Church & Clergy Tax Guide

Chapter Highlights

Introduction

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.

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.

Section 6672

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 withheld income and employment taxes will be collected only once, whether from the business or from one or more of its responsible persons.

Responsibility

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.

Willfulness

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).

Application to churches and other nonprofit organizations

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

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

Table 11-1:

(1) Carter v. United States, 717 F. Supp. 188 (S.D.N.Y. 1989). A federal district court ruling in New York illustrates the importance of complying with the payroll tax procedures discussed in this chapter. A church-operated charitable organization failed to pay over to the IRS withheld income taxes and the employer’s and employees’ share of Social Security and Medicare taxes for a number of quarters in both 1984 and 1985. Accordingly, the IRS assessed a penalty in the amount of 100 percent of the unpaid taxes ($230,245) against each of the four officers of the organization pursuant to section 6672 of the tax code. The officers challenged the validity of the IRS actions. The court observed that federal law requires employers to withhold Social Security and Medicare and income taxes from the wages of their employees and to hold the withheld taxes as a “special trust fund” for the benefit of the United States government until paid or deposited. If an employer fails to make the required payments, “the government may actually suffer a loss because the employees are given credit for the amount of the taxes withheld regardless of whether the employer ever pays the money to the government.” Accordingly, “section 6672 of the [tax code] supplies an alternative method for collecting the withheld taxes. Pursuant to this section, the government may assess a penalty, equal to the full amount of the unpaid tax, against a person responsible for paying over the money who willfully fails to do so.”

The court observed that a person is liable for the full amount of taxes under section 6672 if “(1) he or she was under a duty to collect, account for, and pay over the taxes (i.e., a ‘responsible person’), and (2) the failure to pay the taxes was ‘willful.’” The court concluded that the four officers of the church-related charitable organization satisfied both requirements, and accordingly, that they were personally liable for the unpaid taxes under section 6672. The officers were “responsible persons,” since (1) they were directors as well as officers; (2) they had the authority to sign checks (including payroll checks); and (3) they were involved in “routine business concerns such as corporate funding, bookkeeping, salaries, and hiring and firing.” The fact that a nonprofit organization was involved and that the officers donated their services without compensation did not relieve them of liability. The court also ruled that the officers acted willfully and thus met the second requirement of section 6672. It defined willful action as “voluntary, conscious and intentional—as opposed to accidental—decisions not to remit funds properly withheld to the government.” There need not be “an evil motive or an intent to defraud.”

The court specifically held that “the failure to investigate or to correct mismanagement after having notice that withheld taxes have not been remitted to the government is deemed to be willful conduct.” Further, the court concluded that payment of employee wages and other debts with the knowledge that the payment of payroll taxes is late constitutes willful conduct.

(2) In re Triplett, 115 B.R. 955 (N.D. Ill. 1990). A federal bankruptcy court in Illinois ruled that a church treasurer was not personally liable for his church’s failure to withhold and pay over to the IRS some $100,000 in payroll taxes but that the pastor and chairman of the board of deacons might be. The court concluded that the church treasurer did not have sufficient control over the finances of the church to be liable for the 100-percent penalty. It noted that the chairman of the board of deacons made all decisions regarding which bills would be paid, and he (and the pastor) alone was responsible for day-to-day church operations. While the treasurer did not satisfy the definition of a responsible person, the court suggested that the pastor and chairman of the deacon board would. It observed that “ample evidence exists to indicate that other church employees, like [the pastor and chairman of the deacon board] may be liable. It is fortuitous that the treasurer’s assessment has been litigated before assessments against these other persons.” This case illustrates that the IRS is committed to assessing the 100-percent penalty under section 6674 of the tax code against church leaders in appropriate cases. While the treasurer in this case did not have sufficient control over church finances to be a “responsible person,” there is little doubt that many church treasurers would satisfy the court’s definition of a responsible person.

(3) Holmes v. United States, 2004-2 USTC 50,301 (S.D. Tex. 2004). A church operated a private school for primary and secondary students. The school is incorporated, and its board of directors includes parents of students and members of the affiliated church. The board has six directors. The school suffered a substantial drop in enrollment. The loss of tuition made the school insolvent. The directors chose to pay some creditors while negotiating with others. The board’s goal was to keep the school open as long as possible. The school’s checks required two signatures. The board’s chairman, the treasurer, and the school administrator were signatories. The chairman claimed that he rarely signed checks and only did so when the others were not available.

Because of its financial problems, the school did not deposit its employees’ withheld taxes for three quarters. The treasurer informed the chairman about the tax liability from the beginning. The chairman discussed it with the board and suggested cutbacks to free up cash to pay the taxes. He claimed that the board rejected his ideas. Nearly $120,000 in withheld payroll taxes were not deposited for the quarters in question.

