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IRS Again Alerts Employers to Improper ERC Claims

Third parties are using aggressive tactics and lucrative promises related to ERC claims.

The Editors

Editor’s Note: On September 14, 2023, the Internal Revenue Service (IRS) announced it has immediately stopped processing new Employee Retention Credit (ERC) claims “amid [a] surge of questionable claims.”

Concerns raised by tax professionals, coupled with aggressive marketing to ineligible applicants, “highlights unacceptable risk to businesses and the tax system,” the agency said.

The IRS will continue processing previously filed claims and pay out claims it approves, it said, but processing times will take longer as the agency applies more scrutiny to address fraud concerns.

The IRS also said it is finalizing details to help entities victimized by “aggressive promoters” who have used repeated advertising and direct-contact methods to entice claim applications without carefully evaluating whether an entity truly qualifies for the credit.

Taxpayers who already have a claim submitted, but fear they were misled–including churches and small businesses–will be eligible for a special withdrawal option as well, the IRS said. It plans to announce details for the option soon.

The IRS said more than 600,000 claims remain unprocessed.

Church Law & Tax will continue to monitor developments.

The Internal Revenue Service (IRS) is again warning employers, including churches, to exercise caution if they’re contacted by a third party regarding the Employee Retention Credit (ERC).

The ERC is legitimate. However, third parties are using aggressive tactics to try and entice employers to seek it, and sometimes, the third parties aren’t carefully evaluating an employer’s eligibility, putting the employer in jeopardy with the IRS.

In other instances, the third parties have fraudulent intentions altogether.

Church Law & Tax began warning churches about illegitimate or fraudulent activities surrounding the ERC in February.

A bit of background reading:

Many churches may be eligible for the ERC, a provision providing employers relief due to hardships experienced in the early days of the COVID-19 pandemic. Specific criteria must be met, however.

“The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others,” said IRS Commissioner Danny Werfel, in the agency’s latest alert. “Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit.”
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The IRS provided a list of “warning signs” that employers should look for when dealing with a third party about the ERC, including:
  • Unsolicited calls or advertisements mentioning an “easy application process.”
  • Statements that the promoter or company can determine ERC eligibility within minutes.
  • Large upfront fees to claim the credit.
  • Fees based on a percentage of the refund amount claimed. This is a similar warning sign for everyday taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund.
  • Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation. The ERC is a complex credit that requires careful review before applying.
  • Wildly aggressive suggestions from marketers urging businesses to submit the claim because there is nothing to lose. Those improperly receiving the credit could have to repay the credit—along with substantial interest and penalties.

“These promoters may lie about eligibility requirements,” the IRS added. “In addition, those using these companies could be at risk of someone using the credit as a ploy to steal the taxpayer’s identity or take a cut of the taxpayer’s improperly claimed credit.”
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WATCH: The Dangers of Raising Money For One Thing—And Spending It On Another

Church leaders would do well to pay attention to this fraud lawsuit against a Michigan archdiocese.

Matthew Branaugh, Attorney and Editor
Bio

In this update, Church Law & Tax Editor and Attorney-at-Law Matthew Branaugh highlights a fraud lawsuit out of Michigan to explain the risks of churches raising money for one thing, only to spend it for something else.

The key lesson centers on the idea that a legal doctrine known as “ecclesiastical abstention,” may not always shield churches and church leaders from lawsuits, particularly in financial matters.

Meanwhile, search our state-by-state database of latest and most impactful legal developments affecting church leaders, nationwide.

Matthew Branaugh is an attorney and editor for Church Law & Tax.
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Part 4 of 4: The ‘Discovery Rule’ and What It Means for Abuse Victims and Churches

The discovery rule is an exception to the statute of limitations with far-reaching implications for both abuse victims and churches.

Richard R. Hammar, Attorney, CPA
Bio

Introduction

Child abuse scandals continue to garner widespread media attention as well as the attention of lawmakers nationwide. As more victims come forward, they learn that their state’s statute of limitations prevents them from seeking damages.

In many cases, this includes claims against the perpetrator or, when relevant, the perpetrator’s employer through civil lawsuits. States are helping victims by changing or even removing these barriers.

This four-part series focuses on this continuing trend, helping churches and church leaders understand the potential ramifications.

This part looks specifically at the “discovery rule,” an exception to statutes of limitation long available to victims. This is especially relevant to churches in states that have not extended or removed statutes of limitations. This rule also applies in states where extensions have been granted, but deadlines still exist.

The ‘discovery rule’

Some states have adopted a limited exception to the statute of limitations known as the discovery rule.

Under this rule, the statute of limitations does not begin to run until a person “discovers” that his or her injuries were caused by a particular event or condition, or, with the exercise of reasonable vigilance, should have discovered the connection. It does not matter how long ago the injury occurred.

The discovery rule has been applied most often in the following three situations:

1. Medical malpractice.

In some cases, medical malpractice is difficult, if not impossible, to recognize until after the statute of limitations has expired. Under the discovery rule, the statute of limitations begins to run when the patient knew or should have known of it.

2. Child molestation.

Some courts have applied the discovery rule in cases of child sex abuse. These courts have concluded that young children may “block out” memories of molestation for many years. The statute of limitations does not begin until the victim’s eighteenth birthday, or until the victim knew or should have known that his or her emotional or physical injuries were caused by the acts of molestation. Some courts that have applied this rule have limited it to victims who were very young at the time of the molestation. Adults who claim that they repressed memories of abuse occurring when they were adolescents often have a difficult time convincing juries that they are telling the truth.

3. Seduction of adult counselees.

Some courts have applied the discovery rule in cases of sexual contact between a minister and an adult counselee. These courts have concluded that adults who engage in such acts with a minister may attempt to repress their memory of them. They may also be intimidated to the point that they lack the capacity to file a lawsuit.

Key point. Any rescission or extension of the statute of limitations in child sex abuse cases, or any “revival” of child abuse claims barred under prior law, presents extraordinary difficulties for a church that is sued as a result of an alleged incident of sexual misconduct that occurred many years ago. In some cases, church leaders cannot even remember the alleged wrongdoer, much less the precautions that were followed in selecting or supervising this person.

Several courts have been reluctant to apply the discovery rule in cases of child abuse. This is because of the difficulty of repressing knowledge of such events, especially for victims who were adolescents when the alleged abuse occurred. As one court noted, “The discovery rule does not generally apply to claims from a violent assault because the plaintiff is usually aware of the assault.” Doe v. Jesuit College Preparatory School, 2022 WL 2352953 (Tex. App. 2022).

Example.

A federal court in Vermont ruled that an adult who claimed to have been sexually abused by a nun some 40 years earlier could sue a Catholic diocese for his alleged injuries. 

An adult male (the plaintiff) began receiving intensive psychotherapy for what he alleges were severe emotional problems. As a result of this therapy, the plaintiff claimed that he discovered he was the victim of “childhood sexual abuse, physical abuse and psychological abuse.” These things allegedly happened when he was a resident of a church orphanage.

