When Christianity Today and Brotherhood Mutual Insurance Company sponsored a webinar featuring Richard Hammar on Prevent Payroll Mistakes: What Churches Need to Know, a record number of church leaders registered for the event. That's likely because payroll taxes present complex and unique challenges for churches.
"It comes as a surprise to some churches that there are many reporting obligations that apply to them," Hammar says. "For instance, churches have to submit an annual corporate report to their Secretary of State office, and sales tax reports to the state. Plus now there are the new hire reporting requirements. Under federal law, if you generate unrelated business income, you're required to report it. But by far, the most important filings churches need to make are the payroll and tax reporting obligations."
Unfortunately, many churches are non-compliant with these filings. Unique circumstances for churches, such as the dual tax status of ministers, lead to common payroll errors.
Complex or not, churches need to master the essentials of handling payroll. Some may opt to outsource this responsibility to services such as Ministry Works. Otherwise, the risk of penalty can be significant if errors occur. For instance, if a church files a W-2 correctly, but it is 30 days late, it can be assessed a $30 fine. Or, failing to correctly report taxable income can result in an automatic excess benefit transaction that could cost a church up to 225 percent of the amount owed.
Another penalty that's hugely significant: the trust fund penalty. Churches incur this penalty when they fail to pay on the payroll taxes they've withheld from their employees. Additionally, the person responsible for making payroll tax filings is also personally liable for any fines, as are board members of the church. Because of this, board members need to know who is in charge of filing payroll taxes and whether they fulfill their duties in a timely manner.
To ensure that churches make correct payroll tax filings, Hammar created the following 10-step checklist:
- obtain EIN from IRS
- determine if workers are employees or self-employed, and obtain SSNs
- have employees complete W-4s
- compute each employee's taxable wages, including:
- Love gifts
- Christmas gifts
- Retirement gifts
- Social Security paid by church
- Personal use of church-owned car
- Nonaccountable reimbursements
- Reimbursement of spouse's travel
- Below-market interest loans
- Taxable fringe benefits
- Refusal to accept full salary
- Debt forgiveness
- Holy Land trips
- Severance pay
- 2 special rules for ministers: (1) self-employed for Social Security, (2) exempt from income tax withholding
- estimated taxes
- "voluntary withholding"
Though each of these steps represents a different set of details to consider, this checklist is a useful tool to help ensure that churches are covering the most critical aspects of payroll tax reporting and filing.
For additional resources on payroll-related issues, check out these resources:
- Setting Wages and Benefits for Church Staff
- Setting a Pastor's Pay
- The 2012-2013 Compensation Handbook for Church Staff
- Church & Clergy Tax Guide
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