A few years later, the IRS assessed the full amount of payroll taxes against the treasurer and chairman of the board pursuant to section 6672 of the tax code. Both of these individuals insisted that they were not liable and that the IRS had abused its discretion by not assessing other board members for the taxes. A federal district initially found the treasurer personally liable for the full amount of the payroll tax liability. In a subsequent proceeding, the personal liability of the board chairman was addressed by the court.

The court noted that “under federal law, a company’s agent who is responsible for the collection and payment of employment taxes is liable to the government for the amount of the taxes unpaid” and that a responsible person “has some authority over the payment of the taxes, like paying them himself, ordering their payment, or having some control over the company’s treasury.” The chairman of the board “had enough responsibility to be personally liable for the unpaid taxes. He knew about the tax burden—he signed a return showing that no tax deposits were made for three months. Also, he signed several checks to some of the school’s creditors instead of paying the withheld taxes. He could have seen that the taxes were paid but chose not to.”

The court rejected the board chairman’s argument that his concern over the use of the withheld taxes was ignored or rejected by the board. It observed, “As chairman, he could have protested the use of the funds or refused to follow the directive. Further, that the school required two signatures on its checks is not a defense; it simply shows that at least two people were jointly in control.”

The court also ruled that the board chairman was not immune from liability because he was a volunteer for the school, since “he had a real position, he was involved in the financial operations of the school, and he knew about the obligation to the government. His titles, positions, and jobs were not honorary.”

The court concluded that, along with the treasurer, the government would “recover jointly from the board chairman the balance of the unpaid employment taxes because he actively participated in the diversion of the funds. Others may share in the responsibility.”

(4) In re Vaughn, 2011-2 U.S.T.C. ¶50,681 (E.D.N.C. 2011). A federal court in North Carolina ruled that a minister met the definition of a “responsible person” under section 6672 of the tax code, and therefore the IRS could assess a penalty against her in the amount of 100 percent of the payroll taxes that were not withheld or paid over to the government. Although the employer remains liable for unpaid payroll taxes, its officers and agents may incur personal liability for the unpaid payroll taxes. In order for an individual to be held personally liable under section 6672, (1) the party assessed must be a person required to collect, truthfully account for, and pay over the tax, referred to as a “responsible person,” and (2) the responsible person must have “willfully failed” to ensure that the withholding taxes were paid.

In deciding whether an officer or employee is a “responsible person,” the most important question is whether the person “had the effective power to pay the taxes—that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay the taxes owed.” When making the determination of who is a “responsible person,” courts have considered several factors that are indicative of this authority, including “whether the employee: (1) served as an officer of the company or as a member of its board of directors; (2) controlled the company’s payroll; (3) determined which creditors to pay and when to pay them; (4) participated in the day-to-day management of the corporation; (5) possessed the power to write checks; and (6) had the ability to hire and fire employees.”

The court concluded that the minister in this case was a responsible person based on the following considerations:

The court concluded that the minister had the “power to compel or prohibit the allocation of corporate funds.”

The court acknowledged that responsible person status does not in itself create personal liability under section 6672. Liability arises only if the responsible person acts willfully in failing to collect, account for, or pay over the taxes. The court noted that willfulness can be established if a “responsible person” “(1) has actual or constructive knowledge of the unpaid taxes and the employer continues to pay other creditors in lieu of the United States; (2) lacks actual knowledge of the unpaid taxes, but recklessly disregards the existence of an unpaid deficiency; or (3) becomes aware of the unpaid taxes and fails to use all unencumbered funds to pay the tax liability.” The court noted that “reckless disregard” exists when the person “(1) clearly ought to have known that (2) there was a grave risk that withholding taxes were not being paid and if (3) he was in a position to find out for certain very easily.” In this case, the minister testified that she had actual knowledge that the ministry had failed to remit its employment taxes in the past and that she was aware that it had entered into an installment payment with the IRS.

The court concluded that the minister

was on notice that the taxes were not being paid, but she failed to engage in any investigation to verify that the subsequent trust fund taxes were being paid. Failing to do so meets the reckless disregard test. This notice placed a duty on her to investigate and confirm that the ministry was paying trust fund taxes. The Form 941s [sic] filed by [the ministry] showed significant unpaid taxes and little to no payments for any of the quarters. As CEO and president of the ministry she could have easily confirmed the outstanding liability.

A charity began experiencing severe financial problems. A consultant informed the board of directors that the charity had not been paying withheld payroll taxes to the IRS. The president resigned following this disclosure, but the board refused to accept his resignation, so he agreed to continue to function under the title of “acting president.”

