Church & Clergy Tax Guide

While churches are exempt from federal income taxes if they satisfy the requirements for exemption in section 501(c)(3) of the tax code, they may be subject to other taxes, including one or more of the following: (1) the employer’s share of Social Security (FICA) taxes payable on the wages of nonminister employees; (2) the tax on unrelated business taxable income; (3) state sales tax; (4) property tax on property that is not used exclusively for exempt purposes; and (5) state unemployment taxes.

In addition, many churches are subject to one or more federal reporting requirements, including the following:

These are not the only reporting requirements that apply to churches and religious organizations. However, the reporting requirements addressed in this chapter represent the most common federal reporting requirements for churches.

Key Point: Federal law requires churches to comply with several payroll tax reporting obligations. Almost every church will be subject to at least some of these rules. Many states have similar provisions.

Key Point: Church leaders must take these rules seriously since penalties are assessed for noncompliance. For example, church officers may be personally liable for a penalty equal to the amount of payroll taxes that are not withheld or deposited. It is essential for church leaders to understand these rules.

Without question, the most significant federal reporting obligation of most churches is the withholding and reporting of employee income taxes and Social Security taxes. These requirements apply, in whole or in part, to almost every church. Yet many churches do not comply with them because of unfamiliarity. This can trigger one or more of the penalties summarized in Table 11-1.

Example The Tax Court affirmed section 6721 penalties (see Table 11-1) on a church that failed to provide the Social Security Administration (SSA) with Forms W-2 for its staff. Pantano Church v. Commissioner, T.C. Summary Opinion 2018-3.

One of the most serious penalties is found in section 6672 of the tax code. This section specifies that “any person required to collect, truthfully account for, and pay over any [income tax or FICA tax] who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable for a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”

Stated simply, this section says that if an employer has failed to collect or pay over income and employment taxes, the trust fund recovery penalty may be asserted against those determined to have been responsible and willful in failing to pay over the tax. Responsibility and willfulness must both be established.

The IRS Internal Revenue Manual (IRM) states that responsibility is a matter of “status, duty, and authority,” that “a determination of responsibility is dependent on the facts and circumstances of each case,” and that “potential responsible persons” include an officer or employee of a corporation, or a corporate director. IRM 5.7.3.4.1 (2015). The IRM further clarifies that a responsible person has: (1) power to direct the act of collecting withheld taxes; (2) accountability for and authority to pay employment taxes; and (3) authority to determine which creditors will or will not be paid. The IRM lists the following “indicators of responsibility”:

To determine whether a person has the status, duty, and authority to ensure that employment taxes are paid, the IRM directs IRS agents to consider “the duties of the officers as set forth in the corporate bylaws as well as the ability of the individual to sign checks.” In addition, agents are instructed to determine the identity of individuals who

Here are a few examples that appear in the IRS Internal Revenue Manual (they are adapted for church use):

Example A church bookkeeper has check-signing authority, and she pays all the bills the treasurer gives her. She is not permitted to pay any other bills, and when there are not sufficient funds in the bank account to pay all the bills, she must ask the treasurer which bills to pay. The bookkeeper should generally not be held responsible for the section 6672 penalty.

Example An employee works as a clerical secretary in the office. She signs checks and tax returns at the direction of and for the convenience of a supervisor. She is directed to pay other vendors, even though payroll taxes are unpaid. The secretary is not a responsible person, because she works under the dominion and control of the owner or a supervisor and is not permitted to exercise independent judgment.

Willful means intentional, deliberate, voluntary, reckless, or knowing, as opposed to accidental. No evil intent or bad motive is required. To show willfulness, the IRS generally must demonstrate that a responsible person was aware or should have been aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. A responsible person’s failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid satisfies the willfulness requirement. IRM 5.7.3.4.2 (2024).

Does the penalty imposed by section 6672 apply to churches and other nonprofit organizations? The answer is yes. Consider the following three points.

IRS Policy Statement 5-14 (IRM 1.2.1.6.3). In Policy Statement 5-14 (part of the Internal Revenue Manual), the IRS states:

In general, non-owner employees of the business entity, who act solely under the dominion and control of others, and who are not in a position to make independent decisions on behalf of the business entity, will not be asserted the trust fund recovery penalty. The penalty shall not be imposed on unpaid, volunteer members of any board of trustees or directors of an organization referred to in section 501 of the Internal Revenue Code to the extent such members are solely serving in an honorary capacity, do not participate in the day-to-day or financial operations of the organization, and/or do not have knowledge of the failure on which such penalty is imposed.

In order to make accurate determinations, all relevant issues should be thoroughly investigated. An individual will not be recommended for assertion if sufficient information is not available to demonstrate he or she was actively involved in the corporation at the time the liability was not being paid. However, this shall not apply if the potentially responsible individual intentionally makes information unavailable to impede the investigation.

This language indicates that the IRS will not assert the 100-percent penalty against uncompensated, volunteer board members of a church who

The courts have recognized that church officers can be liable for the section 6672 penalty. Consider the following four cases:

A nonreligious charity’s president avoided section 6672 liability when the Tax Court found he was not a responsible person. The court examined seven factors: (1) bylaws, (2) bank signatory power, (3) signature on tax returns, (4) paying other creditors over the government, (5) officer/director identity, (6) authority over hiring/firing, and (7) control of financial affairs. Here, the bylaws gave payment authority to the board; the president only co-signed checks and payroll was issued by an outside processor; others authorized creditor payments and HR decisions; he did not sign tax forms; and his bankruptcy signature came after learning of the failures. The IRS also failed to prove willfulness (i.e., paying others knowing taxes were due or reckless disregard). In re Lartz, 2003-2 USTC ¶50,674 (2003); see also Verret v. United States, 2008-1 USTC ¶50,248 (E.D. Tex. 2008).

Congress enacted TBOR2 in 1996. It adds four key limitations to section 6672:

Example Bill serves as the church treasurer. Due to financial difficulties, the pastor uses withheld payroll taxes to pay other debts. The IRS later asserts $25,000 in unpaid payroll taxes; the church cannot pay. The IRS claims Bill and board members are personally liable. Bill is likely a responsible person (authority over day-to-day financial activities) and may be liable; TBOR2 will not protect him. It can protect volunteer board members who are unpaid, honorary only, uninvolved in daily/financial activities, and without actual knowledge.

Example A church board votes to use withheld taxes to pay other debts for three years, failing to deposit $100,000. The IRS asserts personal liability against board members, who cite TBOR2. They are not protected if invoking TBOR2 would eliminate all responsible persons from liability.

Conclusions

The precedent summarized above demonstrates that church officers and directors (and in some cases employees, such as administrators or bookkeepers) can be personally liable for the payment of income taxes and Social Security and Medicare taxes that they fail to withhold, account for, or pay over to the government. It does not matter that they serve without compensation, so long as they satisfy the definition of a “responsible person” and act willfully.

Many church officers and directors (and in some cases employees, such as administrators or bookkeepers) will satisfy the definition of a “responsible person,” and such persons can be personally liable for unpaid payroll taxes if they act under the liberal definition of willfully described above. Clearly, church leaders must be knowledgeable regarding a church’s payroll tax obligations and ensure that these obligations are satisfied.

Key Point: Two special rules apply to ministers under the payroll reporting rules. Unfamiliarity with these two rules has created untold confusion. The first rule is that ministers are always self-employed for Social Security with respect to their ministerial services, so they pay the self-employment tax rather than the employee’s share of Social Security and Medicare taxes (even if they report their federal income taxes as employees). The second rule is that ministers’ compensation is exempt from federal income tax withholding whether ministers report their income taxes as employees or as self-employed.

The application of the payroll reporting rules to ministers has created considerable confusion because of two rather simple rules that are often misunderstood. These two rules are explained below.

The first special rule is that ministers always are self-employed for Social Security purposes with respect to services performed in the exercise of ministry (with the exception of some government-employed chaplains—see “Ministers Not Employed by a Church” on page ). As a result, ministers pay the self-employment tax rather than the employee’s share of Social Security and Medicare taxes—even if they report their federal income taxes as employees. It is incorrect for churches to treat ministers as employees for Social Security and to withhold the employee’s share of Social Security and Medicare taxes from their wages. See Chapter 9 for more details. IRC 3121(b)(8)(A).

Example A Seventh-Day Adventist minister (the “plaintiff”) was employed for several years as a minister of the Greater New York Conference of the Seventh-Day Adventist Church (“GNYC”). During his tenure at the GNYC, it classified him as an employee, issuing him an “employee identification card” and W-2 forms but not withholding FICA contributions on his behalf. In 2017 the plaintiff retired, and the Social Security Administration informed him that he was not eligible for benefits because his employer failed to withhold FICA taxes. He was also ineligible for Medicare benefits. In 2019 the plaintiff sued GNYC and three of its officers in a federal district court in New York, claiming that they were guilty of negligence for failing to withhold FICA taxes from his compensation for the 20 years of his employment. A federal district court dismissed the lawsuit, noting: “Because FICA exempts GNYC from withholding contributions on behalf of a person employed as a pastor, dismissal … is warranted here.” The court acknowledged that employers are required to pay one-half of the FICA taxes (7.65 percent) of its employees but stressed that the tax code “excludes from its definition of employment ‘service performed by … minister of a church in the exercise of his ministry.’” However, the court noted that “employees not covered by FICA are required, under the Self-Employment Contributions Act (SECA), to pay taxes for Social Security and Medicare” (a tax of 15.3 percent times net earnings from self-employment).

