Let’s face it. Managing church payroll – and the avalanche of payroll regulations – means you’re under a lot of scrutiny, and you have to get it right.
Each year sixty percent of the church W-2 forms are reported with errors. This is created by the lack of understanding of the reporting requirements of taxable income, how to handle various housing situations, reimbursement and allowance plans, and the elements of clergy compensation.
If payroll and the related taxes are not reported properly or withheld and remitted incorrectly, the IRS can impose severe penalties on the church and the treasurer. Ignorance of the law is not a defense in the eyes of the IRS or the courts.
- Withholding FICA and Medicare taxes on ministers.
- Paying tax-free housing or parsonage allowance to non-ministers.
- Not including fair rental value of employer provided housing as wages for non-ministers.
- Not recording salary reduction 403b contributions or other deductions in box 12. The 403b contributions must be printed in Box 12 of the W-2 with a code of E.
- Not including bonuses, taxable love gifts, wedding fees, etc. as taxable income on the W-2.
- Not including personal expenses of employees (ministerial or lay) which are paid by the church either to or for the employee in the employee’s taxable income on the W-2 and withholding the proper taxes. This may be for car allowances, any reimbursement not under an accountable plan, undocumented reimbursements, personal car payments, personal car gasoline, personal car repairs and maintenance, personal car insurance, personal life insurance, personal quarterly estimated taxes, and social security reimbursements.
- Paying for utilities, lawn care, repairs, etc. for the minister’s house in addition to the minister’s designated housing allowance. If they are not included in the housing allowance, then they essentially become taxable income to be reported on the W-2. If these are covered by the board designated housing allowance, they still must be reported to the minister for inclusion in self-employment income.
Note: For parsonages, if the church pays the utilities, these are deemed to be approved by the church. They must be reported to the minister for his inclusion as self-employment income in computing self-employment tax.
- Not including Group-Term Life Insurance in excess of $50,000 on the W2.
- Treating ministers as self-employed and reporting income on form 1099.
- Not issuing W2 or 1099-Misc. forms.
- Failure to provide Forms 1099-MISC to nonemployee recipients of $600 or more of annual income.
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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