The plaintiff filed a lawsuit against “Sister Jane Doe” and various religious organizations allegedly responsible for hiring and supervising her.

The plaintiff alleged in his lawsuit that he had “used all due diligence, given the nature, extent, and severity of his psychological injuries and the circumstances of their infliction, to discover the fact that he has been injured by the sexual abuse.” The diocese urged the court to dismiss the case on the ground that the statute of limitations had expired.

Under Vermont law, when a plaintiff sues to recover damages for injuries “suffered as a result of childhood sexual abuse,” the lawsuit must be brought within “six years of the act alleged to have caused the injury or condition, or six years of the time the victim discovered that the injury or condition was caused by that act, whichever period expires later.”

The diocese claimed that since the alleged abuse occurred over forty years ago it is reasonable to assume that the plaintiff should have discovered the cause of his injuries long ago. It also argued that forcing it to defend against an alleged injury occurring so long ago violates the very purpose of a statute of limitations, which is to relieve defendants of the difficult if not impossible task of defending against such claims.

The court rejected these arguments and ruled that the statute of limitations had not expired on all but one of the plaintiff’s claims. It also excepted assault and battery, which the court deemed to be unrelated to childhood sexual abuse. The court observed that under Vermont law, the test is when the plaintiff in fact discovered that his injuries were caused by childhood abuse, and not when he reasonably could have made this discovery. Barquin v. Roman Catholic Diocese, 839 F. Supp. 275 (D. Vt. 1993).

‘Active Concealment’ and fraud can also extend statutes of limitations

Some courts have permitted the statute of limitations to be suspended in limited circumstances. This includes fraud or the “active concealment” of the existence of a civil claim against a wrongdoer.

Example.

A Tennessee appellate court ruled the trial court wrongly dismissed a complaint against church entities involving sexual abuse by a pastor.
The court found victims claimed church leaders hid the abuse and created a “whitewash,” amounting to fraudulent concealment.
Because of this alleged concealment, the statute of limitations had not begun before the lawsuit was filed.

Doe v. Presbyterian, 2022 WL 1837455 (Tenn. App. 2022).
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Part 3 of 4: A New Federal Law May Expand Abuse Victims’ Rights to Pursue Damages

The Eliminating Limits to Justice for Child Sex Abuse Victims Act of 2022 places no time limits on when victims can sue.

Richard R. Hammar, Attorney, CPA
Bio

Editor’s Note: Child abuse scandals continue to garner widespread media attention as well as the attention of lawmakers nationwide. As more victims come forward, often years or decades after suffering alleged abuses, they learn their state’s statute of limitations prevent them from seeking damages from the perpetrator or, when relevant, the perpetrator’s employer through civil lawsuits. These time bars have become subject to changes—and in some instances, outright removals—by state legislatures in an effort to help victims.

This four-part series focuses on this continuing trend, helping churches and church leaders understand the potential ramifications. This part looks specifically at changes made by Congress as a way to offer victims a path to seek legal remedies if their states’ statutes of limitations have not been extended.

In 2022, Congress enacted the Eliminating Limits to Justice for Child Sex Abuse Victims Act. This Act provides that “there shall be no time limit” for filing civil lawsuits for any of the following federal sex offenses:

Federal offenseCitation
Forced labor18 USC 1589
Trafficking for forced labor18 USC 1590
Sex trafficking18 USC 1591
Aggravated sexual abuse18 USC 2241(c)
Sexual abuse18 USC 2242
Sexual abuse of a minor18 USC 2243
Sexual exploitation of children18 USC 2251
Selling or buying children18 USC 2251A
Certain activities relating to material involving the sexual exploitation of minors18 USC 2252
Certain activities relating to material involving the sexual exploitation of minors18 USC 2252A
Production of sexually explicit depictions of a minor for importation into the United States18 USC 2260
Transportation generally18 USC 2421
Coercion and enticement18 USC 2422
Transportation of minors18 USC 2423

It remains to be seen how effective this legislation will be since most sex abuse claims are brought in state court. However, it likely will benefit victims of child sexual abuse whose claims are barred by state statutes of limitation.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Part 2 of 4: Is Your Church Prepared for a Decades-Old Abuse Claim?

Pastors, church boards and everyday church members should understand the liability that can come with a decades-old abuse claim.

Richard R. Hammar, Attorney, CPA
Bio

Introduction

Child abuse scandals continue to garner widespread media attention as well as the attention of lawmakers nationwide. As more victims come forward, they learn that their state’s statute of limitations prevents them from seeking damages.

In many cases, this includes claims against the perpetrator or, when relevant, the perpetrator’s employer through civil lawsuits. States are helping victims by changing or even removing these barriers.

This four-part series focuses on this continuing trend, helping churches and church leaders understand the potential ramifications.

This part looks specifically at the legal, financial, and administrative tolls a church may face if a civil lawsuit dating back years or decades moves forward in the courts.

Understand what’s at stake

Church leaders must understand that their church is probably not in a financial position to respond to an abuse claim reaching back several decades, and that in some cases, liability for an abuse claim could extend to board members or even individual members.

The motivation behind states extending victims’ rights when it comes to abuse involving churches is both understandable and laudable: Legislators want to “give voice” to persons sexually abused as minors who, for whatever reason, were reluctant or unwilling to bring their claims in court.

After all, several studies have demonstrated that most child abuse victims find it difficult to seek remedies for their claims in civil court. This is often due to one or more of the following factors:
  • Repressed memory of the abuse.
  • Shame and embarrassment.
  • An unwillingness to publicly disclose in court the details of the abuse.
  • An unwillingness to testify in court regarding the details of the abuse.
  • An unwillingness to confront one’s abuser in court.
  • A reluctance to disclose the details of the abuse to family and friends who may know nothing about it.

But church leaders need to understand that if a church’s assets are below the amount a victim is seeking in court, and a church’s insurance coverage is insufficient to cover the claim, then the victim’s attorney may seek to recover damages against the personal assets of church board members.

Churches are financially ill-prepared to meet new claims

But many churches, schools and other defendants are not adequately positioned to answer for abuse that happened before current staff and members were born.

Inadequate insurance coverage

Unfortunately, insurance policies that are several years or decades old are often discarded by church staff who see no point in keeping them and adding to the general “clutter” in the church office, and most churches do not have liability insurance providing coverage for claims of sexual abuse alleged to have occurred years or decades in the past.

Even if liability insurance is available and no exception applies, the policy often will provide low limits of coverage for providing a defense and paying toward any damages awarded.

Bankruptcy

In any event, if a liability insurance policy for the year that a case of child abuse occurred is not available, then bankruptcy must be considered. This would involve identifying all church assets that are available to pay a sex abuse claim, including buildings, vehicles, bank accounts, and so on.

Furthermore, liability might extend to board members or even individual members if a church’s assets are far below the amount a victim is seeking in court.

Federal law and the laws of most states protect volunteers and uncompensated board members of tax-exempt corporations (including churches) from personal liability for their decisions as members of the board.