To summarize: (1) ministers’ wages from the exercise of ministry are exempt from income tax withholding; (2) ministers pay taxes using the quarterly estimated tax procedure; (3) ministers’ wages from the exercise of ministry are exempt from FICA taxes; and (4) ministers pay self-employment taxes on their net earnings from the exercise of ministry. Therefore, the GNYC was not required to pay the employer’s share of FICA taxes on the plaintiff’s income. The plaintiff was solely responsible to pay self-employment (Social Security) taxes on his ministerial income. Kuma v. Greater N.Y. Conf. of Seventh-Day Adventist Church, 2024 U.S. Dist. LEXIS 156665 (S.D.N.Y. 2020).

The second special rule is that ministers’ compensation is exempt from income tax withholding whether a minister reports his or her income taxes as an employee or as self-employed. While it is true that the tax code requires every employer, including churches and religious organizations, to withhold federal income taxes from employee wages, there are exceptions. One exception is wages paid for “services performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry.” IRC 3401(a)(9). As a result, a church need not withhold income taxes from the salary of a minister who is an employee for income tax reporting purposes. See Chapter 3 for a complete explanation of the term services performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry. Further, since the income tax withholding requirements only apply to the wages of employees, a church should not withhold taxes from the compensation of a minister (or any other worker) who is self-employed.

The IRS maintains that a church and a minister-employee may agree voluntarily that federal income taxes be withheld from the minister’s wages, but this is not required. Some ministers find voluntary withholding attractive because it eliminates the guesswork, quarterly reports, and penalties associated with the estimated tax procedure (which applies automatically if voluntary withholding is not elected).

Use of voluntary withholding may help to avoid underpayment penalties that may apply to ministers and other taxpayers whose estimated tax payments are less than their actual tax liability. See Chapter 1 for more information on the underpayment penalty.

A minister-employee who elects to establish a voluntary withholding arrangement with his or her church need only file a completed Form W-4 (employee’s withholding allowance certificate) with the church. The filing of this form is deemed to be a request for voluntary withholding.

Voluntary withholding arrangements can be terminated unilaterally by either a minister or the church or by mutual consent. Alternatively, a minister can stipulate that the voluntary withholding arrangement will terminate on a specified date. In such a case, the minister must give the church a signed statement setting forth the date on which the voluntary withholding is to terminate, the minister’s name and address, and a statement that he or she wishes to enter into a voluntary withholding arrangement with his or her employer. This statement must be attached to a completed Form W-4. The voluntary withholding arrangement will terminate automatically on the date specified. Either the church or the minister may terminate a voluntary withholding arrangement before a specified or mutually agreed upon termination date by providing a signed notice to the other.

If a church and its minister voluntarily agree that income taxes will be withheld, a minister ordinarily will no longer be subject to the estimated tax requirements with respect to federal income taxes. But what about a minister’s self-employment taxes? Ministers who have not exempted themselves from Social Security coverage are required to pay the self-employment tax (Social Security tax for self-employed persons). Can a church withhold the self-employment tax from a minister-employee’s wages? The answer is yes. IRS Publication 517 (Social Security and Other Information for Members of the Clergy) states that “if you perform your services as a common-law employee of the church and your salary is not subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and [self-employment] tax that may be due” (emphasis added).

A church whose minister has elected voluntary withholding (and who is not exempt from Social Security taxes) withholds an additional amount from each paycheck to cover the minister’s estimated self-employment tax for the year and then reports this additional amount as additional income tax (not FICA tax) withheld on its quarterly 941 forms. The minister should submit an amended Form W-4 to the church, inserting on line 4c an additional amount of income tax to be withheld that will be enough to cover projected self-employment taxes for the year. The excess income tax withheld is a credit against tax that the minister claims on his or her federal income tax return and is applied against the minister’s self-employment tax liability. Further, it is a timely payment of the minister’s self-employment tax obligation, so no penalties for late payment of the quarterly estimates will apply.

A self-employed minister is free to enter into an unofficial withholding arrangement whereby the church withholds a portion of his or her compensation each week and deposits it in a church account, then distributes the balance to the minister in advance of each quarterly estimated tax payment due date. However, note that no Form W-4 should be used to initiate such unofficial withholding arrangements, and none of the withheld taxes should be reported to the IRS on the church’s Forms 941.

Ministers who report their income taxes as self-employed persons should recognize that the use of a Form W-4 will almost guarantee that they will be deemed to be an employee by the IRS. Only ministers who report their income taxes as employees should use a Form W-4 to initiate (or amend) voluntary withholding.

Key Point: The courts have rejected the argument that the application of the payroll tax reporting rules to churches violates the constitutional guaranty of religious freedom.

No withholding exemption exists for nonminister church employees. As a result, churches must be careful to follow the withholding requirements discussed below with respect to any nonminister employees (or to minister-employees who have elected voluntary withholding).

Does the imposition of these requirements upon churches violate the constitutional principle of separation of church and state? Every court that has addressed this question has said no. Consider the following three examples.

A church withheld federal payroll taxes from the wages of its organist, pianist, choir director, janitor, and church clerk. It paid the withheld taxes to the government and then filed a refund claim with the IRS. It cited the following five reasons why it was not legally obligated to withhold payroll taxes from its employees: (1) a church cannot be made a trustee or collection agent of the government against its will; (2) the First Amendment prevents the IRS from requiring churches to withhold taxes from the wages of employees; (3) it was not the intent of Congress to require churches to withhold taxes from the wages of employees; (4) if withholding laws apply to churches, then churches would become “servants” of the federal government in violation of their constitutional right of religious freedom; and (5) church employees are exempt because they qualify for the exemption available to members of religious orders. The IRS rejected the church’s request for a refund, and the church appealed the case to a federal court.

A federal district court in Kansas rejected all the church’s arguments. It noted that the tax code specifies that all wages are subject to withholding, with certain exceptions, and therefore the wages of church employees are subject to withholding unless a specific exception applies. The court concluded that the wages of nonminister church employees are not specifically exempted from the withholding requirements, and therefore a church is legally required to comply with the tax withholding requirements with respect to these employees. Note that the wages of ministers are exempted by law from tax withholding, as noted previously in this chapter, so churches are not required to withhold taxes from the wages of ministers who are being compensated for the performance of ministerial duties. The court also rejected the church’s attempt to bring its employees under the exemption available to members of religious orders.

In rejecting the church’s constitutional arguments, the court observed: “A taxing statute is not contrary to the provisions of the First Amendment unless it directly restricts the free exercise by an individual of his religion. We think it clear that, within the intendment of the First Amendment, the Internal Revenue Code, in imposing the income tax and requiring the filing of returns and the payment of the tax, is not to be considered as restricting an individual’s free exercise of his religion.” A federal court rejected the church’s challenge to the constitutionality of the tax withholding requirements. Eighth Street Baptist Church v. United States, 291 F. Supp. 603 (D. Kan. 1968), aff’d, 431 F.2d 1193 (10th Cir. 1970); see also Bethel Baptist Church v. United States, 822 F.2d 1334 (3rd Cir. 1987) Schultz v. Stark, 554 F. Supp. 1219 (D. Wis. 1983); Goldsboro Christian Schools, Inc. v. United States, 436 F. Supp. 1314 (D.S.C. 1976).

A church stopped filing federal employment tax returns and withholding or paying federal employment taxes for its employees. Church leaders insisted that the government could not regulate an unincorporated “New Testament church.” When IRS attempts to discuss the matter with church leaders failed, the IRS assessed $5.3 million in unpaid taxes and interest. The IRS asked a federal court to enter a judgment for the full $5.3 million and to foreclose on a tax lien the IRS had placed on the church’s property.

The church claimed that the First Amendment guaranty of religious freedom prevented the IRS from applying payroll tax reporting requirements to churches opposed on religious grounds to complying with those requirements and also prohibited the IRS from penalizing noncompliant churches for failing to comply.

The court rejected the church’s position, noting that “neutral laws of general application that burden religious practices do not run afoul” of the First Amendment. Since federal employment tax laws are “neutral laws of general application” (they apply to a large class of employers and do not single out religious employers for less favorable treatment), they do not violate the First Amendment.

This case demonstrates that any attempt by a church to avoid compliance with federal payroll tax obligations (including the withholding and payment of income taxes and Social Security taxes) on the basis of the First Amendment will be summarily rejected by the civil courts. Indianapolis Baptist Temple v. United States, 224 F.3d 627 (7th Cir. 2000).

The founder of a parachurch ministry was charged in a 58-count indictment for willfully failing to withhold and deposit federal income taxes and FICA taxes for employees of his ministry, structuring cash withdrawals to avoid financial reporting requirements, and obstructing the administration of tax laws. He was convicted on all charges and received a prison sentence of 10 years. The court also ordered a forfeiture of all property attributable to the reporting crimes.