The charity was forced to file for bankruptcy. The IRS sought to recover $50,000 against the president under section 6672 of the tax code, which amounted to the full amount of payroll taxes (plus interest) that the charity had withheld but not paid over to the government. The president insisted that he was not a financially responsible person and so could not be liable for the 100-percent penalty. The Tax Court agreed with the president and refused to impose the penalty.

The court considered the following seven factors in deciding whether the penalty should be assessed: (1) the corporate bylaws, (2) the person’s ability to sign checks on the company’s bank account, (3) the signature on the employer’s federal quarterly and other tax returns, (4) payment of other creditors in lieu of the government, (5) the identity of officers and directors, (6) the identity of individuals in charge of hiring and discharging employees, and (7) the identity of individuals in charge of the firm’s financial affairs. It concluded that a consideration of these factors did not support the assessment of the 100-percent penalty against the president:

The charity’s bylaws do not allow the president to determine which bills should be paid. They only specify that the board of directors is responsible for the proper conduct of all business of the charity. The bylaws expressly permit the president to cosign checks with the treasurer but do not grant the president sole authority. Additionally, the charity’s payroll checks were issued by ADP Incorporated, an independent contractor, who used a facsimile signature of the president on the checks. [Further], the president was only one of several officers, employees and members of the club who sometimes authorized the payment of creditors and the hiring and firing of employees. The evidence does not reveal that he decided to pay the charity’s other creditors in lieu of the government. Also, there is no evidence that he signed the charity’s tax forms. Although he did sign the charity’s bankruptcy petition, he did so after learning of its failure to pay [withheld payroll taxes].

The court also noted that the 100-percent penalty requires proof that a financially responsible person acted willfully and that “a responsible person acts willfully when he pays other creditors in preference to the IRS knowing that the taxes are due, or with reckless disregard for whether taxes have been paid.” The court concluded that the IRS failed to prove that the president acted willfully. In re Lartz, 2003-2 USTC ¶50,674 (2003). See also Verret v. United States, 2008-1 USTC ¶ 50,248 (E.D. Tex. 2008).

Taxpayer Bill of Rights 2 (TBOR2)

Congress enacted the Taxpayer Bill of Rights 2 in 1996. This law contains four important limitations on the application of the penalty under section 6672:

The IRS must issue a notice to an individual it has determined to be a responsible person with respect to unpaid payroll taxes at least 60 days prior to issuing a notice and demand for the penalty.

TBOR2 requires the IRS, if requested in writing by a person considered by the IRS to be a responsible person, to disclose in writing to that person the name of any other person the IRS has determined to be a responsible person with respect to the tax liability. The IRS is required to disclose in writing whether it has attempted to collect this penalty from other responsible persons, the general nature of those collection activities, and the amount (if any) collected. Failure by the IRS to follow this provision does not absolve any individual from any liability for this penalty.

If more than one person is liable for this penalty, each person who paid the penalty is entitled to recover from other persons who are liable for the penalty an amount equal to the excess of the amount paid by such person over such person’s proportionate share of the penalty. This proceeding is a federal cause of action and is separate from any proceeding involving IRS collection of the penalty from any responsible party.

TBOR2 clarifies that the responsible person penalty is not to be imposed on volunteer, unpaid members of any board of trustees or directors of a tax-exempt organization to the extent that such members are solely serving in an honorary capacity, do not participate in the day-to-day or financial activities of the organization, and do not have actual knowledge of the failure. However, this provision cannot operate in such a way as to eliminate all responsible persons from responsibility.

TBOR2 requires the IRS to develop materials to better inform board members of tax-exempt organizations (including voluntary or honorary members) that they may be treated as responsible persons. The IRS is required to make such materials routinely available to tax-exempt organizations. TBOR2 also requires the IRS to clarify its instructions to IRS employees on application of the responsible person penalty with regard to honorary or volunteer members of boards of trustees or directors of tax-exempt organizations.

EXAMPLE Bill serves as the treasurer of his church. Due to financial difficulties, the pastor decides to use withheld payroll taxes to pay other debts. The IRS later asserts that the church owes $25,000 in unpaid payroll taxes. The church has no means of paying this debt. The IRS insists that Bill and other church board members are personally liable for the debt. It is likely that Bill is a responsible person who may be liable for the 100-percent penalty since he has authority over the day-to-day financial activities of the church. TBOR2 will not protect him. However, it will protect members of the church board who (1) are volunteer, unpaid members; (2) serve solely in an honorary capacity; (3) do not participate in the day-to-day or financial activities of the organization; and (4) do not have actual knowledge of the failure to pay over withheld taxes to the government.