Exceptions
  • In most states, the immunity of uncompensated church board members does not extend to willful and wanton acts or gross negligence, or to board members of unincorporated churches. To illustrate, if an old claim of child abuse occurred because of a failure by the board to institute reasonable protective policies and procedures, it is possible that this will constitute gross negligence. This will expose the board members to the personal liability exception.
  • Immunity statutes providing limited relief to church board members only apply to uncompensated directors. This is an important point for church leaders to understand. Some churches provide limited amounts of compensation to board members. These may include a gift or stipend at Christmas, or non-accountable expense reimbursements. Even limited forms of compensation jeopardize the significant protection that uncompensated directors enjoy from personal liability, making it important for church leaders to review any future examples of compensation provided by the church to its board members.

Also note that some courts have suggested that members of an unincorporated church may be personally liable for the acts and obligations of other members, or the church itself, opening the door for victims to recover damages from individual members if the church cannot pay out of its own assets and insurance.

Understanding insurance is key

Clergy and church leaders evaluating possible abuse claims past or present need to understand the insurance coverage their churches possess (or possessed in the past). Of particular importance is whether a church secured an occurrence policy or a “claims made” policy.

Claims made and occurence insurance policies

“Occurrence” policies only cover injuries that occur during the policy period, regardless of when a claim is made.

Advantages to an “occurence” policy:
  • Covers any injury that occurs during the policy period, regardless of when a lawsuit is filed
  • No “prior acts” coverage needed if a church maintains a succession of “occurrence” policies

Disadvantages:
  • Does not cover lawsuits filed during the policy period for injuries occurring prior to the policy period.
  • Insurance premiums usually higher than for a “claims made” policy.

A “claims made” policy covers injuries for which a claim is made during the policy period if the insured has continuously been insured with claims made policies with the same insurer since the injury occurred.

Advantages to a “claims made” policy:

  • Covers any lawsuit filed during the policy period, regardless of when the injury occurred
  • Coverage limits are the current limits, not the limits in effect when the injury occurred
  • Insurance premiums often are lower than for an occurrence policy  

Disadvantages:
  • Must have carried “claims made” insurance continuously with the same insurer from the date of the injury to the date of the claim, or have purchased “prior acts coverage,” which can be costly.
  • A brief lapse in insurance coverage for any reason can result in no “claims made” coverage
  • Coverage for prior claims is lost if a church switches from a “claims made” to an “occurrence” policy
  • When a policy expires or is terminated, for any reason, coverage ceases (even for claims that are later made for injuries occurring during the policy period)
  • Claims for injuries occurring in more than one year may be filed during the same year, meaning that the policy’s “aggregate” coverage limit is more quickly reached (the aggregate limit is the total amount the insurer will pay out during that year for all covered claims)
  • Claims must not only be made during the policy period to be covered—they also must be reported to the insurer (a technicality that is sometimes overlooked)

“Prior acts” coverage, available for an additional cost and at the insurer’s discretion, covers claims made during the current policy period for injuries occurring in the past when the insured carried insurance with another insurer.

Example: A church purchases “claims made” counseling insurance from Company A each year for several years. It switches to an “occurrence policy” with Company B this year.

A lawsuit is brought against the church this year for an alleged act of counseling malpractice that occurred three years ago. The church’s policy with Company A will not cover this claim since the claim was not “made” during the policy period (even though it occurred during the policy period). Had the church not switched insurers this year, the claim would have been covered. Does the policy with Company B cover the claim? No, since the injury did not occur during the policy period.

As a result, there is no coverage for this claim. Note that the result would have been the same had the church purchased a claims made policy from Company B, unless it also purchased “prior acts” coverage.

This example illustrates an important point. Churches should not switch from a claims made to an occurrence policy (with the same or a different insurer), or switch claims made insurers, without legal counsel.

Church leaders should ensure that liability insurance policies are never discarded. Policies often are the only means of establishing the existence and availability of insurance for old claims—both now and in the future.

Church leaders should periodically review the policies and procedures the church has adopted to address the risk of child abuse and ensure both their adequacy and consistent application.

Insurance ‘archeology’

If a church cannot locate an insurance policy covering a case of child abuse occurring many years in the past, the services of an “insurance archaeologist” may be helpful. Insurance archaeologists are trained to locate missing insurance policies. Even if successful, conditions may apply. Further, the coverage limits under old policies often will be far below the damages sought, making the services of an archaeologist of limited value in many cases.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Part 1 of 4: More States Expand Victims’ Rights to Sue for Abuse

New laws extend, and in some cases, eliminate statutes of limitations for filing civil lawsuits in connection with abuse cases.

Richard R. Hammar, Attorney, CPA
Bio

Editor’s Note: Child abuse scandals continue to garner widespread media attention as well as the attention of lawmakers nationwide. As more victims come forward, often years or decades after suffering alleged abuses, they learn their state’s statute of limitations prevent them from seeking damages from the perpetrator or, when relevant, the perpetrator’s employer through civil lawsuits.

These time bars have become subject to changes—and in some instances, outright removals—by state legislatures in an effort to help victims.

This four-part series focuses on this continuing trend, helping churches and church leaders understand the potential ramifications. This part looks specifically at how many states are changing statutes of limitation, and court cases illustrating how those changes affect the legal process.

Most states have several statutes of limitations specifying the deadline for filing a civil lawsuit seeking a legal remedy (such as compensation) for an injury that can range from a breach of contract to a personal injury to property damage. Different deadlines apply for different types of claims.

Key point 10-16.4 The statute of limitations specifies the deadline for filing a civil lawsuit. Lawsuits cannot be brought after this deadline has passed.

There are a few exceptions that have been recognized by some courts:

(1) The statute of limitations for injuries suffered by a minor begins to run on the minor’s eighteenth birthday.

(2) The statute of limitations does not begin to run until an adult survivor of child sexual molestation “discovers” that he or she has experienced physical or emotional suffering as a result of the molestation.

(3) The statute of limitations does not begin to run until an adult with whom a minister or church counselor has had sexual contact “discovers” that his or her psychological damages were caused by the inappropriate contact.

(4) The statute of limitations is suspended due to fraud or concealment of a cause of action.

Persons who do not file a lawsuit by the deadline specified by law generally have no legal recourse.

But state lawmakers, federal lawmakers, and courts have come up with a variety of ways to extend the statute of limitations for injuries to minors, particularly as it relates to sexual abuse and molestation.

A report released in 2022 by CHILD USA notes:
  • 50 states have eliminated the statute of limitations for child abuse criminal claims.
  • 18 states have eliminated a statute of limitations for some or all child abuse civil claims.
  • 27 states have enacted “revival statutes” that “revive” child sex abuse claims that expired under prior law.

Case Studies

North Carolina

An adult male sued a religious denomination in 2022 for injuries he sustained as a result of being sexually abused by a house parent at a denomination–run orphanage. A North Carolina appeals court observed:

The Sexual Assault Fast Reporting and Enforcement Act (“the Act”) was enacted in 2019 to “strengthen and modernize” our sexual assault laws. Among other revisions, the Act extended to ten years the statute of limitations for a civil action based on sexual abuse suffered while a minor.