On appeal, the founder insisted that he had not willfully failed to withhold or pay federal payroll taxes since he did not know of the specific statutes that required him to collect and pay withholding taxes.

A federal appeals court rejected this argument and affirmed his conviction. The court observed that a conviction for willfully failing to collect or withhold payroll taxes only requires that the defendant knew of the “duty purportedly imposed by the tax laws, not that he knew which specific provision created that duty. When a defendant knows of facts constituting an offense, he has acted with the requisite willfulness to violate the law.” The court concluded:

The government proved that [the founder] knew the tax laws required the collection and payment of withholding taxes, but he refused to comply. Employees of [his parachurch ministry] testified that he disputed the authority of the Internal Revenue Service based on the separation of the church and state, debated the interpretation and application of the withholding requirements, and intentionally characterized [his ministry] as a “church” and his employees as “missionaries” to avoid tax obligations. He had opined to [an attorney] that he was “smarter” than other church officials who had forfeited property after they refused to collect or pay withholding taxes. Although he argued at trial that he was ignorant of the law and the Internal Revenue Service failed to identify a law that required him to collect and pay withholding taxes, the jury was entitled to find that he knew about and deliberately violated the tax laws.

In summary, the wages of nonminister church employees are subject to withholding. This obligation cannot be avoided by labeling a church employee an independent contractor or self-employed unless the person clearly fails the IRS common-law employee test (explained in Chapter 2).

Church secretaries, teachers, choir directors, preschool workers, business managers, and custodians almost always will satisfy the common-law employee test and therefore will be employees of the church despite a church’s characterization of the person as self-employed.

If a church concludes that a particular worker is self-employed, it should issue the person a Form 1099-NEC rather than a Form W-2 at year end (assuming the person has received church compensation of at least $600 for the year).

Churches should be careful in characterizing any worker as self-employed, since section 3509 of the tax code imposes a penalty on any employer that fails to withhold income taxes or Social Security taxes from the wages of a worker deemed to be self-employed but whom the IRS reclassifies as an employee.

Church compliance with the payroll tax reporting rules can be understood with the following 10 simple steps. Keep in mind that all 10 steps will not apply to every church. All (or most) of the 10 steps apply only if a church has nonminister employees to whom it pays wages or if its minister reports income taxes as an employee and has elected voluntary withholding. Smaller churches with no nonminister employees will only be subject to a few of these steps. But regardless of a church’s size, its payroll tax reporting obligations will be described by some or all of the following 10 steps. These 10 steps are illustrated in comprehensive examples at the end of this chapter.

This number must be listed on some of the returns listed below and is used to reconcile a church’s deposits of withheld taxes with the Forms W-2 it issues to employees. The EIN is a nine-digit number that looks like this: 00-0246810.

Key Point: The employer identification number is not a “tax exemption number” and has no relation to a church’s nonprofit corporation status. It merely identifies an employer subject to tax withholding and reporting and ensures that the employer receives credit for payments of withheld taxes. You can obtain an EIN by submitting a Form SS-4 to the IRS.

Key Point: Taxpayers can request an Employer Identification Number (EIN) through a web-based system that instantly processes requests and generates identification numbers in real time. Here’s how it works: A taxpayer accesses the Internet EIN system through the IRS website (IRS.gov) and enters the required information. If the information passes the automatic validity checks, the IRS issues a permanent EIN to the taxpayer. An EIN assigned through Internet submission is immediately recognized by IRS systems.

The IRS Tax Guide for Churches and Religious Organizations contains the following statement about employer identification numbers:

Every tax-exempt organization, including a church, should have an Employer Identification Number (EIN), whether or not the organization has any employees. There are many instances in which an EIN is necessary. For example, a church needs an EIN when it opens a bank account, in order to be listed as a subordinate in a group ruling, or if it files returns with the IRS (e.g., Forms W-2, 1099, 990-T). An organization may obtain an EIN by filing Form SS-4, Application for Employer Identification Number, in accordance with the instructions.

Many pastors and church treasurers think their church has a special “tax exemption number” confirming that it is exempt from federal income tax. This is not the case. While in some states churches have a “tax exemption number” for sales taxes, no corresponding number is issued by the IRS. The IRS Tax Guide for Churches and Religious Organizations notes that “the IRS does not assign a special number or other identification as evidence of an organization’s exempt status.”

In some cases, it is difficult to determine whether a worker is an employee or self-employed. If in doubt, churches should treat a worker as an employee since penalties can be assessed against an employer for treating a worker as self-employed who is later reclassified as an employee by the IRS. The IRS and the courts have developed various tests to assist in classifying a worker as an employee or self-employed. These are explained in Chapter 2.

Key Point: Congress has established important limitations on the authority of the IRS to assess penalties against employers for misclassifying workers as self-employed. These are discussed under “Section 530” on page of this chapter.

After classifying a worker as an employee or self-employed, obtain the worker’s Social Security number. A worker who does not have a Social Security number can obtain one by filing Form SS-5 (available from the Social Security Administration website, SSA.gov). If a self-employed worker performs services for your church (and earns at least $600 for the year) but fails to provide you with a correct Social Security number, the church is required by law to withhold a portion of the worker’s compensation as backup withholding. The backup withholding rate is 24 percent of a worker’s compensation.

Key Point: The backup withholding rate is 24 percent of a worker’s compensation.

An employer also must engage in backup withholding if a self-employed worker submits a Social Security number that the IRS later notifies you is incorrect.

A self-employed person can stop backup withholding by providing the church with a correct Social Security number. The church will need the correct number to complete the worker’s Form 1099-NEC (discussed later).

Churches can be penalized if the Social Security number they report on a Form 1099-NEC is incorrect, unless they have exercised “due diligence.” A church will be deemed to have exercised due diligence if it has self-employed persons provide their Social Security numbers using Form W-9. It is a good idea for churches to present self-employed workers (e.g., guest speakers, contract laborers) with a Form W-9 and to “backup withhold” unless the worker returns the form. The church should retain each Form W-9 to demonstrate due diligence.

The backup withholding requirements were designed to ensure that self-employed persons fully report their income. Without backup withholding, self-employed persons can underreport their true income (without detection) by simply refusing to provide their Social Security number to employers. To avoid backup withholding, some self-employed persons may consider providing a false Social Security number. The IRS will discover such a scheme when it receives the Form 1099-NEC containing the false number. At such time the IRS will notify the church to commence backup withholding on any future payments to the individual (until a correct Social Security number is provided).

Two deposit schedules—monthly or semiweekly—are used to determine when you must deposit withheld income tax. These schedules tell you when a deposit is due after a tax liability arises (e.g., you make a payment subject to income tax withholding, including backup withholding). Before the beginning of each calendar year, you must determine which of the two deposit schedules you must use.

For 2025, you are a monthly schedule depositor for Form 945 if the total tax reported on your 2024 Form 945 (line 3) was $50,000 or less. If the total tax reported for 2024 exceeded $50,000, you are a semiweekly schedule depositor.

Key Point: If your backup withholdings for the year are less than $2,500, you are not required to make deposits, and you may enclose a check for the balance with your annual Form 945.

Example A church invites a visiting pastor to conduct services for one week in April 2025 and agrees to pay him $1,000. The visiting pastor declines to disclose his Social Security number. As a result, the church must withhold $240 from his compensation as backup withholding (24 percent of total compensation). If the church accumulates less than $2,500 of backup withholding during the year, it simply encloses a check for the full amount when it files its 2025 Form 945 with the IRS by January 31, 2026.

The IRS made major changes to Form W-4. Be sure you are using a current form.

The amount of taxes a church should withhold from an employee’s wages depends on the amount of the employee’s wages and the information provided on his or her Form W-4. A church must determine the wages of each employee that are subject to withholding and Social Security and Medicare taxes. Wages subject to federal withholding include pay given to an employee for service performed. The pay may be in cash or in other forms. Measure pay that is not in money (such as property) by its fair market value. Wages include a number of items in addition to salary (see Chapter 4 for more details). Some of these items are listed below.

The way employers figure federal income tax withholding has changed to reflect the changes in Form W-4. Employers now use IRS Publication 15-T to figure the amount of federal income tax to withhold from their employees’ wages. Employees no longer request adjustments to their withholding using withholding allowances. Instead, using the new Form W-4, employees will provide employers with amounts to increase or reduce taxes and amounts to increase or decrease the amount of wage income subject to income tax withholding. The computations described in Publication 15-T will allow employers to figure withholding regardless of whether the employee provided a Form W-4 in an earlier year or will provide a new Form W-4 in 2024 or thereafter. Publication 15-T also allows employers to figure withholding based on their payroll system (automated or manual) and withholding method of choice.

Publication 15-T describes five methods for determining the amount of income taxes to be withheld from an employee’s wages in 2024 (the latest year for which forms were available at the time of publication):

Key Point: The IRS is asserting that the new method for computing withheld taxes is simpler. But many employers believe the opposite is true. Fortunately, the IRS is launching an online withholding estimator at IRS.gov/W4App to provide employees with the most accurate withholding method.