EXAMPLE A church board votes to use withheld taxes to pay other debts of the church. Over a three-year period, the church fails to deposit $100,000 in withheld taxes. The IRS claims that the board members are personally liable for the 100-percent penalty for failing to deposit withheld taxes. All of the members of the board claim they are protected by the provisions of TBOR2. They are not correct, since TBOR2 specifies that its provisions cannot operate in such a way as to eliminate all responsible persons from responsibility.

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.

Clarification of rules

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.

Voluntary withholding for minister-employees

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.

Voluntary withholding for self-employed ministers

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.

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.

The Eighth Street Baptist Church case

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).

The Indianapolis Baptist Temple case

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).

United States v. Hovind, 305 Fed. Appx. 615 (11^th Cir. 2008)

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.

Conclusions

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.

Step 1: Obtain an employer identification number (EIN) from the IRS

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.

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.”

Step 2: Determine whether each church worker is an employee or self-employed, and obtain each worker’s Social Security number

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.

Backup withholding

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.

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 reporting, 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 additional rules pertain to backup withholding:

Form 945. All taxes withheld through backup withholding must be reported to the IRS on Form 945. The Form 945 for 2025 must be filed with the IRS by January 31, 2026. However, if you made deposits on time in full payment of the taxes for the year, you may file the return by February 10.

Depositing backup withholdings. Deposit all nonpayroll withheld federal income taxes, including backup withholding, by electronic funds transfer. Combine all Form 945 taxes for deposit purposes. Do not combine deposits for Form 941 with deposits for Form 945. Generally, the deposit rules that apply to Form 941 also apply to Form 945. However, because Form 945 is an annual return, the rules for determining your deposit schedule (discussed below) are different from those for Form 941.

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.

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.

Step 3: Have each employee complete Form W-4

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

Step 4: Compute each employee’s taxable wages

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.

Step 5: Determine the amount of income tax to withhold from each employee’s wages

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):

See IRS Publication 15-T for more information.

Step 6: Withhold Social Security and Medicare taxes from nonminister employees’ wages

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.

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.

Step 7: Deposit withheld taxes

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.

Payment with return

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.

When to deposit

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.

How to deposit

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.

Deposit penalties

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 (1) 2 percent for deposits made one to five days late; (2) 5 percent for deposits made six to 15 days late; (3) 10 percent for deposits made 16 or more days late; (4) 10 percent for deposits made at an unauthorized financial institution, paid directly to the IRS, or paid with your tax return; (5) 10 percent for amounts subject to electronic deposit requirements but not deposited using EFTPS; and (6) 15 percent for amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due or the day on which you receive notice and demand for immediate payment, whichever is earlier.

Accuracy of deposits rule

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:

Step 8: File Form 941

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:

Clergy wages

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.

Churches with only one employee

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:

In conclusion, note three additional points:

Form 944

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.

Form 941-X

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.

Step 9: Complete Forms W-2 and W-3

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.

Changes in 2024 Form W-2 and Form W-3

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.

Completing Form W-2

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

Box a. Report the employee’s Social Security number. Insert “applied for” if an employee does not have a Social Security number but has applied for one.

Box b. Insert your church’s federal employer identification number (EIN). This is a nine-digit number assigned by the IRS. If you do not have one, you can obtain one by submitting a completed Form SS-4 to the IRS.

Box c. List your church’s name and address.

Box d. You may use this box to identify individual W-2 forms. You are not required to use this box.

Box e. Identify the employee by name as it appears on his or her Social Security card. Do not insert titles or academic degrees, such as Dr., Rev., or D.Min., at the beginning or end of an employee’s name. Generally, do not enter “Jr.,” “Sr.,” etc., in the “Suff.” box on Copy A unless the suffix appears on the employee’s Social Security card. However, the Social Security Administration still prefers that you do not enter the suffix on Copy A. If the name does not fit, you may show first initial, middle initial, and last name (and ignore the vertical line).

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

Box f. List the employee’s address and zip code.

Box 1. Report all wages paid to the employee during the year. If an employee works for only the last week of December in 2024 and is paid in the first week of January 2025, do not issue a 2024 Form W-2, even though the wages were earned in 2024. The wages are reported when paid—on a 2025 Form W-2.

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

Box 2. List all federal income taxes you withheld from the employee’s wages in 2024. The amounts reported in this box (for all employees) should correspond to the amount of withheld income taxes reported on your four Forms 941 for 2024.

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).

Box 3. 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: (1) the taxable cost of group term life insurance over $50,000 included in box 1, (2) employee and nonexcludable employer contributions to an Archer Medical Savings Account or health savings account (HSA), (3) employee contributions to a SIMPLE retirement account, and (4) adoption benefits.

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.

Box 4. 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.

Box 5. 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.

Box 6. 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.

