When you hire an employee, you must have the employee complete a Form W-4 (Withholding Allowance Certificate). Form W-4 reports the employee’s marital status, withholding allowances, and any additional amount to use in withholding federal income taxes from the employees’ pay. If an employee fails to provide the employer with a properly completed Form W-4, the employer is required to withhold federal income taxes from the employee’s wages as if he or she were single and claiming no withholding allowances.
If an employee qualifies, Form W-4 (lines 1-4 and 7) is also used by the employee to inform the employer not to deduct any federal income taxes from his or her wages.
To qualify for exempt status, the employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. However, if the employee can be claimed as a dependent on a parent’s or another person’s tax return, additional limitations may apply.
A Form W-4 claiming exemption from withholding is valid for only one calendar year. To continue to be exempt from with- holding in the next year, an employee must complete a new Form W-4 claiming exempt status by February 15 of that year. If the employee does not provide the employer with a new Form W-4, then the employer must withhold tax as if he or she is single, with no withholding allowances. However, if you have an earlier Form W-4 (not claiming exempt status) for this employee that is valid, withhold as you did before.
Any unauthorized change or addition to Form W-4 makes it invalid. This includes taking out any language by which the employee certifies that the form is correct. A Form W-4 is also invalid if, by the date an employee gives it to you, he or she indicates in any way that it is false. When you get an invalid Form W-4, do not use it to determine Federal income tax withholding. Tell the employee that it is invalid and ask for another one. If the employee does not give you a valid one, withhold taxes as if the employee were single and claiming no withholding allowances. However, if you have an earlier Form W-4 for this employee that is valid, withhold as you did before.
Some churches have employed persons who claim to be exempt from tax withholding based on one or more “tax protester” grounds, including the following:
- Payment of tax is voluntary.
- Wages, tips, and other compensation received for personal services are not income.
- Only foreign-source income is taxable.
- The employee is not a “citizen” of the United States, thus not subject to the federal income tax laws.
- The “United States” consists only of the District of Columbia, federal territories, and federal enclaves.
- The employee is not a “person” as defined by the Internal Revenue Code, thus is not subject to the federal income tax laws.
- The only “employees” subject to federal income tax are employees of the federal government.
- Taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment.
- Federal income taxes constitute a “taking” of property without due process of law, violating the Fifth Amendment.
- Taxpayers do not have to file returns or provide financial information because of the protection against self-incrimination found in the Fifth Amendment.
- Compelled compliance with the federal income tax laws is a form of servitude in violation of the Thirteenth Amendment.
The IRS identifies each of these claims as “frivolous,” and warns taxpayers that their use will expose taxpayers to substantial penalties.
Can a church that properly rejects these tax-protester “exemptions” from taxes and tax withholding be sued by an employee who believes they are valid? That issue was addressed by a federal court in Pennsylvania.
A recent case. A company hired an employee (“Alan”). At the time of hire, Alan completed and signed an I-9 Employment Eligibility Verification Form along with a W-4 Employee’s Withholding Allowance Certificate. On his W-4 form Allen claimed that he was exempt from withholding taxes. A few days later Alan provided his employer with a “bizarre and puzzling packet of documents,” including a document claiming that he did not “engage in any activity for which the United States Congress has imposed a revenue tax liability,” and asserted that he was, therefore, not a taxpayer.
The employer, believing that Alan was not exempt from payroll taxes, withheld these taxes from his wages. A few weeks later Alan’s employment was terminated. He demanded a refund of the taxes that he insisted were improperly withheld from his wages. When the employer refused to comply with this request, Alan filed a lawsuit in a federal court in Pennsylvania seeking a return of the withheld taxes plus $250,000 in punitive damages.