Further, it provided that “a plaintiff may file a civil action within two years of the date of a criminal conviction for a related felony sexual offense against a defendant for claims related to sexual abuse suffered while the plaintiff was under 18 years of age.”

The Act also contained a provision, effective from 1 January 2020 to 31 December 2021, that revived “any civil action for child sexual abuse otherwise time-barred under [prior law] as it existed immediately before” the Act’s passage. Doe v. The Western North Carolina Conference of the United Methodist Church, 871 S.E.2d 877 (N.C. App. 2022).

New York

Example 1: The plaintiff, a 69 year old male, sued a church and others for sexual abuse from 1960 to 1964 by two persons associated with his Boy Scout troop, the suit was not time-barred because the Child Victims Act … extended the statute of limitations to bring a civil action based on sexual abuse until the child victim reached the age of 55, and … created a one-year revival window for time-barred claims, which was later extended by the Governor for an additional year regardless of the victim’s age. LG 67 Doe v. Resurrection Lutheran Church, 164 N.Y.S.3d 803 (N.Y. App. 2022).

Example 2: A federal district court in New York made the following comments regarding a sex abuse case:

On February 14, 2019, former New York Governor Andrew Cuomo signed into law the Child Victims Act. … The Child Victims Act allows individuals who were sexually abused as children to assert civil claims that had previously been barred by the statute of limitations. Specifically, the CVA extends the statute of limitations for actions against ‘any party whose intentional or negligent acts or omissions are alleged to have resulted in the commission of child sexual offenses.’

Those actions must be brought before the plaintiff reaches the age of 55. The CVA also created a ‘window of time’ during which previously time-barred claims alleging child sexual abuse could be brought. … After the CVA became law, more than 200 previously time-barred actions alleging child sexual abuse were brought against the Diocese and certain individuals and organizations affiliated with the Diocese.

Together, these suits allege acts of sexual abuse dating back more than six decades. The Diocese provided notice to its former insurers and requested that they defend and indemnify the Diocese in accordance with the requirements in the individual policies. The filing of more than 200 claims, and the possibility of additional claims, led the Diocese on October 1, 2020, to file for bankruptcy protection pursuant to Chapter 11 of the United States Bankruptcy Code. Roman Catholic Diocese of Rockville Ctr. v. Certain Underwriters at Lloyds, 2021 WL 4027020 (S.D.N.Y. 2021).

Old abuse claims pose challenges for both victims, churches

While the motivation behind such laws is understandable, churches will likely struggle to defend themselves against claims arising from decades-old abuse cases.

This is due to several factors, including:
  • memories have faded,
  • witnesses are dead,
  • alleged living witnesses have no recollection of the abuse,
  • few, if any, church members have any knowledge or recollection of the abuse,
  • no documentary evidence exists pertaining to the alleged abuse,
  • the victim has no corroborating physical evidence pertaining to the abuse, such as letters, email, social media posts, and photographs,
  • the victim cannot identify the alleged perpetrator,
  • a lack of evidence that the victim reported the abuse to parents, friends, or church staff.

Some courts have noted that the following factors tend to corroborate claims of child abuse occurring many years or decades ago:
  • an admission by the abuser,
  • a criminal conviction for the abuse,
  • a victim’s documented medical history of childhood sexual abuse,
  • contemporaneous records or written statements of the abuser, such as diaries or letters,
  • photographs or recordings of the abuse,
  • an objective eyewitness’s account,
  • evidence the abuser had sexually abused others,
  • “… proof of a chain of facts and circumstances having sufficient probative force to produce a reasonable and probable conclusion that sexual abuse occurred. …” Moriarty v. Garden Sanctuary Church of God, 534 S.E.2d 672 (SC 2000).
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

4-Part Series: Expanding Abuse Victims’ Rights and What It Means for Churches

As state and federal lawmakers understandably expand abuse victims’ rights, Church Law & Tax examines what it all means for churches.

Richard R. Hammar, Attorney, CPA
Bio

Child abuse scandals continue to garner widespread media attention as well as the attention of lawmakers nationwide. As more victims come forward, often years or decades after suffering alleged abuses, they learn their state’s statute of limitations prevents them from seeking damages from the perpetrator or, when relevant, the perpetrator’s employer through civil lawsuits. These time bars have become subject to changes—and in some instances, outright removals—by state legislatures in an effort to help victims.

This four-part series focuses on this continuing trend, helping churches and church leaders understand the potential ramifications.

Part 1: More States Expand Victims’ Rights to Sue for Abuses

Part 2: Is Your Church Prepared for a Decades-Old Abuse Claim?

Part 3: A New Federal Law May Expand Abuse Victims’ Rights to Pursue Damages

Part 4: The ‘Discovery Rule’ and What It Means for Victims and Churches
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Key Tax Dates May 2023

Along with monthly and semiweekly requirements, May includes several quarterly filings and forms for churches, ministries, and church-run schools.

Richard R. Hammar, Attorney, CPA
Bio

Monthly requirements

If your church or organization reported withheld taxes of $50,000 or less during the most recent lookback period (for 2023 the lookback period is July 1, 2021, through June 30, 2022), then withheld payroll taxes are deposited monthly.

Tip: The 2023 Church & Clergy Tax Guide is available—order a print copy today (while supplies last) or download the .pdf version now.

Monthly deposits are due by the 15th day of the following month. Note, however, that if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church or organization need not deposit the taxes.

Instead, it can pay the total withheld taxes directly to the Internal Revenue Service (IRS) with its quarterly Form 941. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes (7.65 percent of wages), and the employer’s share of Social Security and Medicare taxes (an additional 7.65 percent of employee wages).

Semiweekly requirements

If your church or organization reported withheld taxes of more than $50,000 during the most recent lookback period (for 2023 the lookback period is July 1, 2021, through June 30, 2022), then the withheld payroll taxes are deposited semiweekly.

This means that for paydays falling on Wednesday, Thursday, or Friday, the payroll taxes must be deposited on or by the following Wednesday. For all other paydays, the payroll taxes must be deposited on the Friday following the payday.

Note further that large employers having withheld taxes of $100,000 or more at the end of any day must deposit the taxes by the next banking day. The deposit days are based on the timing of the employer’s payroll. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes (7.65 percent of wages), and the employer’s share of Social Security and Medicare taxes (an additional 7.65 percent of employee wages).
May 2023 Tax CalendarDownload

May 10, 2023: Employer’s quarterly federal tax return—Form 941

Churches having non-minister employees (or one or more ministers who report their federal income taxes as employees and who have elected voluntary withholding) may file their employer’s quarterly federal tax return (Form 941) by this date instead of April 30 if all taxes for the first calendar quarter have been deposited in full and on time.