Box 11. 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).

Box 12. 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” (not “A 5300.00,” even though it is the first or only entry in this box). 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:

C You (the church) provided your employee with more than $50,000 of group term life insurance. Report the cost of coverage in excess of $50,000. It should also be included in box 1 (and in boxes 3 and 5 for nonminister employees).

E Report elective deferrals made by the church to an employee’s 403(b) tax-sheltered annuity. An elective deferral is one made by an employee through a voluntary salary reduction agreement. While this amount ordinarily is not reported in box 1, it is included in boxes 3 and 5 for nonminister employees since it is subject to Social Security and Medicare taxes with respect to such workers.

L You (the church) reimbursed the employee for employee business expenses using a mileage rate or per diem rates, and the amount you reimbursed exceeds the IRS-approved amounts. Enter code L in box 12, followed by the amount of the reimbursements that equals the IRS-approved standard mileage or per diem rates. Any excess reimbursements (above the per diem or standard mileage rates) should be included in box 1. For nonminister employees, report the excess in boxes 3 and 5 as well. Do not include any per diem or mileage allowance reimbursements for employee business expenses in box 12 if the total reimbursements are less than or equal to the amount deemed substantiated under the IRS-approved standard mileage rate or per diem rates.

R Report employer contributions to an Archer Medical Savings Account on behalf of the employee. Any portion that is not excluded from the employee’s income should also be included in box 1.

S Report employee salary reduction contributions to a SIMPLE retirement account. However, if the SIMPLE account is part of a 401(k) plan, use code D.

T Report amounts paid (or expenses incurred) by an employer for qualified adoption expenses furnished to an employee under an adoption assistance program.

W Report employer contributions to a health savings account.

Y You may, but are not required to, report deferrals under a section 409A nonqualified deferred compensation plan in box 12 using code Y.

Z Enter all amounts deferred (including earnings on amounts deferred) that are includible in income under section 409A because the NQDC plan fails to satisfy the requirements of section 409A. Do not include amounts properly reported on a Form 1099-NEC, corrected Form 1099-NEC, Form W-2, or Form W-2c for a prior year. Do not include amounts that are considered to be subject to a substantial risk of forfeiture for the purposes of section 409A. The amount reported in box 12 using code Z is also reported in box 1 and is subject to an additional tax reported on the employee’s Form 1040. See Chapter 10 for more details.

BB Report designated Roth contributions under a section 403(b) salary reduction agreement. Do not use this code to report elective deferrals under code E.

DD The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan. IRS Notice 2011-28 made this requirement optional for small employers filing fewer than 250 Forms W-2 until further guidance is issued. The reporting under this provision is for information only; the amounts reported are not included in taxable wages and are not subject to new taxes. Additional information about the transitional reporting rules is available on the Affordable Care Act Tax Provisions page of IRS.gov.

Box 13. Check the appropriate box.

Box 14. This box is optional. You may use it to provide information to your employee. Some churches report a church-designated housing allowance in this box (for ministers who report their income taxes as employees). This is not mandatory, however.

Boxes 15 through 20. Use these boxes to report state and local income tax information. Enter the two-letter abbreviation for the name of the state. An employer’s state ID number is assigned by the state. The state and local information boxes can be used to report wages and taxes for two states and two localities. Keep each state’s and locality’s information separated by the broken line. If you need to report information for more than two states or localities, prepare a second Form W-2. Contact your state or locality for specific reporting information.

Furnishing Form W-2 to employees electronically

You may set up a system to electronically furnish Forms W-2 to employees who choose to receive them in this format. Each employee participating must consent electronically, and you must notify the employees of all hardware and software requirements to receive the forms. You may not send Form W-2 electronically to any employee who does not consent or who has revoked consent previously provided.

To furnish Forms W-2 electronically, you must meet the following disclosure requirements and provide a clear and conspicuous statement of each of them to your employees.

The employer must furnish the electronic statements by the due date of the paper forms. See IRS Publication 15-A for more information.

Internet verification of Social Security numbers

The Social Security Administration (SSA) offers employers two methods for verifying employee SSNs online:

While this service is available to all employers and third-party submitters, it can only be used to verify current or former employees and only for wage reporting (Form W-2) purposes.

Why verify names and SSNs online? The Social Security Administration lists the following reasons:

In order to access online verification, you must register. See the Social Security Administration website for information.

Employers have other options for verifying employee SSNs, including telephone and paper options. These are fully explained on the SSA website.