The court dismissed what it labeled a “frivolous” lawsuit. It concluded: “Alan claims that his employer owes him a debt for the amount of taxes taken out of his earnings. He argues that he is not a taxpayer of the United States or the Commonwealth of Pennsylvania. This argument is frivolous. An employer is required under federal and state law to withhold and deduct federal and state income taxes from employees’ wages.” Fuce v. Hoffman, 2010-1 U.S.T.C. ΒΆ50,205 (E.D. Pa. 2010)
Payroll Tax Withholding Summary
Note the following points regarding a church’s withholding obligations:
- Employers are legally required to withhold payroll taxes (income taxes, and Social Security and Medicare taxes) from the wages of employees.
- Churches are not required to withhold payroll taxes from wages paid to ministers for ministerial services.
- Ministers who are treated as employees by the church can elect voluntary with- holding of income taxes by submitting a Form W-4 to the church. Note, however, that ministers are always treated as self-employed for compensation paid for ministerial services, and so churches should not withhold Social Security and Medicare taxes from their wages even if they elect voluntary withholding. However, ministers who elect voluntary withholding can request that their employing church withhold additional income taxes in an amount that will be sufficient to cover their self-employment taxes. These additional income tax with- holdings become a credit that can be applied to self-employment taxes on the minister’s tax return. The additional income tax withholdings are requested on line 6 of Form W-4.
- Some churches have elected to exempt themselves from the employer’s share of Social Security and Medicare taxes by filing a timely Form 8274 with the IRS. The filing of this form has the effect of recharacterizing lay employees as self-employed persons for purposes of Social Security, meaning that the church does not withhold Social Security or Medicare taxes from their wages. However, the church is not relieved of the obligation to withhold income taxes.
- See IRS Publication 15 for information on computing the correct amount of income taxes, as well as Social Security and Medicare taxes, to withhold.
- Employees whose wages are subject to withholding should provide the church with a completed Form W-4. If this is not done, then the church must withhold federal income taxes from an employee’s wages as if he or she were single and claiming no withholding allowances.
- Some lay employees are exempt from income tax withholding. To qualify for exempt status, the employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. However, if the employee can be claimed as a dependent on a parent’s or another person’s tax return, additional limitations may apply.
- Exemption from withholding is claimed by submitting a properly completed Form W-4 to one’s employer. The exemption is claimed by completing lines 1-4 and 7 of the form, and signing it. A Form W-4 claiming exemption from withholding is valid for only one calendar year. To continue to be exempt from withholding in the next year, an employee must complete a new Form W-4 claiming exempt status by February 15 of that year. If the employee does not provide the employer with a new Form W-4, then the employer must withhold tax as if he or she is single, with no withholding allowances. However, if you have an earlier Form W-4 (not claiming exempt status) for this employee that is valid, with- hold as you did before.
- Employees should be encouraged to review their W-4 form annually to see if they need to file a new W-4 form with the church. W-4 forms often become obsolete because of changes in an employee’s circumstances. This can result in withholding that is significantly above or below the actual tax liability. There are many reasons why an employee’s W-4 may be inaccurate, including the birth of a child, a pay raise, or significant medical expenses. These same considerations apply to ministers who have elected voluntary withholding of their taxes. The tax cuts passed by Congress in recent years have reduced taxes for most Americans, and this is another reason why some church employees will want to submit a new W-4 form.
- When requested by the IRS, you must make original Forms W-4 available for inspection by an IRS employee. You may also be directed to send certain Forms W-4 to the IRS. Send the requested copy or copies of Form W-4 to the IRS at the address provided and in the manner directed by the notice. After submitting a copy of a requested Form W-4 to the IRS, continue to withhold federal income tax based on that Form W-4 if it is valid. However, if the IRS later notifies you in writing the employee is not entitled to claim exemption from withholding or a claimed number of withholding allowances, withhold federal income tax based on the effective date, marital status, and maximum number of withholding allowances specified in the notice (commonly referred to as a ”lock-in letter”).
- Frivolous tax protester arguments, like those summarized in the feature article, should never persuade a church to ignore its payroll tax withholding obligations. The only way for an employee to claim exemption from withholding is by submitting a properly completed and signed Form W-4 (lines 1-4 and 7) to the church.