See IRS Publication 15-T for more information.

Churches and their nonminister employees are subject to Social Security and Medicare taxes. The combined tax rate is 15.3 percent of each employee’s wages. This rate is paid equally by the employer and employee, with each paying a tax of 7.65 percent of the employee’s wages. Churches must withhold the employee’s share of Social Security and Medicare taxes from the wages of nonminister employees and, in addition, must pay the employer’s share of these taxes. This 7.65-percent rate is comprised of two components: (1) a Medicare hospital insurance (HI) tax of 1.45 percent and (2) an “old-age, survivor, and disability” (Social Security) tax of 6.2 percent.

For 2025, the Medicare tax (the 1.45-percent tax rate) applies to all wages, regardless of amount. The Social Security tax (the 6.2-percent tax rate) applies to wages up to $176,100.

The church must withhold the employee’s share of Social Security and Medicare taxes from each wage payment. Simply multiply each wage payment by the applicable percentage above. Special tables in IRS Publication 15 help in making this computation. Wages of less than $108.28 per year paid to a church employee are exempt from Social Security and Medicare taxes.

The employee portion of the Medicare (HI) tax is increased by an additional tax of 0.9 percent on wages received in excess of the threshold amount (the “Additional Medicare Tax”). However, unlike the general 1.45-percent HI tax on wages, this additional tax is on the combined wages of the employee and the employee’s spouse in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

Key Point: The $125,000, $200,000, and $250,000 threshold amounts are not adjusted for inflation.

However, in determining the employer’s requirement to withhold and liability for the tax, only wages the employee receives from the employer in excess of $200,000 for a year are taken into account, and the employer must disregard the amount of wages received by the employee’s spouse. As a result, the employer is only required to withhold on wages in excess of $200,000 for the year, even though the tax may apply to a portion of the employee’s wages at or below $200,000, if the employee’s spouse also has wages for the year, they are filing a joint return, and their total combined wages for the year exceed $250,000.

EXAMPLE In 2025 a pastor earns $100,000 in church compensation. His wife, a physician, earns $200,000. The combined income of the husband and wife exceeds the threshold amount of $250,000, so they are liable for an additional Medicare tax of 0.9 percent times compensation above $250,000. However, neither spouse’s employer is required to withhold any portion of this additional tax from their wages, even though the combined wages of the taxpayer and the taxpayer’s spouse are over the $250,000 threshold, since neither earned compensation of more than $200,000.

The employee is also liable for this additional 0.9-percent HI tax to the extent the tax is not withheld by the employer. The amount of this tax not withheld by an employer must also be taken into account in determining a taxpayer’s liability for estimated tax. This same additional HI tax (0.9 percent) applies to the HI portion of SECA tax on self-employment income above the threshold amount. As in the case of the additional HI tax on employee wages, the threshold amount for the additional SECA HI tax is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case. The threshold amount is reduced (but not below zero) by the amount of wages taken into account in determining the FICA tax with respect to the taxpayer. No deduction is allowed for the additional SECA tax, and the deduction under 1402(a)(12) is determined without regard to the additional SECA tax rate.

Deposit withheld income taxes and employee’s share of Social Security and Medicare taxes, along with the employer’s share of Social Security and Medicare taxes, by electronic funds transfer using the Electronic Federal Tax Payment System (EFTPS.) If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make deposits on your behalf.

You may make a payment of payroll taxes with Form 941 instead of depositing them if you accumulate less than a $2,500 tax liability during the quarter (line 10 of Form 941) and you pay in full with a timely filed Form 941. However, if you are unsure that you will accumulate less than $2,500, deposit under the appropriate rules so you will not be subject to penalties for failure to deposit.

Tip: As noted above, under Step 2, separate deposits are required for backup withholdings. Do not combine deposits for Forms 941 and 945 tax liabilities.

Two deposit schedules (monthly or semiweekly) are used by most churches to determine when to deposit Social Security, Medicare, and withheld income taxes. These schedules tell you when a deposit is due after a tax liability arises (e.g., when you have a payday). Prior to the beginning of each calendar year, you must determine which of the two deposit schedules you are required to use. The deposit schedule you must use is based on the total tax liability you reported on Form 941 during a four-quarter “lookback period,” discussed below. Your deposit schedule is not determined by how often you pay your employees or make deposits.

Lookback period. Your deposit schedule for a calendar year is determined from the total taxes reported on your Forms 941 (line 10) in a four-quarter lookback period. The lookback period begins July 1 of the second preceding year and ends June 30 of the previous year. If you reported $50,000 or less of taxes for the lookback period, you are a monthly schedule depositor; if you reported more than $50,000, you are a semiweekly schedule depositor.

Monthly deposit schedule. You are a monthly schedule depositor for a calendar year if the total taxes on Form 941 (line 10) for the four quarters in your lookback period were $50,000 or less. Under the monthly deposit schedule, deposit Form 941 taxes on payments made during a month by the 15th day of the following month. Monthly schedule depositors should not file Form 941 on a monthly basis.

Semiweekly deposit schedule. You are a semiweekly schedule depositor for a calendar year if the total taxes on Form 941 (line 10) during your lookback period were more than $50,000. Under the semiweekly deposit schedule, deposit Form 941 taxes on payments made on Wednesday, Thursday, and Friday by the following Wednesday. Deposit amounts accumulated on payments made on Saturday, Sunday, Monday, and Tuesday by the following Friday.

Tip: If a deposit is required to be made on a day that is not a banking day, the deposit is considered timely if it is made by the close of the next banking day. In addition to federal and state bank holidays, Saturdays and Sundays are treated as nonbanking days. For example, if a deposit is required to be made on a Friday and Friday is not a banking day, the deposit will be considered timely if it is made by the following Monday (if that Monday is a banking day).

Tip: The terms monthly schedule depositor and semiweekly schedule depositor do not refer to how often your business pays its employees or even how often you are required to make deposits. The terms identify which set of deposit rules you must follow when an employment tax liability arises. The deposit rules are based on the dates wages are paid, not on when tax liabilities are accrued.

You must make electronic deposits of all depository taxes (such as employment taxes) using the Electronic Federal Tax Payment System (EFTPS). If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make deposits on your behalf.

Penalties may apply if you do not make required deposits on time, if you make deposits for less than the required amount, or if you do not use EFTPS when required. The penalties do not apply if any failure to make a proper and timely deposit was due to reasonable cause and not to willful neglect. For amounts not properly or timely deposited, the penalty rates are:

You are required to deposit 100 percent of your tax liability on or before the deposit due date. However, penalties will not be applied for depositing less than 100 percent if both of the following conditions are met:

Form 941 reports the number of employees and amount of Social Security and Medicare taxes and withheld income taxes that are payable. Form 941 contains a box on line 4 that is checked if wages and other compensation are not subject to Social Security or Medicare tax. This box should be checked if your church filed a timely Form 8274 with the IRS exempting itself from the employer’s share of Social Security and Medicare taxes. See “Social Security Taxes” on page for more information.

Form 941 is due on the last day of the month following the end of each calendar quarter, as shown in the following table:

Tip: The Form 941 e-file program allows a taxpayer to electronically file Form 941 using a personal computer, modem, and commercial tax preparation software. See the IRS website (IRS.gov) for more information.

Tip: You can call the IRS toll free at 1-800-829-4933 for answers to your questions about completing Form 941, tax deposit rules, or obtaining an EIN.

The wages of ministers who report their income taxes as employees are reported on line 2 along with the wages of nonminister employees. Do not include a minister’s housing allowance on this line, since it will not be reported on the Form W-2 issued to the minister. However, ministers’ wages are exempt from tax withholding, so no amount will be entered on line 3 with respect to minister employees unless they have elected voluntary tax withholding.

Ministers are deemed to be self-employed for Social Security with respect to services performed in the exercise of ministry, so they do not pay the employee’s share of Social Security or Medicare taxes, and their employing church does not pay the employer’s share of these taxes. Instead, ministers pay the self-employment tax. As a result, no amount is entered on lines 5a through 5d for ministers.

Some smaller churches have only one employee (a minister). They also may have another worker, such as a part-time custodian, who is self-employed for tax reporting purposes. Are these churches required to file a Form 941? Consider the following:

IRS regulation 31.6011(a)-4(a)(1) states: “Every person required to make a return of income tax withheld from wages pursuant to section 3402 shall make a return for the first calendar quarter in which the person is required to deduct and withhold such tax and for each subsequent calendar quarter, whether or not wages are paid therein, until the person has filed a final return.” According to this regulation, only those employers that are required to withhold income taxes from the wages of employees pursuant to section 3402 of the tax code are required to file a Form 941. Section 3401(a)(9) states that employee wages subject to income tax withholding do not include compensation paid for “services performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties required by such order.” As a result, the wages of a minister are not subject to income tax withholding; therefore, according to the above-quoted regulation, the minister’s employing church is not required to file a Form 941 if the minister is the only employee.

If the church employs nonminister employees, it will have to file Forms 941 since the wages of these employees would be subject to income tax withholding. The same would be true if a church has only one employee, its minister, who has elected voluntary income tax withholding.