Employee retention of Forms W-2

It is a good practice for employees to keep copies of all Forms W-2 issued to them by their employer until they confirm that the earnings reported on their Forms W-2 correspond to the earnings credited to them on their Social Security Statement. The Social Security Statement is available on the Social Security website and is mailed annually to persons over 60 years of age. If earnings reflected on an employee’s Social Security Statement are underreported, the easiest way to correct the record is for the employee to present copies of his or her Forms W-2 for the year in question to the nearest Social Security office. While proof of earnings is possible without Forms W-2, it is much more difficult and time-consuming.

Completing Form W-3

Any employer required to file Forms W-2 must file Form W-3 to transmit Copy A of Forms W-2 to the Social Security Administration. Make a copy of Form W-3 and keep it and Copy D of Forms W-2 with your records for four years. Be sure to use Form W-3 for the correct year. Churches need to file Form W-3 even if they only issue one Form W-2. Form W-3 combines all of the data reported on the individual Forms W-2 issued by an employer. The 2024 Form W-3 is due January 31, 2025.

Step 10: Complete Forms 1099-NEC and 1096

By January 31, 2025, churches must furnish Copy B of Form 1099-NEC (Nonemployee Compensation) to any self-employed person to whom the church paid nonemployee compensation of $600 or more in 2024. This form (rather than Form W-2) should be provided to clergy who report their federal income taxes as self-employed, since the Tax Court and the IRS have both ruled that a worker who receives a Form W-2 rather than a Form 1099-NEC is presumed to be an employee rather than self-employed. Other persons to whom churches may be required to issue a Form 1099-NEC include evangelists, guest speakers, contractors, and part-time custodians.

File Copy A of this form with the IRS by January 31, 2025.

The income tax regulations specify that “every person engaged in a trade or business” shall issue a Form 1099-NEC “for each calendar year with respect to payments made by him during the calendar year in the course of his trade or business to another person” of compensation of $600 or more. In other words, a church must issue a Form 1099-NEC to a person only if the following five requirements are satisfied: (1) the church is “engaged in a trade or business”; (2) the church pays the person compensation of $600 or more during the calendar year; (3) the person is self-employed (a nonemployee); (4) the payment is in the course of the church’s “trade or business”; and (5) no exception exists.

Is a church engaged in a trade or business? The regulations specify that the term person engaged in a trade or business includes not only “those so engaged for gain or profit, but also organizations the activities of which are not for the purpose of gain or profit,” including organizations exempt from federal income tax under section 501(c)(3) of the tax code. This includes churches and other religious organizations. There is no doubt that churches are required to issue a Form 1099-NEC if the other requirements are satisfied. Note, however, that various exceptions may apply in a particular case. These are addressed below.

A church should issue a Form 1099-NEC to any person to whom it pays $600 or more in a year in the form of self-employment earnings. These forms can be obtained from any IRS office or by calling the IRS forms hotline at 1-800-829-3676. Self-employment earnings include compensation paid to any individual other than an employee. Examples include ministers who report their income as self-employed for income tax reporting purposes, some part-time custodians, and certain self-employed persons who perform miscellaneous services for the church (plumbers, carpenters, lawn maintenance providers, etc.) who are not incorporated. Exceptions apply, and they are discussed later in this section.

Churches also must issue a Form 1099-NEC to a self-employed person who is paid in property other than money. The regulations state that “if any payment required to be reported in Form 1099-NEC is made in property other than money, the fair market value of the property at the time of payment is the amount to be included on such form.” In other words, if a church pays a self-employed minister compensation in the form of a car or other property, the fair market value of the property must be reported on a Form 1099-NEC.

Exceptions

The income tax regulations specify that no Form 1099-NEC is required for certain payments, including the following:

Payments of income required to be reported on Forms W-2 or 941. This means that a church should not issue a Form 1099-NEC to any worker who is treated as an employee for income tax and payroll tax reporting.

Payments to a corporation. Generally, payments to corporations do not have to be reported on Form 1099-NEC.

EXAMPLE A self-employed, incorporated evangelist conducts religious services at a church on two occasions during 2025 and is paid $500 on each occasion. The church also reimburses the evangelist’s substantiated travel expenses under its accountable reimbursement plan. The church is not required to issue a Form 1099-NEC to the evangelist, since his ministry is incorporated. It is a good practice for churches to confirm an evangelist’s representation that his or her ministry is incorporated. This is easily done by checking with the secretary of state’s office in the state in which the evangelist is allegedly incorporated to confirm corporate status (in most states, this can be done via the secretary of state’s website).

Payments of bills for merchandise, telegrams, telephone, freight, storage, and similar charges. According to this exception, a church need not issue a Form 1099-NEC to the telephone company, UPS, or to vendors from which it purchases merchandise.

