03 Nov The Three Most Common Payroll Mistakes Churches Make
Payroll and taxes are usually a confusing topic for businesses who can easily find themselves in trouble with the IRS if payroll taxes are not reported correctly. For churches and places of worship, payroll taxes can be especially tricky due to the dual-tax status of their pastoral staff. There is a widespread misunderstanding among churches and pastors with how ministers, and even non-clergy employees or contractors should be handled for income tax purposes. Below is a list of the three most common mistakes we find churches making in regards to payroll:
Churches treat clergy staff as employees for social security/medicare taxes
It may seem contradictory, but a minister is considered an employee for federal, and if applicable, state income tax purposes, but a minister is also considered self-employed for social security/medicare taxes. Ministers are responsible for making quarterly estimated self-employment (SECA) tax payments.
Churches include the minister’s housing allowance as wages on the form W-2
A minister’s housing allowance (i.e. parsonage or rental allowance) should be excluded from gross income for income tax purposes. Housing allowance is NOT excluded from SECA taxes, and ministers must be careful that they pay the correct taxes related to their housing earnings. Instead of being reported in boxes 1, 3 and 5 of the form W-2, this allowance is normally reported in box 14 as an informational only item.
Churches treat ministers and non-clergy staff as self-employed/1099 contractors to simplify payroll
Churches may believe they can treat ministers and non-clergy staff as self-employed individuals when it comes to compensation, but this is not correct. All people employed by the church should be treated as employees and must receive a form W-2 at the end of the year showing the wages paid by the church.
Sometimes churches want to simplify their payroll process and not bother calculating payroll taxes, so they end up treating all employees as contractors and issuing them a 1099-MISC form. This will cause incorrect income tax returns and will raise the chances of being audited since the IRS will suspect that a church is trying to avoid paying taxes.
For these and other reasons, many churches choose to outsource their payroll so that taxes for their clergy and non-clergy staff are handled properly. Church staff can get easily confused by the rules for dual status taxes, or even misinformed by other churches that have been handling payroll and taxes incorrectly.
We at Payroll Partners have been serving faith based organizations for 24 years and are grateful that one third of our clientele is represented by churches. We have the knowledge and experience to process church payrolls and their tricky taxes correctly. Pay us a visit or call us to get your church compliant today!
Payroll Partners is committed to helping clients stay informed about payroll and human resource news, developments and current events. This article is intended to provide readers with general information on payroll matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular payroll practice. All efforts have been made to assure the accuracy of the information. Payroll Partners does 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 payroll practice. If you are seeking accounting advice, you are encouraged to consult a certified public accountant.