May 15, 2023: File forms 990, 990-T, and 5578

Information return—Form 990

An annual information return (Form 990) for tax-exempt organizations is due by this date for tax year 2022. Form 990 summarizes revenue, expenses, and services rendered. Organizations exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code must report additional information on Schedule A.

Note. Churches, conventions, and associations of churches, “integrated auxiliaries” of churches, and church-affiliated elementary and secondary schools are among the organizations that are exempt from this reporting requirement. Organizations not exempt from this reporting requirement must file Form 990 if they normally have annual gross receipts of $50,000 or more.

Unrelated business income tax return—Form 990-T

An unrelated business income tax return (Form 990-T) must be filed by this date by churches and any other organization exempt from federal income tax that had gross income from an unrelated trade or business of $1,000 or more in 2022. Learn more about unrelated business income on this Recommended Reading page.

Certificate of racial nondiscrimination—Form 5578

Annual certification (for calendar year 2022) of racial nondiscrimination by a private school exempt from federal income tax (Form 5578) must be filed by this date by schools that operate on a calendar-year basis.

This form must be filed by preschools, primary and secondary schools, and colleges, whether operated as a separate legal entity or by a church.

Richard R. Hammar further explains Form 5578, including the steps for filing one, in this article.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: Image: Getty/Douglas Sacha

Can a Church Glorify God via the Property Tax Process? Absolutely.

What churches should know, especially when an unexpected property tax bill arrives.

The Editors

Churches meeting certain criteria are considered automatically exempt for federal tax purposes. That’s why many are caught off-guard when an unexpected bill arrives from the local assessor. Attorney Midgett Parker, a long-time senior editorial advisor for Church Law & Tax, explains what happens when property tax gets assessed, why it might happen, and how churches can work to avoid such problems by building good relationships and maintaining strong communications in the community.

Q: Churches meeting certain criteria are considered automatically tax-exempt for federal tax purposes. Does this mean any property they own is also automatically exempt from taxes?

No. Real property owned by a religious entity is not automatically tax-exempt. Churches that own property or rent their space are still paying property taxes until they apply for, and receive from the local jurisdiction, their tax exemption status for the real property.

In other words, churches must take steps to find out what the procedures are in their local jurisdiction to apply for the tax exemption status for the real property. In today’s world, it’s easy: just conduct an online search by typing in “real property tax exemption for churches in …” followed by the county and state name.

Did you know the practice of exempting religious organizations from property taxes is both ancient and widespread? From Joseph protecting priests’ lands from Pharoah to Constantine exempting churches from property taxes in the fourth century, the concept is not new to the United States. 

Once you’ve found the address and phone number of the local tax assessment office, pick up the phone, ask for help applying for the exemption and perhaps even visit that office.

Build relationships. Look at it as a positive experience—an opportunity to spread the word that your church is in the community; that it has acquired a property or is leasing a property.

The next thing to do is talk to other church leaders. Ask them if their property is exempt and what processes they went through. Again, it’s about building relationships not just for advancement of the kingdom, but to obtain relief for your congregations whose tithes and offerings are supporting the church. It’s worth the time.

Q: What should a church be prepared to have ready when going through a tax exemption application at the local level?

The primary purpose behind the exemption is that the property is used exclusively for religious worship purposes (which is basically the standard across the United States). You want to present evidence (through written documentation and oral testimony) to show how the property is used EXCLUSIVELY for religious worship purposes.

If you’re not ready to build on a vacant property, obtain a permit for a tent, have a revival. Print out your program or have available a program showing the property is being used for religious worship purposes.

Sure, your church can have picnics, create exercise and meditation gardens, have and serve refreshments, but again, the primary use is religious worship.

Also, make sure you have a site plan that shows the actual property boundaries. You might even want to take a surveyor to the site and put stakes in the ground outlining the shape and size of the property.

Q: What about churches that lease space?

Storefront churches, and churches using similar spaces, are a growing trend because it’s easier to move into an existing building than build a new one from the ground up.

When renting space, the reality is that a portion of your rent is going to pay local real property taxes. And typically, in lease documents, they outline what the rent rate is and maybe mention your responsibility for your portion of the real property taxes. If the lease agreement includes such information, ask the assessor for any exemptions from real property taxes for your religious use on a portion of the real property in the lease.

Tip: Sometimes, a county government will offer an exemption from real property taxes for space used by a religious entity exclusively for religious worship purposes. Prince George County, Maryland, for example, offers an exemption that might make a good template to take to your local assessor or governing body to ask for a similar arrangement.

Q: Why is a church property tax exemption not permanent?

Because land uses change—and there are eyes watching you all the time. So be careful.

A church may sell its property and the government wants to receive its share of taxes, so it will add the property back to the tax rolls.

Learn how to evaluate your church’s property tax exemptions each year.

Or maybe a church owns the property and changes the use. For example, the church adds affordable housing or housing for the elderly, making it a residential use.

Another example: a church lost its exemption from real property tax when it decided to begin renting parking spaces in direct competition with the local metropolitan parking lot – typically near a mass transit rail line. As a result, it lost its property tax exemption for the portion of the property being used as a commercial parking lot.

Q: What if a church sells its property to another church?

Typically, the exemption will remain in place. But, again, relationships and communication are key. Talk to the assessor’s office, let them know what is going on, and remind them that the property will continue to be used exclusively for religious worship purposes.

Q: What types of situations might trigger a property tax assessment for a church, even if it has a valid exemption on record with its local assessor?

When activities cause others to question the activities on the property, it might bring a challenge.

Food banks are a good example, or perhaps a clothing thrift shop. An outsider might see such activity as a non-religious use without being aware the food bank or thrift shop is part of your mission. So, let the assessor know the missional aspect of the activity because, chances are, you will be challenged.

Q: What about building on vacant property or vacating an existing building to allow renovations or an addition? What should church leaders expect from the local taxing authority in these situations?

The period during construction for the church’s use may be targeted to be taxed because you’re not using the space exclusively for religious worship purposes. The key, though, is to continue worshiping there, even during construction.

Another key: building a morals and religious worship clause into all construction contracts spelling out that the property is God’s property and is to be treated as holy ground. Turn the project into a worship experience.

Dig Deeper: A New Jersey church was forced to pay taxes for a converted building. Click here to find out why.

Think creatively. Find a biblical basis—the nexus between what your activity is (construction) and the worshipful aspect of that activity. And be prepared to take your argument to the local tax assessor and your elected officials. They could change the local tax code to allow that a church in the midst of a construction project while continuing to hold religious worship services on the property does not violate the exclusive use requirement.

I’m an optimist about these things!

Q: If a church receives an unexpected property tax bill, what are the best steps that leaders can take to appeal it with the local assessor?

First, do not panic. Pray. Then, read the tax notice in detail, front-to-back, top to bottom. There ought to be in that tax bill a statement of how the recipient can appeal the assessment, along with an address and phone number. Be sure to call the number provided and ask about the appeal process.

Again, be communicative in a positive way. Typically, there is a very limited window of time to initiate an appeal of an adverse decision—often 30 days from the date of the letter. Missing the window means you’ll likely have to wait until the next year to appeal.