Travel expense reimbursements paid under an accountable reimbursement arrangement. According to this exception, a church need not report on a Form 1099-NEC the amount of travel and other business expense reimbursements that it pays to a self-employed worker under an accountable reimbursement arrangement (i.e., expenses are reimbursed only if they are substantiated as to amount, date, place, and business nature, and any excess reimbursements must be returned to the employer).

On the other hand, travel expense reimbursements (or advances) of $600 or more that are paid to a self-employed person without adequate substantiation are considered nonaccountable and must be reported as compensation on Form 1099-NEC. An example of a nonaccountable reimbursement would be a monthly car allowance paid to a minister without requiring the minister to account for the amount and business purpose of the reimbursed expenses. Another common example of a nonaccountable reimbursement would be a church’s reimbursement of a guest speaker’s travel expenses based on the speaker’s oral statement or estimate of the amount of the expenses (without any substantiation).

Payments not made in the course of a trade or business. The income tax regulations specify that organizations must issue a Form 1099-NEC only with respect to payments they make in the course of their trade or business. As a result, the Form 1099-NEC filing requirement does “not apply to an amount paid by the proprietor of a business to a physician for medical services rendered by the physician to the proprietor’s child.” Similarly, a homeowner need not issue a Form 1099-NEC to a roofer or carpenter who is paid $600 or more during the year, because the payment is not made “in the course of a trade or business.” The same result applies to payments most persons make to dentists, physicians, lawyers, photographers, and similar professionals, to the extent that such payments are not made in the course of a trade or business.

Repairs

The instructions for Form 1099-NEC clarify that “payment for services, including payment for parts or materials used to perform the services” are reportable as nonemployee compensation “if supplying the parts or materials was incidental to providing the service. For example, report the entire insurance company payments to an auto repair shop under a repair contract showing an amount for labor and another amount for parts, since furnishing parts was incidental to repairing the auto.”

The $600 requirement

As noted above, churches need not issue a person a Form 1099-NEC unless the individual is paid $600 or more in compensation. Let’s take a closer look at this rule.

Compensation of less than $600. There is no need to issue a Form 1099-NEC to persons paid less than $600 in self-employment earnings during the year.

Accountable reimbursements of business expenses. Since reimbursements under an accountable business expense reimbursement arrangement are not included in the reportable income of self-employed persons, it is reasonable to assume that such reimbursements should not count toward the $600 threshold for filing a Form 1099-NEC. Under an accountable reimbursement arrangement, an employer reimburses a worker’s expenses only if the worker substantiates (with documentary evidence, including receipts for individual expenses of $75 or more) the amount, date, location, and business purpose of each reimbursed expense within a reasonable time. The instructions for Form 1099-NEC state that a “travel reimbursement for which the nonemployee did not account to the payer, if the . . . ​reimbursement totals at least $600” must be reported on the form. This implies that accountable reimbursements do not count toward the $600 filing amount.

EXAMPLE A church paid a guest speaker (an ordained minister) $1,000 in 2024, of which $300 was a reimbursement of substantiated travel expenses and $200 was a church-designated housing allowance. No Form 1099-NEC should be issued, since the church has only paid the speaker $500 of reportable income.

EXAMPLE Same facts as the previous example, except that the guest speaker “substantiated” travel expenses solely by means of a handwritten note not accompanied by any receipts or other supporting documentary evidence. The church’s reimbursement of the $300 of travel expenses under these circumstances constitutes a nonaccountable arrangement. As a result, the reimbursements must be reported as income. Since the travel expense reimbursements and compensation amount to $800, the church must issue a Form 1099-NEC. However, the Form 1099-NEC would only report $800 (the housing allowance would not be included).

Benevolence recipients

Should a church give recipients of benevolence distributions a Form 1099-NEC (for distributions of $600 or more for the year)? Ordinarily, the answer would be no, since the Form 1099-NEC is issued only to nonemployees who receive compensation of $600 or more from the church during the year. IRS Revenue Ruling 2003-12; IRS Letter Rulings 9314014 and 200113031. To the extent that benevolence distributions to a particular individual represent a legitimate charitable distribution by the church (consistent with its exempt purposes), no Form 1099-NEC would be required. It would be unrealistic to characterize such distributions as compensation for services rendered when the individual performed no services for the church.

Completing the Form 1099-NEC

A Form 1099-NEC is easy to complete. A church (the “payer”) should list its name, street address (no post office box numbers), and employer identification number on the form as well as the name, address, and Social Security number (or other tax identification number) of the recipient. Form 1099-NEC includes 7 numbered boxes. The key boxes are 1 and 4.

Box 1. Report nonemployee compensation (NEC) of $600 or more paid to a nonemployee (self-employed person) in the course of the payer’s “trade or business.” This would include compensation a church pays to a pastor who is self-employed for income tax reporting purposes or to any other self-employed person who performs services on behalf of the church.