Similarly, the instructions for IRS Form 941 state: “File your initial Form 941 for the quarter in which you first paid wages that are subject to Social Security and Medicare taxes or subject to federal income tax withholding.” Since a church with only one employee (its minister) does not pay wages subject to Social Security or Medicare taxes or to income tax withholding, it is not required to file Form 941.

Form 944 (Employer’s Annual Federal Tax Return) is designed so the smallest employers (those whose annual liability for Social Security, Medicare, and withheld federal income taxes is $1,000 or less) will file and pay these taxes only once a year instead of every quarter using Form 941.

In general, if the IRS has notified you to file Form 944, you must file Form 944 to report all of the following amounts: (1) wages you have paid; (2) federal income tax you withheld; (3) both the employer’s and the employee’s share of Social Security and Medicare taxes; and (4) advance earned income tax credit (EIC) payments. You must file a Form 944 for each year, even if you have no taxes to report (or you have taxes in excess of $1,000 to report), unless the IRS notifies you that your filing requirement has been changed to Form 941.

If you believe you are eligible to file Form 944 but the IRS did not notify you, call the IRS at 1-800-829-4933 to determine whether you can file Form 944. If you contact the IRS and the IRS determines you are eligible to file Form 944, it will send you a written notice that your filing requirement has been changed.

File Form 944 for 2024 by January 31, 2025. If you made deposits in full payment of your taxes for the year by January 31, you have until February 10 to file the return.

After you file your first Form 944, you must file Form 944 for every year after that, even if you have no taxes to report, or until the IRS notifies you to file Form 941.

File Form 944 only once for each calendar year. If you filed Form 944 electronically, do not also file a paper Form 944.

The IRS matches amounts reported on Form 944 with Form W-2 amounts totaled on Form W-3 (Transmittal of Wage and Tax Statements). If the amounts do not agree, the IRS may contact you.

If your liability for Social Security, Medicare, and withheld federal income taxes is less than $2,500 for the year, you can pay the taxes with your return if you file on time. You do not have to deposit the taxes. However, you may choose to make deposits of these taxes even if your liability is less than $2,500.

Form 944 filers whose payroll grows during the year may be required to make federal tax deposits, but they will still file Form 944 for the year. If your total tax liability for calendar year 2024 is more than $1,000, the IRS will notify you when to begin filing quarterly Forms 941.

Use Form 941-X to correct errors on a Form 941 that you previously filed. Use Form 941-X to correct:

When you discover an error on a previously filed Form 941, you must:

If you did not file a Form 941 for one or more quarters, do not use Form 941-X. Instead, file Form 941 for each of those quarters. However, if you did not file Forms 941 because you improperly treated workers as independent contractors or nonemployees and are now reclassifying them as employees, see the instructions for line 24 of Form 941-X.

Report the correction of underreported and overreported amounts for the same tax period on a single Form 941-X unless you are requesting a refund or abatement. If you are requesting a refund or abatement and are correcting both underreported and overreported amounts, file one Form 941-X correcting the underreported amounts only and a second Form 941-X correcting the overreported amounts. You will use the adjustment process if you underreported employment taxes and are making a payment or if you overreported employment taxes and will be applying the credit to Form 941 for the period during which you file Form 941-X.

Key Point: Since the Form 941-X is a stand-alone form, the employer will be able to file Form 941-X when an error is discovered rather than having to wait to file it at the end of the quarter with the next employment tax return.

Tip: Form 941-X is used to make adjustments and claim refunds. If an employer is correcting an overpayment for a Form 941, the employer will be able to either make an adjustment or claim a refund. If an adjustment is made, the amount of the overpayment will be applied as a credit to the quarter in which the Form 941-X is filed. Employers correcting underpayments of employment taxes that result in a balance due can pay using EFTPS, by credit or debit card, or by sending a check or money order along with Form 941-X. The IRS will make both the tax and wage corrections to the actual tax period being corrected, resulting in a more accurate record.

By January 31, 2025, churches must furnish copies B, C, and 2 of Form W-2 (Wage and Tax Statement) to each person who was an employee during 2024. This requirement applies to clergy who report their federal income taxes as employees rather than as self-employed, even though they are not subject to mandatory withholding of income, Social Security, and Medicare taxes.

Nonminister church employees must also receive a Form W-2.

Churches must send Copy A of Forms W-2, along with Form W-3, to the Social Security Administration by January 31, 2025. The deadline is the same whether you file electronically or use paper forms.

Key Point: This section discusses the issuance of Forms W-2 for compensation paid in 2024. The 2025 Forms W-2 were not available at the time of publication.

Tip: Be sure to add cents to all amounts. Make all dollar entries without a dollar sign and comma but with a decimal point and cents. For example, $1,000 should read “1000.00.” Government scanning equipment assumes that the last two figures of any amount are cents. If you report $40,000 of income as “40000,” the scanning equipment would interpret this as 400.00 ($400)! If a box does not apply, leave it blank—do not insert “0.”

Tip: If a worker’s employment ends before December 31, you may issue a Form W-2 to the person at any time after the termination of employment up until the due date of the form.

The Taxpayer First Act of 2019 authorized the IRS to issue regulations that reduce the threshold for mandatory electronic filing. Treasury Decision 9972, published February 23, 2023, amended Regulations section 301.6011-2 to change the electronic filing rules for certain information returns, including Forms W-2 and W-2c. The regulations lowered to 10 the threshold at which you must file certain information returns electronically, including Form W-2.

To determine whether you must file information returns electronically, add together the number of information returns and the number of Forms W-2 you must file in a calendar year. If the total is at least 10 returns, you must file them all electronically.

The regulations revise the requirements for electronic filing of Form W-2c to correct an originally filed Form W-2.

Forms W-2c and W-3c have been updated.

The due date for filing the 2024 Form W-2 is January 31, 2025, whether you file using paper forms or electronically.

Beginning with the tax year 2023 forms (filed in tax year 2024), you may complete copies 1, B, C, 2 (if applicable), and D (if applicable) of Form W-2 at IRS.gov and print them to provide to the recipient. An entry made on any one of these copies will automatically populate to the other copies. As before, Copy A cannot be completed online to print and file with the SSA and is posted at IRS.gov for informational purposes only.

The SSA will reject Form W-2 electronic and paper wage reports under the following conditions: (1) Medicare wages and tips are less than the sum of Social Security wages and Social Security tips; (2) the Social Security tax is greater than zero; (3) Social Security wages and Social Security tips are equal to zero; and (4) the Medicare tax is greater than zero. If the above conditions occur in an electronic wage report, an error message will alert the submitter to correct the report. If the above conditions occur in a paper wage report, the SSA will notify the employer by email or postal mail to correct the report and resubmit it to the SSA. Do not write “corrected” or “amended” on any resubmitted reports.

Employers may truncate the employee’s SSN on employee copies of Form W-2. Do not truncate the employee’s SSN on Copy A of Form W-2. To truncate where allowed, replace the first five digits of the nine-digit number with asterisks (*) or Xs (for example, an SSN XXX-XX-1234 would appear on the employee copies as ***-**-1234 or XXX-XX-1234). Truncation of SSNs on employee copies of Form W-2 is voluntary. You are not required to truncate SSNs on employee copies of Form W-2. Check with your state, local, or territorial governments to determine whether you are permitted to truncate SSNs on copies of Form W-2 submitted to the government.

Failure to file correct W-2 forms by the due date can result in a penalty. See the instructions for Form W-2 on the IRS website for details.

Here are some tips that will assist churches in completing W-2 forms.

Key Point: Some churches have more than one EIN (for example, some churches that operate a preschool have a number for the church and a separate number for the preschool). Be sure that the EIN listed on an employee’s Form W-2 is the one associated with the employee’s actual employer. Also, be sure that this box reports the same EIN that appears on the Forms 941 on which the Form W-2 wages and withholdings are reported.

Example: Identify pastor John Doe Jr. as “John Doe,” not “Rev. John Doe Jr.”

Here are some common items of income that are reported in box 1 (see Chapter 4 for additional items):

Caution: Taxable fringe benefits not reported as income in box 1 may constitute an automatic excess benefit transaction exposing the recipient and members of the church board to intermediate sanctions in the form of substantial excise taxes. See “Intermediate sanctions” on page … for details.

Key Point: Churches should not include in box 1 the annual rental value of a parsonage or a housing allowance provided to a minister as compensation for ministerial services.

You must notify employees who have no income tax withheld that they may be able to claim an income tax refund because of the earned income tax credit. You can do this by using a Form W-2 containing the EIC notice on the back of Copy B (all forms provided by the IRS contain this notice).

Report a nonminister employee’s wages subject to Social Security taxes. The amount in this box usually will be the same as the amount in box 1, but not always. For example, certain retirement contributions are included in box 3 that are not included in box 1. To illustrate, contributions to a tax-sheltered annuity may be excludable from income and not reportable in box 1, but they are subject to Social Security taxes, so they represent Social Security wages for nonminister employees and are reported in box 3.