One of the best steps a church leader can take is to accept where you are now. If an appeal is possible, do it. If your church got taxed because its exemption lapsed for one reason or another, rededicate your use of the real property toward EXCLUSIVE religious worship purposes and then apply for the exemption. Then, renew the exemption every year going forward. Don’t look back. Look forward and continue to use the property EXCLUSIVELY for religious worship purposes.

(Editor’s Note: This interview was edited for length and clarity.)
Image: Getty/d3sign

Remote Work Expense Deductions for Pastors and Church Staff

Explore how pastors and church staff can benefit from tax-free reimbursements and deductions for remote work expenses.

Michael E. Batts, CPA
Bio

Last Reviewed: January 17, 2025

Question: More churches have allowed pastors and employees to work from home one or more days a week. For income tax purposes, can those individuals deduct the business expenses they incur while working from home?

Are Remote Work Expenses Deductible?

In general, employees can no longer deduct unreimbursed business expenses from their personal income tax returns. This change stems from the Tax Cuts and Jobs Act of 2017, which eliminated miscellaneous itemized deductions, including unreimbursed employee expenses.

However, this does not mean that churches cannot assist pastors and staff with their home office expenses. Here are two key considerations:

Ministers and Dual Tax Status

Ministers are uniquely treated under the tax code due to their dual tax status. They are considered employees for income tax purposes but are treated as self-employed for Social Security and Medicare purposes under the Self-Employed Contributions Act (SECA). Because of this distinction, ministers may still be able to deduct unreimbursed business expenses when calculating net income subject to self-employment tax. Consulting with qualified tax counsel is essential to explore this possibility further.

Reimbursement for Work-from-Home Expenses

Churches can reimburse pastors and staff for valid business expenses incurred while working from home under an accountable reimbursement arrangement. Eligible expenses include costs for equipment and supplies used exclusively for employment purposes. Examples of reimbursable expenses include:
  • Computers or laptops (especially for cybersecurity and productivity needs)
  • Monthly internet service (to ensure adequate speeds for video calls and other activities)
  • Office supplies, such as paper, pens, or folders
  • Printers, scanners, or other office equipment
  • Office furniture, if necessary and approved by the employer

Advantages of Reimbursements

There are distinct advantages for churches to reimburse work-from-home expenses:
  • Tax-Free Reimbursements: Expenses reimbursed under an accountable reimbursement arrangement are not taxable income to the employee.
  • Improved Productivity and Security: Providing specific equipment or internet services ensures employees have the tools needed to perform their roles effectively and securely.

For a detailed look at accountable reimbursement arrangements, including key points and examples, see Chapter 7 of Richard Hammar’s “Church & Clergy Tax Guide”.

Important Considerations

For Pastors and Employees

If an employer pays for furniture or equipment, the employer retains ownership of these items. Employees are responsible for maintaining these items and returning them if their employment ends.

For Churches

Reimbursements can impact budgets, but they provide significant financial relief to employees and are generally not taxable. Churches should balance the financial benefit to staff with their overall budgetary constraints.

FAQs About Remote Work Expense Deductions

Can pastors deduct home office expenses on their taxes? Pastors may deduct unreimbursed business expenses for self-employment tax purposes but should consult with a tax professional for guidance. What is an accountable reimbursement arrangement? It is a plan that allows employers to reimburse employees for valid business expenses tax-free, provided detailed documentation is maintained. Which expenses qualify for reimbursement? Qualifying expenses include computers, internet service, office supplies, and other items used exclusively for work purposes. Do employees own reimbursed equipment? No, items purchased or reimbursed by the employer typically remain the property of the employer.

Conclusion

While pastors and church staff may not be able to deduct unreimbursed business expenses directly, churches can help by reimbursing valid work-from-home costs. This not only supports staff productivity but also provides financial relief through tax-free reimbursements. Churches should establish clear accountable reimbursement arrangements to ensure compliance and maximize the benefits for their teams.

Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.
Image: Image: Getty/Kevin Dietsch

Keeping Your Church’s Deposits Safe in a Jittery Bank Environment

Silicon Valley Bank’s failure shows we never really know whether a bank is truly safe and sound.

Michael E. Batts, CPA
Bio

Editor’s Note: This article, which is provided for information only and is not an endorsement, has been edited and republished with permission from Batts Morrison Wales & Lee.

Many church and nonprofit leaders are wondering if their organizations’ bank deposits are safe in the current banking environment. And for good reason.

Join Church Law & Tax today as an Advantage Member and begin receiving unlimited access, product discounts, exclusive webinars and events, and much, much more!

Immediately before Silicon Valley Bank (SVB) was taken over by the FDIC on March 10, 2023, one major ratings agency had an “A” rating outstanding for the bank, and another had a “B” rating outstanding.

SVB’s failure was the second largest in US history, according to The Wall Street Journal, which offered a truly remarkable observation about it: “The bank was in sound financial condition on Wednesday, the regulator said. A day later, it was insolvent.”

When a bank with “A” and “B” ratings is considered by regulators to be sound one day, and taken over by the FDIC two days later, it’s only logical to wonder how any reasonable, prudent person can know whether any bank is in healthy financial condition.

For more help with managing liquidity and financial position, see chapter 6 of Church Finance, Second Edition, by Michael E. Batts

Fortunately for SVB’s depositors, federal banking officials have indicated that all SVB depositors will be made whole, even beyond the $250,000-per-depositor FDIC coverage cap because of SVB’s systemic importance.

But a logical corollary is that one cannot assume that the same will be true for the next bank that fails. Another bank, Signature Bank, also recently failed.

Assessing where your organization banks

Given the practical limitations on the ability to know whether any bank is truly safe and sound, what can–and should—church and nonprofit leaders do to ensure that their organizations’ bank cash deposits are safe?

Some people are suggesting that perhaps the only safe banks are the very largest banks in the country … those that many believe regulators deem are “too big to fail.” It is important to note that the assumption that regulators would make all depositors of a very large bank whole in any failure scenario is just that…an assumption. There is no federal guarantee of regular deposits in any bank beyond the FDIC’s $250,000 per depositor insurance coverage.

Additionally, If all depositors decided to bank only with the largest banks, smaller local and regional banks would be wiped out, and local banking relationships could be more difficult to maintain. And depending on the size of your organization’s deposit balances, it may not be practical to try to spread deposits among multiple banks keeping balances below the FDIC coverage cap of $250,000 per depositor.

So, let’s turn to the topic of making deposits in the banking system.

Clearly, there are ways to protect cash outside of the banking system in an investment portfolio, such as investing (with the help of a properly credentialed investment advisor) in short-term US Treasury securities or in appropriate investment funds that hold such securities. But what about cash that your organization simply wants to keep in the bank?

It is probably true that the larger the bank, the more likely it is that federal regulators would deem it too big to fail.