Generally, amounts paid to individuals that are reportable in box 1 are subject to self-employment tax.

The following are examples of payments to be reported in box 1:

Box 4. Report backup withholding (explained elsewhere in this chapter) in this box.

Backup withholding

Federal law requires that organizations (including churches) that are required to furnish a Form 1099-NEC to a self-employed worker must apply “backup withholding” if (1) the worker fails or refuses to furnish his or her Social Security number (or other taxpayer identification number) or (2) the IRS notifies you that the worker’s Social Security number is incorrect or (3) the IRS notifies you to apply backup withholding.

Backup withholding means that you must withhold a specified amount of total compensation from the paycheck of the self-employed person and report the withholdings on Form 945. These requirements are explained fully under Step 2, above. The backup withholding rate is 24 percent of compensation for 2025.

Corrected forms

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.

Section 530 employees

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

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.

Civil damages for filing fraudulent Forms 1099-NEC

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 contains the following observation regarding this provision:

The committee does not want to open the door to unwarranted or frivolous actions or abusive litigation practices. The committee is concerned, for example, about the possibility that an unfounded or frivolous action might be brought under this section by a current or former employee of an employer who is not pleased with one or more items that his or her current or former employer has included on the employee’s Form W-2. Therefore, actions brought under this section will be subject to Rule 11 of the Federal Rules of Civil Procedure, relating to the imposition of sanctions in the case of unfounded or frivolous claims, to the same extent as other civil actions.

EXAMPLE A church loans $15,000 to Pastor B, its youth pastor, to assist him in making a down payment on a home. Pastor B signs a $15,000 promissory note with a five-year term. After two years, Pastor B leaves the church to accept another position. He still owes the church $14,000 (unpaid principal and accrued interest) but does not respond to several requests by the church for repayment. The church informs Pastor B that if he does not respond, it will have no option but to declare the entire balance due in full and include it on his Form W-2 for the year. The church receives no response, so it issues Pastor B a Form W-2 at the end of the year reporting his wages and the $14,000 unpaid note. Pastor B threatens to sue the church for civil damages under TBOR2. Pastor B has no recourse under TBOR2, since the church’s Form W-2 was not fraudulent. If Pastor B sues, he risks being assessed sanctions for filing a frivolous lawsuit.

IRS investigation of disputed Forms W-2 and 1099-NEC

TBOR2 provides that, in any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return (Form 1099-NEC or W-2) filed by an employer and the taxpayer has fully cooperated with the IRS, then the government has the burden of proving the deficiency (in addition to the information return itself). Fully cooperating with the IRS includes (but is not limited to) the following: bringing the reasonable dispute over the item of income to the attention of the IRS within a reasonable period of time and providing (within a reasonable period of time) access to and inspection of all witnesses, information, and documents within the control of the taxpayer (as reasonably requested by the IRS).

EXAMPLE A church employee is issued a Form W-2 that incorrectly reports certain items as income. The employee refuses to pay tax on her full income, and this results in an IRS audit. The case is eventually appealed to a federal court, where she insists that her employer erroneously included various items as wages on her Form W-2. Under TBOR2, the government has the burden of proving the deficiency and cannot rely on the Form W-2 itself—if the employee has fully cooperated with the IRS.

In the 1960s, the IRS began vigorously challenging employer attempts to classify workers as self-employed rather than as employees. Predictably, employers complained about what was seen as overreaching by the IRS. Employers also were concerned about being assessed large penalties if the IRS successfully reclassified workers as employees. Congress responded with section 530 of the Revenue Act of 1978. Section 530 was designed to provide employers with relief from hostile IRS attempts to reclassify workers from self-employed to employees. It specifies that an employer can treat a worker as self-employed for employment tax purposes so long as three conditions are met:

If you did not have a reasonable basis for treating the workers as independent contractors, you do not meet the relief requirements.

If you do not meet these relief requirements, the IRS will need to determine whether the workers are independent contractors or employees and whether you owe employment taxes for those workers.

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.

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.

The sequence of the audit process is as follows:

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.

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:

Revocation of election. Either the electing church or organization or the IRS may revoke this election. The electing church or organization can permanently revoke the election by paying social security and Medicare taxes for wages covered by this election. The IRS will permanently revoke the election if the organization does not file Form W-2 for 2 years or more and does not provide the information within 60 days after a written request by the IRS.

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 .

“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.

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.

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.

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:

Notice Of Nondiscriminatory Policy As To Students

The (name) school admits students of any race, color, national and ethnic origin to all the rights, privileges, programs, and activities generally accorded or made available to students at the school. It does not discriminate on the basis of race, color, national and ethnic origin in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs.

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.

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.