Churches need to report each employee’s taxable income and withheld income taxes as well as Social Security and Medicare taxes on Form W-2, and furnish copies B, C, and 2 of the 2021 Form W-2 to each employee by January 31, 2022. Copy A should be submitted to the Social Security Administration (SSA) by January 31, 2022, along with Form W-3, Transmittal of Wage and Tax Statements. The deadline is the same whether you file electronically or use paper forms.
Note: If your employees give their consent, you can furnish Forms W-2 to your employees electronically. For details on furnishing W-2s in this format, see chapter 11 in my Church & Clergy Tax Guide.
Although W-2s are not difficult to prepare, there are some tips you should know.
First, be sure to add cents to all amounts. Make all dollar entries without a dollar sign and comma, but with a decimal point and cents. For example, $1,000 should read “1000.00.” Government scanning equipment assumes that the last two figures of any amount are cents. If you report $40,000 of income as “40000,” the scanning equipment would interpret this as 400.00 ($400)! If a box does not apply, leave it blank—do not insert “0.”
Second, here are some details on how to fill in specific boxes.
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.
Caution. The SSA has noted that the main reason W-2s are rejected is the use of incorrect Social Security numbers.
Box b. Insert your church’s federal employer identification number (EIN). This is a nine-digit number that is assigned by the IRS. If you don’t have one, you can obtain one by submitting a completed Form SS-4 to the IRS.
Tip. Some churches have more than one EIN (for example, some churches that operate a private school have a number for both the church and the school). Be sure that the EIN listed on an employee’s Form W-2 is the one associated with the employee’s actual employer.
Box c. Enter 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. Enter the employee’s name as it appears on his or her Social Security card.
Box f. Enter the employee’s address and ZIP code.
Box 1. Report all wages (taxable income) paid in 2021 to workers who are treated as employees for federal income tax reporting purposes.
Key point. Churches should not include in box 1 the annual rental value of a parsonage or a housing allowance provided to a minister as compensation for ministerial services. Also, some contributions made to certain retirement plans out of an employee’s wages are not reported (see Box 3).
Caution. Taxable fringe benefits not reported as income in box 1 may constitute an automatic excess benefit transaction exposing the recipient and members of the church board to intermediate sanctions in the form of substantial excise taxes.
Box 2. List all federal income tax that you withheld from the employee’s wages in 2021. The amount reported in this box (for all employees) should correspond to the amount of withheld income taxes reported on your four 941 forms for 2021.
Box 3. Report a nonminister employee’s wages subject to the Social Security tax. 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 Savings Incentive Match PLan for Employees (SIMPLE) retirement account, and (4) adoption benefits. Box 3 should not list more than the maximum wage base ($137,700 for 2021).
Remember: Ministers (including those who report their income taxes as employees) are self-employed for Social Security with respect to their ministerial services, and so they pay self-employment tax rather than the employee’s share of Social Security and Medicare tax. Therefore, they will not have a number included in this box.
Tip. This box usually will be the same as 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 403(b) plan by salary reduction agreement 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.
Tip. Churches that filed a timely Form 8274 exempting themselves from the employer’s share of FICA tax do not report the wages of nonminister employees in this box since such employees are considered self-employed for Social Security purposes.
Box 4. Report the Social Security tax that you withheld from the nonminister employee’s wages. This tax is imposed on all wages up to a maximum of $137,700 in 2021. Ministers who report their income taxes as employees are still treated as self-employed for Social Security purposes with respect to their ministerial services. For ministers, this box should be left blank.
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 $137,700 in 2021), 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 tax (1.45 percent of an employee’s wages) that you withheld from the nonminister employee’s wages in 2021. Box 6 is left blank for ministers with respect to ministerial compensation.
Box 11. Report distributions to an employee from a nonqualified plan. 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.
If your church made distributions and is reporting any deferrals in Boxes 3 and 5, do not complete Box 11.
Note. The purpose of Box 11 is for the SSA to determine if any part of the amount reported in Box 1 or Boxes 3 or 5 was earned in a prior year. The SSA uses this information to verify that it has properly applied the Social Security earnings test and paid the correct amount of benefits.
If your church made distributions and is reporting any deferrals in Boxes 3 and 5, do not complete Box 11.
Box 12. Insert the appropriate code and dollar amount in this box. Insert the code letter followed by a space and then insert the dollar amount on the same line within the box. Do not enter more than four codes in this box. If more are needed, use another Form W-2. Use capital letters for the codes, and remember not to use dollar signs or commas.
Example. To report a $3,000 contribution to a section 403(b) tax-sheltered annuity, you would report “E 3000.00” in this box.
The codes are as follows:
A, B – This will not apply to church employees.
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).
D – Generally not applicable to churches.
E – Report the amount of contributions to a 403(b) plan pursuant to a “salary reduction agreement” on behalf of the employee. 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 tax with respect to such workers.
F, G, H, J, K – Generally not applicable to churches.
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 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.
M, N P, Q – Not applicable or generally not applicable to churches.
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.
V – Not applicable to churches.
W – Report employer contributions to an health savings account (HSA).
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 nonqualified deferred compensation (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. Also, 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 in my Church & Clergy Tax Guide for more details.
AA – Generally not applicable to churches.
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 reporting 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.
EE, FF, GG, HH – Not applicable or generally not applicable to churches.
Box 13. Check the appropriate box.
- Statutory employee. Churches rarely if ever have statutory employees. These include certain drivers, insurance agents, and salespersons.
- Retirement plan. Mark this checkbox if the employee was an active participant (for any part of the year) in any of the following: (1) a qualified pension, profit-sharing, or stock bonus plan described in section 401(a) (including a 401(k) plan); (2) an annuity; (3) a simplified employee pension (SEP) plan; or (4) a SIMPLE retirement account.
- Third party sick pay. Churches generally will not check this box.
Box 14. This box is optional. You may use it to provide information to your church 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.
Box 15 thorugh 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.