Key point. Federal law requires churches to comply with several payroll tax reporting obligations. Almost every church will be subject to at least some of these rules. Many states have similar provisions. Church leaders must take these rules seriously, since penalties are assessed for noncompliance. For example, church officers may be personally liable for a penalty equal to the amount of payroll taxes that are not withheld or deposited. It is essential for church leaders to understand these rules.
A federal district court in North Carolina ruled that a pastor was responsible for 100 percent of payroll taxes that her employing church failed to withhold or pay over to the government. A pastor filed for bankruptcy protection from her creditors. The IRS filed a claim for $88,000 with the bankruptcy court based on its assertion that the pastor was liable for $88,000 in unpaid payroll tax obligations of her church since she was a "responsible person" liable for unpaid payroll tax obligations. The pastor asked the court to reject the IRS claim on the grounds that she was not a "responsible person," and that any recognition of the IRS claim was barred by the First Amendment's guaranty of religious freedom. The bankruptcy court rejected the pastor's defenses, and the case was appealed to a federal district court.