Q&A: The Ins and Outs of Form 941

Should a church with no nonminister employees and only one minister file the quarterly 941 form (employer's quarterly federal tax return)?

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.

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.

Churches with only one employee

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

IRS regulation 31.6011(a)-4(a)(1) states: “Every person required to make a return of income tax withheld from wages pursuant to section 3402 shall make a return for the first calendar quarter in which the person is required to deduct and withhold such tax and for each subsequent calendar quarter, whether or not wages are paid therein, until the person has filed a final return.”

According to this regulation, only those employers that are required to withhold income taxes from the wages of employees pursuant to section 3402 of the tax code are required to file a Form 941.

Section 3401(a)(9) states that employee wages subject to income tax withholding do not include compensation paid for “services performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties required by such order.” As a result, the wages of a minister are not subject to income tax withholding; therefore, according to the above-quoted regulation, the minister’s employing church is not required to file a Form 941 if the minister is the only employee.

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

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

In conclusion, note three additional points:

1. It is being assumed that the sole minister has not elected voluntary withholding.
2. The same analysis would apply to a church with more than one minister-employee, so long as there are no nonminister employees.
3. Issuing the minister a Form W-2 without filing quarterly Forms 941 will present an apparent discrepancy that may trigger an IRS inquiry. On the other hand, submitting Forms 941 that report a minister’s wages but no Social Security and Medicare withholdings will also raise questions. In either case, the apparent discrepancy can be easily explained.

Form 941 is due on the last day of the month following the end of each calendar quarter.

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