hierarchy of the church then it would be in your best interest to make sure that you have someone in charge of payroll.
Especially when you have so much of your own vital role to be getting on with.