Also include the following in box 3:

Box 3 does not report compensation paid to ministers for services performed in the exercise of ministry, since ministers (including those who report their income taxes as employees, but excluding some chaplains) are considered self-employed for Social Security purposes with respect to such services. They pay the self-employment tax, not the employee’s share of Social Security and Medicare taxes.

Key Point: Box 3 should not list more than the maximum wage base ($168,600 for 2024 and $176,100 for 2025).

Tip: Churches that filed a timely Form 8274 exempting themselves from the employer’s share of FICA taxes do not report the wages of nonminister employees in this box, since these employees are considered self-employed for Social Security purposes. See “A limited exemption” on page …

Report the Social Security tax withheld from a nonminister employee’s wages. This tax is imposed on all wages up to a maximum of $168,600 in 2024. Ministers who report their income taxes as employees remain self-employed for Social Security purposes with respect to their ministerial services. Box 4 is left blank for ministers with respect to compensation received in the exercise of their ministry.

Report a nonminister employee’s wages subject to the Medicare tax (1.45 percent of an employee’s wages). Note that there is no limit on the amount of wages subject to this tax. For most workers (earning less than $168,600 in 2024), boxes 3 and 5 should show the same amount. Box 5 is left blank for ministers with respect to compensation received in the exercise of ministry.

Report Medicare taxes (1.45 percent of an employee’s wages) that you withheld from the nonminister employee’s wages in 2024. Box 6 is left blank for ministers with respect to ministerial compensation.

The purpose of box 11 is for the Social Security Administration to determine whether any part of the amount reported in box 1 or boxes 3 and 5 was earned in a prior year. The SSA uses this information to verify that they have properly applied the Social Security earnings test and paid the correct amount of benefits.

Report distributions to an employee from a nonqualified plan in box 11. Also report these distributions in box 1. Under nonqualified plans, deferred amounts that are no longer subject to a substantial risk of forfeiture are taxable even if not distributed. Report these amounts in boxes 3 (up to the Social Security wage base) and 5. Do not report in box 11 deferrals included in boxes 3 and 5 or deferrals for current-year services (such as those with no risk of forfeiture).

Complete and code this box for all items described below. Do not report in box 12 any items that are not listed as codes A through HH. On Copy A (Form W-2), do not enter more than four items in box 12. If more than four items need to be reported in box 12, use a separate Form W-2 to report the additional items, but enter no more than four items on each Copy A (Form W-2). On all other copies of Form W-2 (copies B, C, etc.), you may enter more than four items in box 12.

Use the IRS code designated below for the item you are entering, followed by the dollar amount for that item. Even if only one item is entered, you must use the IRS code designated for that item. Enter the code using a capital letter. Leave at least one space blank after the code, and enter the dollar amount on the same line. Use decimal points but not dollar signs or commas. For example, if you are reporting $5,300.00 in elective deferrals to a section 403(b) plan, the entry would be “E 5300.00.” Report the IRS code to the left of the vertical line in boxes 12a–d and the money amount to the right of the vertical line.

The codes most relevant to churches are the following:

Check the appropriate box:

This box is optional. Churches may use it to provide additional information, such as reporting a church-designated housing allowance for ministers who report income taxes as employees. This is not mandatory.

Use these boxes to report state and local income tax information. Enter the state abbreviation and employer’s state ID number. The boxes can be used to report up to two states and two localities. If more are needed, prepare a second Form W-2. Contact your state or locality for specific reporting instructions.

Key Point: The SSA urges employers to ensure that amounts on Form W-3 correspond with amounts reported on quarterly Forms 941. Incorrect Social Security numbers are the most common reason Forms W-2 are rejected.

Tip: To reduce discrepancies, reconcile Form W-3 with Forms 941 by comparing amounts for (1) income tax withholding (box 2), (2) Social Security and Medicare wages (boxes 3, 5, and 7), and (3) Social Security and Medicare tax withholdings (boxes 4 and 6). The IRS also notes common W-2 errors: using faint ink, small entries, adding dollar signs, and incorrectly checking the “retirement plan” box.

Employers may provide W-2 forms electronically if employees consent. Requirements include:

Key Point: Employers can also submit W-2 forms electronically to the SSA. See SSA.gov for details.

The SSA offers employers two online verification methods:

Reasons to verify online include faster processing, fewer errors, lower costs, and ensuring employees’ earnings are credited correctly for Social Security benefits.

Employees should keep all W-2s until their earnings are confirmed on their Social Security Statement. If earnings are underreported, presenting W-2s to the SSA is the simplest correction method.

Tip: Encourage church employees to retain each Form W-2 until they confirm their earnings appear correctly on their Social Security Statement. Consider including a reminder in church communications.

Employers filing W-2s must file Form W-3 to transmit Copy A to the SSA. Keep a copy of Form W-3 and Copy D of each W-2 for four years. Even if issuing only one W-2, a W-3 must be filed. Form W-3 summarizes all W-2 data for the employer. The 2024 Form W-3 is due January 31, 2025.

By January 31, 2025, churches must provide Copy B of Form 1099-NEC to any self-employed person who received $600 or more in nonemployee compensation in 2024. This includes clergy reporting as self-employed, evangelists, guest speakers, contractors, and part-time custodians. File Copy A of the form with the IRS by the same deadline. Form 1099-NEC (not W-2) must be used for clergy who are self-employed, since issuing a W-2 creates a presumption of employee status.

The income tax regulations specify that “every person engaged in a trade or business” must issue a Form 1099-NEC for each calendar year with respect to payments of $600 or more made in the course of business to a self-employed person. For churches, this means a Form 1099-NEC must be issued if the following conditions are met:

Key Point: The regulations clarify that the definition of “trade or business” includes nonprofit organizations such as churches. Therefore, churches must issue Form 1099-NEC when the other requirements are satisfied, subject to exceptions discussed below.

Churches must issue a Form 1099-NEC to any self-employed individual paid $600 or more in a year, including:

Noncash compensation is also reportable. For example, if a church pays a self-employed minister with property (such as a car), the fair market value of the property must be reported on Form 1099-NEC.

Payments for services that include incidental materials are reportable. For example, if a repair invoice includes both labor and parts, the full amount is reported as nonemployee compensation.

Churches need not issue Form 1099-NEC unless the total annual compensation to an individual is $600 or more, not counting accountable reimbursements. Examples:

Churches generally do not issue Form 1099-NEC for benevolence distributions, even when $600 or more is provided. As long as the payments are legitimate charitable assistance consistent with the church’s exempt purposes, they are not treated as compensation for services.

Form 1099-NEC requires the church (payer) to list its name, address (no P.O. boxes), and EIN, along with the recipient’s name, address, and SSN or TIN. The key boxes are:

Backup withholding (24 percent in 2025) must be applied if:

Backup withholding must be reported on Form 945. Additionally, a Form 1099-NEC must be filed for anyone subject to backup withholding, regardless of total payment amount.

Tip: Always obtain a completed Form W-9 from self-employed workers to avoid backup withholding and demonstrate compliance.

If you issue a Form 1099-NEC with incorrect information, you should issue a corrected Form 1099-NEC. See the instructions for IRS Forms 1099.

Payments to section 530 employees should be reported as nonemployee compensation in box 1. Section 530 employees are defined later in this chapter.

Key Point: What are the 10 most common payroll tax reporting errors made by churches? See Table 11-3.

Key Point: The Taxpayer Bill of Rights 2 contains a number of provisions pertaining to payroll reporting requirements.

In 1996 Congress enacted a second Taxpayer Bill of Rights (TBOR2) that contains a number of provisions pertaining to payroll reporting requirements. Two of these provisions are summarized below.

TBOR2 permits employers who issue fraudulent Forms 1099-NEC or W-2 to be sued by the person who receives them. Damages are the greater of $5,000 or actual damages plus attorney’s fees. A committee report noted concern about frivolous lawsuits, and Rule 11 of the Federal Rules of Civil Procedure applies to actions brought under this section.

Example: A church loans $15,000 to Pastor B, who later leaves owing $14,000. When he does not repay, the church issues a Form W-2 reporting the unpaid note as income. Pastor B threatens to sue for damages under TBOR2, but he has no recourse since the Form W-2 was not fraudulent. If he sues, he risks sanctions for a frivolous lawsuit.

TBOR2 provides that in any court proceeding, if a taxpayer disputes income reported on a Form 1099-NEC or W-2 and has fully cooperated with the IRS, the government must prove the deficiency beyond the information return itself. Cooperation includes raising the dispute promptly and providing access to information and documents requested by the IRS.

Example: A church employee disputes income reported on a Form W-2. Under TBOR2, if she fully cooperated with the IRS, the government bears the burden of proof in court and cannot rely solely on the Form W-2.

In the 1960s, the IRS began challenging employers’ classification of workers as self-employed. In response, Congress enacted Section 530 of the Revenue Act of 1978, providing relief to employers if they meet three conditions:

If these conditions are not met, the IRS will determine worker status and assess employment taxes if necessary.

Key Point: Section 530 relieves employers of penalties that might apply for treating certain workers as independent contractors. However, it does not apply to the workers’ personal tax reporting. For example, a church may use Section 530 to avoid penalties, but workers cannot use it to defend self-employed status when reporting their own federal taxes.