So, if your organization wants to bank with a big bank, that could be an appropriate strategy. Bankrate offers a list of the 15 largest banks in the US. It is interesting to note, however, that #14 on the list, First Republic Bank, recently had a severe challenge. Bankrate’s website includes an update on First Republic Bank dated March 17, 2023, which states:

It’s also important to note that First Republic recently faced turmoil that threatened its solvency following the collapse of Silicon Valley Bank and Signature Bank. However, 11 of the largest US banks came together to save the bank, depositing $30 billion into First Republic to keep it afloat.

Just know the fact that a bank is large–even very large–is not, in and of itself, assurance of the bank’s financial health.

A word of caution: Any organizations or persons considering any strategy to manage the risk of their bank deposits or other assets should perform their own due diligence before taking action.

Tapping into IntraFi

Is there a way to ensure that an organization’s bank cash deposits are safe, even with a local or regional bank?

Many such banks would answer that question with a resounding “Yes!,” and a number of them would point to their participation in programs offered by IntraFi Network, LLC (IntraFi). IntraFi’s website describes its two main programs, ICSand CDARS, as follows:

Using IntraFi Cash Service℠, or ICS, and CDARS you can access millions in FDIC insurance for cash deposits from IntraFi® network banks and enjoy the simplicity of banking with just one trusted, local institution. Conveniently and easily secure funds placed into demand deposit accounts, money market deposit accounts, or CDs.

Banks that participate in the IntraFi network allow customers to maintain a relationship with one bank and have FDIC insurance coverage for deposits well beyond the standard FDIC coverage cap of $250,000 per depositor per bank. The network allows for the larger deposits to be spread among multiple banks in the network in amounts below the $250,000 FDIC cap while maintaining one point of contact with one participating bank.

IntraFi offers programs for demand deposit (checking) accounts, money market accounts, and CDs. Participation in the IntraFi program with a participating bank can carry a cost or fee . The cost can apply as a reduction in the interest rate you earn on your deposit balances. For example, in another alert about earning interest on your organization’s excess checking account funds, I quoted Texas Security Bank president, Craig Scheef, who stated that his bank reduces the interest rate it pays on money market accounts (currently, approximately 4% annualized) by 0.15% for deposits that participate in the IntraFi program.

The IntraFi website, which says that thousands of financial institutions across the country participate in its programs, has a web page that allows you to find banks that participate in the program as well as an FAQ page. In the current environment, interest in the IntraFi program has increased significantly, according to Scheef.
Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.
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Why That “Gift” to Your Pastor Requires Caution

Church congregations naturally see giving gifts to pastors as a blessing. But there are some critical tax considerations.

Matthew Branaugh, Attorney and Editor
Bio

Q: We are giving our pastor and wife of 40 years a cruise. Is this gift taxable to them?

It’s great your church wants to do this. But caution is needed—at least two significant issues are triggered when churches give gifts to ministers.

A gift poses potential income tax consequences for the pastor. It also raises concerns about reasonable compensation.

Chapter 12 of Church Law & Tax Senior Editorial Advisor and CPA Elaine Sommerville’s Church Compensation, Second Edition, does an excellent job of explaining the tax and reasonable compensation issues surrounding gifts:

Where the church pays directly to a minister or an employee, the amounts are not gifts, according to the Internal Revenue Code. This classification includes any payment of cash or transfer of a noncash item unless it is a qualified employee achievement award or a small de minimis item. (emphasis added)

In chapter 2 of her book, Sommerville also notes concerns related to excess benefit transactions, in which a person with presumed influence receives a benefit valued above a reasonable range of compensation for his or her position. An excess benefit transaction occurs “when a church pays a worker more than is reasonable for the services rendered, or when the church fails to report a taxable fringe benefit.”

The penalties for an excess benefit transaction are severe, both for the recipient (the pastor) and the church.

Retirement gifts

Church leaders also often ask whether the analysis changes for a gift when it involves a pastor who is retiring. Unfortunately, the answer is usually no.

Sommerville notes: Confusion arises when working with retirement gifts. An old IRS revenue ruling states it is possible that a gift to a retiring minister may not be taxable (Rev. Rul. 55-422, 1955-1 CB 14). (The revenue ruling has never formally been made obsolete by the IRS.) The ruling is often cited to support a tax-free retirement gift, but its application has changed with the 1986 change to the definition of a gift in the Internal Revenue Code. Since employers may not give a tax-free gift to an employee, a retirement gift may not be a tax-free payment. (emphasis added)

Also note that how a church collects, handles, and distributes funds matters a great deal in how any special-occasion gifts are analyzed. This article dives deeper into why.

Final point

Lastly, in very limited instances, there may be times when a gift associated to a retired pastor may not cause taxable income. A 2018 Tax Court ruling about a pastor who received monetary gifts from church members included an analysis discussing prior federal court decisions involving former ministers who received gifts from their former congregations that did not trigger income tax liability for the ministers.

Attorney and senior editor Richard Hammar, in reviewing the 2018 Tax Court decision, noted that gifts to a retired pastor may not be taxable when specific facts and circumstances are involved. Regarding one of the federal cases cited by the Tax Court (Schall v. Commissioner, 174 F.2d 893 (5th Cir. 1949), Hammar made this observation about the Fifth Circuit court’s analysis and its reason for concluding the gifts were not taxable: “[The pastor] made no request of the congregation that any amount be paid to him after his resignation, and he had no knowledge that the church would agree to do so. He did not agree to render any services in exchange for the gift and in fact did not do so.” 

While the 2018 decision is insightful, churches still should evaluate their situations carefully, preferably in consultation with qualified local tax counsel, before reaching a similar conclusion.

Similarly, as noted above, for gifts involving employed pastors, it’s strongly recommended churches retain qualified local counsel to assist them with the income tax treatment of those gifts.
Matthew Branaugh is an attorney and editor for Church Law & Tax.
Video

Making Sense of Retirement for Pastors

Learn how to address the most common issues in retirement planning for pastors and church staff.

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Retirement compensation and benefits are frequently a concern of church leaders and pastors. It is common for churches to provide an option through denominational affiliations. While others may offer their own plan, they aren’t confident it is the best. Others offer nothing at all.

This webinar recording is presented by Matthew Branaugh, Church Law & Tax attorney and content editor, and attorney Danny Miller, covering retirement plan options, managing costs, and rules and regulations for pastors and church staff.
Panelists:

Danny Miller | Attorney

Matthew Branaugh | Attorney & Content Editor for Church Law And Tax
Reading & Resources: 

Download the resources and templates mentioned in this webinar below.

Key Tax Dates March 2023

Monthly and semiweekly requirements for depositing payroll taxes.

Richard R. Hammar

Monthly Requirements

If your church reported withheld taxes of $50,000 or less during the most recent lookback period (for 2023 the lookback period is July 1, 2021, through June 30, 2022), then withheld payroll taxes are deposited monthly.

Monthly deposits are due by the 15th of the following month.

Important Note: If withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church need not deposit the taxes. Instead, the church can pay the total withheld taxes directly to the IRS with its quarterly Form 941. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes.