A congressional report explaining section 530, and which is an authoritative guide to its meaning, states that section 530 is to be “construed liberally in favor of taxpayers.” Remember that the purpose of section 530 was to protect employers from zealous attempts by the IRS to reclassify millions of workers as employees, thereby subjecting employers to substantial penalties for incorrectly treating workers as self-employed.

Key Point: The IRS audit guidelines for ministers (updated in 2009) specify that section 530 does not apply to ministers, “since they are statutorily exempt from FICA and are subject to SECA.”

The Voluntary Classification Settlement Program (VCSP) is a voluntary program that provides an opportunity for employers to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To participate in this program, an employer must meet certain eligibility requirements, apply to participate in the VCSP by filing Form 8952 (Application for Voluntary Classification Settlement Program), and enter into a closing agreement with the IRS.

The VCSP is available for employers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees.

The employer must have consistently treated the workers as nonemployees and must have filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years to participate in the VCSP.

Exempt organizations may participate in the VCSP if they meet all of the eligibility requirements.

An employer participating in the VCSP will agree to prospectively treat the class or classes of workers as employees for future tax periods. In exchange, the employer:

To participate in the VCSP, an employer must apply using Form 8952 (Application for Voluntary Classification Settlement Program). The application should be filed at least 60 days from the date the employer wants to begin treating its workers as employees. See the IRS website (IRS.gov) for details.

Congress has imposed special limitations, found in section 7611 of the tax code, on how and when the IRS may conduct civil tax inquiries and examinations of churches. The IRS may only initiate a church tax inquiry if an appropriate high-level Treasury Department official reasonably believes, based on a written statement of the facts and circumstances, that the organization (a) may not qualify for the exemption or (b) may not be paying tax on an unrelated business or other taxable activity.

Restrictions on church inquiries and examinations apply only to churches and conventions or associations of churches. They don’t apply to related persons or organizations. Thus, for example, the rules don’t apply to schools that, although operated by a church, are organized as separate legal entities. Similarly, the rules don’t apply to integrated auxiliaries of a church.

Restrictions on church inquiries and examinations do not apply to all church inquiries by the IRS. The most common exception relates to routine requests for information. For example, IRS requests for information from churches about the filing of returns, compliance with income or Social Security and Medicare tax withholding requirements, supplemental information needed to process returns or applications, and other similar inquiries are not covered by the special church audit rules.

Restrictions on church inquiries and examinations don’t apply to criminal investigations or to investigations of the tax liability of any person connected with the church, such as a contributor or minister.

The procedures of section 7611 are used in initiating and conducting any inquiry or examination into whether an excess benefit transaction (as that term is used in IRC Section 4958) has occurred between a church and an insider.

Key Point: For more information on the Church Audit Procedures Act, see “The Church Audit Procedures Act” on page .

There are additional safeguards for the protection of churches under section 7611. For example, the IRS can’t begin a subsequent examination of a church for a five-year period unless the previous examination resulted in a revocation, notice of deficiency or assessment, or a request for a significant change in church operations, including a significant change in accounting practices.

In the past, the IRS did not apply the protections of section 7611 to employment tax inquiries in which the IRS sought to determine a church’s compliance with payroll tax reporting requirements. For many years, the IRS Internal Revenue Manual specified: “Section 7611 procedures do not apply to employment tax inquiries.”

However, in 2018 the IRS amended the Internal Revenue Manual with the insertion of the following new section 4.23.2.2.3.2 (2018): “IRC 7611 provides guidelines and a procedural framework for certain examinations of churches. IRC 7611 procedures apply to employment tax inquiries. Examiners should not initiate any examinations on a church. If for some reason an employment tax examiner encounters a church employment tax issue, the examiner should immediately contact TE/GE Exempt Organizations Examinations using SRS [Specialist Referral System]” (emphasis added).

The amendment is effective immediately and has been added to the Internal Revenue Manual.

Key Point: Federal law allowed churches that had nonminister employees as of July 1984 to exempt themselves from the employer’s share of Social Security and Medicare taxes by filing a Form 8274 with the IRS by October 30, 1984. Many churches did so. The effect of such an exemption is to treat all nonminister church employees as self-employed for Social Security purposes. Such employees must pay the self-employment tax (just like ministers).

Key Point: Many churches pay some or all of a minister’s self-employment taxes. The amount paid by a church represents taxable income to the minister and should be so reported.

Since the beginning of the Social Security program in 1937, the employees of churches and most other nonprofit organizations were exempted from mandatory coverage. The exemption was designed to encourage nonprofit organizations by freeing them from an additional tax burden that they ordinarily could not pass along to customers through price increases. Churches and other nonprofit organizations were permitted to waive their exemption by filing Forms SS-15 and SS-15a with the IRS.

In 1983 Congress repealed the exemption beginning in 1984. The repeal was criticized by some church leaders who viewed it as a “tax” on churches, in violation of the constitutional principle of separation of church and state.

In 1984 Congress responded to this criticism by again amending the Social Security Act, this time to give churches a one-time irrevocable election to exempt themselves from Social Security coverage if they were opposed, for religious reasons, to the payment of the employer’s share of Social Security and Medicare taxes and if they filed an election (Form 8274) with the IRS prior to the deadline for filing the first quarterly employer’s tax return (Form 941) after July 17, 1984, on which the employer’s share of Social Security and Medicare taxes is reported.

Since a Form 941 is due on the last day of the month following the end of each calendar quarter (i.e., April 30, July 31, October 31, and January 31), the election deadline for churches in existence as of July 1984 and having at least one nonminister employee was October 30, 1984 (the day before the deadline for filing Form 941 for the quarter ending September 30). Churches either not in existence as of July 1984 or not having nonminister employees at that time have until the day prior to the deadline for their first Form 941 to file an election (Form 8274).

To illustrate: a church that was established in 2015 and that hires its first nonminister employee (a secretary) on September 1, 2025, has until October 30, 2025, to file Form 8274. No deadline exists until a church has at least one nonminister employee, since the deadline corresponds to the next filing date of a church’s quarterly tax return reporting the employer’s share of Social Security taxes, and no tax or return is due until a church has nonminister employees.

What about a church with only one employee—its minister? As noted in the preceding section, the preferred practice would be for the church to file quarterly 941 forms reporting the minister’s compensation, even though no taxes are withheld. But would the church thereby be prevented from filing a Form 8274 later if it hires nonminister employees (on the ground that it already has submitted Forms 941, and accordingly, the deadline for filing Form 8274 has expired)? The answer is no, since section 3121(w) of the tax code defines the deadline for filing Form 8274 as any time prior to the date of a church’s first Form 941 “for the tax imposed under section 3111.” Section 3111 pertains to the employer’s share of Social Security and Medicare taxes, and therefore a church with no nonminister employees does not trigger the deadline for filing a Form 8274 by filing Forms 941 for its minister.

A timely election relieves a church of the obligation to pay the employer’s share of Social Security and Medicare taxes (7.65 percent of an employee’s wages in 2025) and relieves each nonminister employee of the obligation to pay the employee’s share of Social Security and Medicare taxes (an additional 7.65 percent of wages in 2025). However, the employee is not relieved of all Social Security tax liability, since the nonminister employees of an electing church are required to report and pay their Social Security taxes as self-employed individuals (the self-employment tax) if their annual compensation exceeds $108.28. This tax is significantly greater than the employee’s share of Social Security and Medicare taxes.

EXAMPLE A nonminister church employee receiving a salary of $20,000 in 2025 would pay $1,530 in Social Security and Medicare taxes (7.65 percent × $20,000) if his or her church did not file an election on Form 8274 (the church would pay an additional $1,530). However, if the church filed the election to exempt itself from the employer’s share of Social Security and Medicare taxes, the following consequences occur: (1) the church pays no Social Security and Medicare taxes; (2) the employee pays no Social Security and Medicare taxes; and (3) the employee must report and pay a self-employment tax liability of $3,060 (15.3 percent × $20,000), for an additional $1,530 in taxes. The self-employment tax is reduced by an income tax deduction of half the self-employment tax, and also by a similar deduction in computing self-employment taxes (explained fully in Chapter 9), but is still substantially higher than the 7.65-percent tax rate for Social Security and Medicare taxes paid by nonminister employees.

The nonminister employees of an electing church may use the estimated tax procedure (Form 1040-ES) to report and pay their estimated self-employment tax in quarterly installments. Alternatively, they can request that an additional amount be withheld from their wages each pay period to cover the estimated self-employment tax liability. The church simply withholds an additional amount from each paycheck to cover an employee’s estimated self-employment tax liability for the year and then reports this additional amount as additional income tax (not FICA tax) withheld on its quarterly Forms 941. The excess income tax withheld is a credit against tax that each employee may claim on his or her federal income tax return and is applied against an employee’s self-employment tax liability. A similar withholding arrangement has been approved by the IRS with respect to a minister-employee’s self-employment tax (see IRS Publication 517). Unless an employee makes such a request, a church that has elected to exempt itself from the employer’s share of Social Security and Medicare taxes has no obligation to withhold Social Security taxes from the wages of its employees.

Many churches and church employees consider this situation unfair. Churches are free to exempt themselves from Social Security taxes, but only at the cost of increasing the tax liability of their employees. In response, many electing churches have increased the salary of their employees to compensate for the increase in taxes. Of course, this leaves the church in essentially the same position as if it had not elected to be exempt—it is, in effect, paying Social Security taxes indirectly. This dilemma, argued a church in Pennsylvania, unconstitutionally restricts the religious freedom of churches by forcing them (contrary to their religious convictions) to divert church resources away from religious and charitable functions in order to increase employee compensation (and thereby indirectly pay the Social Security tax).

A federal appeals court rejected this contention. The court based its ruling on a 1982 Supreme Court decision that upheld the imposition of the Social Security tax to employees of Amish farmers even though this directly violated the farmers’ religious beliefs. The Supreme Court had observed that “tax systems could not function if denominations were allowed to challenge the tax systems because tax payments were spent in a manner that violates their religious belief.” It concluded that the broad public interest in the maintenance of the federal tax systems was of such a high order that religious belief in conflict with the payment of the taxes provides no constitutional basis for resisting them.

The appeals court found this precedent controlling in resolving the challenge to Social Security coverage of church employees. The appeals court also rejected the church’s argument that the taxation of church employees violates the First Amendment’s nonestablishment of religion clause by creating an “excessive entanglement” between church and state. It also rejected the claim that the tax code was impermissibly discriminatory in granting ministers an exemption from Social Security coverage, but not churches or church employees. Bethel Baptist Church v. United States, 822 F.2d 1334 (3rd Cir. 1987).

Churches that file a timely election application remain subject to income tax withholding and reporting requirements with respect to all nonminister employees and to ministers who have requested voluntary withholding. They must continue to issue Forms W-2 to all nonminister employees and to ministers who are treated as employees for income tax purposes. In addition, they must file Form 941 (Employer’s Quarterly Federal Tax Return) with the IRS.

The law specifies that the IRS can revoke a church’s exemption from Social Security coverage if the church fails to issue Forms W-2 for a period of two years or more to nonminister employees or ministers who report their federal income taxes as employees and if the church disregards an IRS request to furnish employees with such forms for the period during which its election has been in effect. IRC 3121(w)(2).

Only churches that are opposed for religious reasons to the payment of Social Security taxes are eligible for the exemption. Presumably, a church will qualify for the exemption if it is opposed, for religious reasons, to the payment of Social Security taxes, even if it is affiliated with a religious denomination that has no official position on the subject. Churches, conventions or associations of churches, and elementary and secondary schools that are controlled, operated, or principally supported by a church are all eligible for the exemption. Qualified church-controlled organizations also are eligible for the exemption. Such organizations include most church-controlled tax-exempt organizations described in section 501(c)(3) of the tax code. See “Nondiscrimination rules” on page for a full explanation of this term.

Some churches that filed a timely election (Form 8274) begin treating nonminister employees as employees for Social Security purposes, either intentionally or inadvertently. The IRS has ruled that such churches are treated as if they had never filed the election. Internal Revenue News Release IR-87-94.

EXAMPLE The IRS rejected a church’s application for exemption from the employer’s share of FICA taxes, since the application (Form 8274) was filed after the deadline. The church asked the IRS to waive the deadline, but the IRS refused. The IRS concluded: “The law setting forth the filing of elections for tax exemption was enacted by Congress, and there are no statutory provisions to permit an exception, for any reason, if the due date is missed. While we can sympathize with your situation, we have no authority to extend the period for filing the Form 8274, or to grant an exception to the timely filing requirement imposed by the law. Accordingly, you should continue to file Form 941.” IRS Letter Ruling 199911025.

Churches that have elected to exempt themselves from the employer’s share of Social Security and Medicare taxes (by filing a timely Form 8274) can revoke their exemption. IRS Form 8274 states:

If a church revokes its exemption, nonminister employees are no longer treated as self-employed for Social Security purposes and should no longer file quarterly estimated tax payments (their Social Security and Medicare taxes will be withheld from their wages).

The application of unemployment taxes to churches is addressed under “Unemployment Taxes” on page .

Key Point: A federal court in Kentucky dismissed a legal challenge by three atheist organizations to the preferential treatment of religious organizations in the tax code, including the Form 990 filing requirement. American Atheists, Inc. v. Shulman, 2014 WL 2047911 (E.D. Ky. 2014).

“Information returns” are financial reports that provide information to the IRS other than an amount of tax due. Some common types of information returns have already been discussed in this chapter (Forms W-2, 1099-NEC, and 941). This section will describe another type of information return that must be filed annually by certain kinds of tax-exempt organizations.

Section 6033 of the tax code requires every organization that is exempt from federal income taxes to file an annual return (Form 990) with the IRS. Form 990 consists of more than 100 questions requesting detailed information about the finances, services, and administration of the exempt organization. However, section 6033 exempts several organizations from the reporting requirements, including the following:

Some members of Congress have suggested that churches (and most other exempt organizations mentioned above) be required to file Form 990 each year as a means of avoiding financial impropriety and fraud. At this time, such efforts are merely suggestions.

Tip: A charity that does not meet one of the bases for exemption summarized above must file Form 990 if it has annual gross income of $200,000 or more or total assets less than $500,000. Unless required to file Form 990, an organization may file Form 990-EZ if its annual gross receipts are less than $200,000 and total assets at the end of its tax year are less than $500,000. An organization whose annual gross receipts are normally $50,000 or less may file Form 990-N. Some exceptions apply. If an organization fails to provide the required notice for three consecutive years, its tax-exempt status is revoked. Churches are exempt from this reporting requirement.

EXAMPLE The IRS ruled that a separately incorporated, church-controlled private elementary and secondary school was exempt from federal income taxation as a result of its relationship with the church and was not required to file an annual information return (Form 990) with the IRS. The IRS pointed out that (1) the school was created to further the religious purposes of the church by providing education consistent with the church’s religious teachings; (2) the spiritual teachings and values of the church were incorporated into all aspects of school life; (3) the school conducted a mandatory weekly worship service for all students; (4) the church controlled the school’s board of directors; (5) a majority of the school’s board were required to be members of the church; and (6) admissions literature clearly identified the school’s relationship with the church. IRS Private Letter Ruling 200615027.

Key Point: Independent religious schools that are not affiliated with a church or denomination and that file Form 990 (see above) do not file Form 5578. Instead, they make their annual certification of racial nondiscrimination directly on Form 990 (Schedule E).

Churches and other religious organizations that operate, supervise, or control a private school must file a certificate of racial nondiscrimination (Form 5578) each year with the IRS. The certificate is due by the 15th day of the fifth month following the end of the organization’s fiscal year. This is May 15 of the following year for organizations that operate on a calendar year basis. For example, the Form 5578 for 2024 is due May 15, 2025.

A private school is defined as an educational organization that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly conducted. The term includes primary, secondary, preparatory, or high schools, as well as colleges and universities, whether operated as a separate legal entity or an activity of a church.

Key Point: The term school also includes preschools, and this is what makes the reporting requirement relevant for many churches. As many as 25 percent of all churches operate a preschool program.

Form 5578 is easy to complete. A church official simply identifies the church and the school and certifies that the school has “satisfied the applicable requirements of sections 4.01 through 4.05 of Revenue Procedure 75-50.” This reference is to the following requirements:

The IRS has clarified that “a publicly accessible homepage is one that does not require a visitor to input information, such as an email address or a username and password, to access the homepage. Factors to be considered in determining whether a notice is reasonably expected to be noticed by visitors to the homepage include the size, color, and graphic treatment of the notice in relation to other parts of the homepage, whether the notice is unavoidable, whether other parts of the homepage distract attention from the notice, and whether the notice is visible without a visitor having to do anything other than simple scrolling on the homepage. A link on the homepage to another page where the notice appears, or a notice that appears in a carousel or only by selecting a dropdown or by hover (mouseover) is not acceptable. If a school does not have its own website, but it has webpages contained in a website, the school must display a notice of its racially nondiscriminatory policy on its primary landing page within the website.”

The IRS has drafted the following statement that satisfies the publicity requirement:

The publicity requirement is waived if one or more exceptions apply. These include the following:

Filing the certificate of racial nondiscrimination is one of the most commonly ignored federal reporting requirements.

Key Point: Independent religious schools that are not affiliated with a church or denomination and that file Form 990 do not file Form 5578. Instead, they make their annual certification of racial nondiscrimination directly on Form 990 (Schedule E).

Churches that operate a private school (including a preschool), as well as independent schools, may obtain copies of Form 5578 through the IRS website (IRS.gov).

Churches may apply for recognition of exemption from federal income taxes by submitting a Form 1023 to the IRS. This procedure is discussed under “Recognition of exemption” on page .

Churches that generate unrelated business taxable income may be required to file Form 990-T with the IRS. The unrelated business income tax and Form 990-T are addressed under “Tax on Unrelated Business Income” on page .

A number of reporting requirements under federal law are associated with charitable contributions. These are discussed fully in Chapter 8.