Semiweekly Requirements

If your church reported withheld taxes of more than $50,000 during the most recent lookback period (for 2023 the lookback period is July 1, 2021, through June 30, 2022), then the withheld payroll taxes are deposited semiweekly with a bank.

This means that for paydays falling on Wednesday, Thursday, or Friday, the payroll taxes must be deposited on or by the following Wednesday. For all other paydays, the payroll taxes must be deposited on the Friday following the payday.

Note further that large employers having withheld taxes of $100,000 or more at the end of any day must deposit the taxes by the next banking day. The deposit days are based on the timing of the employer’s payroll. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes (7.65 percent of wages), and the employer’s share of Social Security and Medicare taxes (an additional 7.65 percent of employee wages).

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Note: If a date listed for filing a return or making a tax payment falls on a Saturday, Sunday, or legal holiday (either national or statewide in a state where the return is required to be filed), the return or tax payment is due on the following business day.

Note: You must use electronic funds transfer to make all federal employment tax deposits. This is generally done using the Electronic Federal Tax Payment System, a free service provided by the U.S. Department of Treasury. If you don’t wish to use EFTPS, you can arrange for your tax professional, financial institution, or payroll service to make deposits on your behalf. Failure to make a timely deposit may subject you to a 10-percent penalty.

How SECURE 2.0 Affects Churches and Employees with Retirement Distributions, Enrollment Rules

Under SECURE 2.0, ‘Catch-Up’ limits increase, and employers soon can help employees more as they deal with student debt.

Richard R. Hammar

The aptly-named Setting Every Community Up for Retirement Enhancement Act (SECURE 2.0) is designed to:
  • increase retirement savings,
  • simplify and clarify retirement plan rules and,
  • encourage employees to contribute more to their retirement accounts.

Effective now

Mandatory distributions now set to begin at 73 (Section 107)
 
The minimum age jumped to 72 under SECURE 1.0. Now, under SECURE 2.0, the minimum age is 73. In 2033, it jumps to 75. The goal? Making sure people spend their retirement savings before they die instead of passing it on to future generations.

Also, Section 302 of SECURE 2.0 drops the required minimum distributions tax penalty from 50 percent to 25 percent for qualified plans. It drops even further (to 10 percent) if the failure to take a minimum distribution is corrected in a timely manner.

Stay informed! Consider an Advantage Membership with Church Law & Tax for access to in-depth information and analysis on topics confronting today’s church pastors and leaders.

Small—and immediate—financial incentives for contributing to a plan (Section 113)

While employers may provide matching contributions as a long-term incentive for employees to contribute to a retirement plan, they have not been allowed to offer immediate financial incentives for such activities.

SECURE 2.0 removes this barrier by allowing de minimis financial incentives, such as low-dollar gift cards, not paid for out of plan assets, to boost employee participation in 401(k) and 403(b) plans.

Penalty-free withdrawals for emergencies (Section 115)

SECURE 2.0 allows for once-a-year distributions from 401(k), 403(b), and Individual Retirement Account (IRA) plans of up to $1,000 for unforeseeable and/or immediate financial needs of a personal or family nature.

Taxpayers have up to three years to repay the money. While they’re repaying it, no additional emergency withdrawals are allowed.

Assisting states in locating owners of applicable savings bonds (Section 122)

Section 122 requires the Treasury Secretary to share certain relevant information with a state that relates to an applicable savings bond registered to an owner with a last known or registered address in that state.

The state can use that information to locate the registered owner in accordance with the state’s standards for recovery of abandoned property. Section 122 further requires the Treasury Secretary to develop guidance as may be necessary to carry out the proper disclosure and protection of such information.

Enhancement of 403(b) plans (Section 128)

403(b) plan investments were once generally limited to annuity contracts and publicly traded mutual funds to the detriment of charitable, public school, and college and university employees. Now, the law allows 403(b) custodial accounts to participate in group trusts with other tax-preferred savings plans and IRAs.

Retirement plan overpayment recovery (Section 301)

Retirement plan fiduciaries can now decide whether to recoup overpayments mistakenly made to retirees according to certain limitations and protections put in place to protect retirees.

Background: Through no fault of their own, retirees sometimes receive more money than they are owed under their retirement plans, which can cause problems when plan fiduciaries look to claw back those overpayments, with interest.

SECURE ACT 2.0 is a continuation of SECURE ACT 1.0, passed in 2019, that allows penalty-free distributions from qualified retirement plans and IRAs for adoptions, for example. Read Richard Hammar’s SECURE 1.0 analysis here.

Updating dollar limits for mandatory distributions (Section 305)
Section 305 expands the Employee Plans Compliance Resolution System (“EPCRS”) to:
  1. Allow more types of errors to be corrected internally through-self correction,
  2. Apply inadvertent IRA errors, and
  3. Exempt certain failures to make required minimum distributions from the otherwise applicable excise tax. For example, Section 305 allows for correction of many plan loan errors through self-correction, which are a frequent area of error and can be burdensome to correct a single loan error through the Internal Revenue Service (IRS).

Any guidance or revision of guidance required by Section 305 shall be made widely known no later than 2 years after the date of enactment of this Act. Revenue Procedure 2021–30 (or any successor guidance) shall be updated to take into account the provisions of this section no later than 2 years after the date of enactment of this Act.

Employees can now certify hardship distribution conditions (Section 312)

Employees in need of a hardship withdrawal from an eligible retirement plan can now, under certain circumstances, self-certify that they’re in need of the funds and have no other options available to meet the need.

Section 312 is effective for any plan year beginning after the date of the enactment of SECURE 2.0.

Tax treatment of IRA involved in a prohibited transaction (Section 322)

Section 322, Tax treatment of IRA involved in a prohibited transaction. When an individual engages in a prohibited transaction with respect to his or her IRA, the IRA is disqualified and treated as distributed to the individual, irrespective of the size of the prohibited transaction. Section 322 clarifies that if an individual has multiple IRAs, only the IRA with respect to which the prohibited transaction occurred will be disqualified.

Exception to withdrawal penalties for terminally ill individuals (Section 326)

Section 326 provides an exception to the 10 percent tax on early distributions from tax preferred retirement accounts in the case of a distribution to a terminally ill individual.

Effective after Dec. 31, 2023

Higher ‘Catch-Up’ limits for IRA contributions (Section 108)

The $1,000 limit on IRA contributions is to be indexed for individuals who have reached age 50 starting with taxable years that begin after Dec. 31, 2023.

Help for those struggling to save while paying student debt (Section 110)

SECURE 2.0 permits an employer to make matching contributions under a 401(k), 403(b), SIMPLE IRA, or 457(b) plan with respect to “qualified student loan payments.”

What is a “qualified student loan payment?” Broadly defined, it’s “any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.”

Starter 401(k) plans for employers with no retirement plans (Section 121)

An employer that does not sponsor a retirement plan can offer either a starter 401(k) or safe harbor 403(b) plan that would generally require all employees to be default-enrolled anywhere from a 3- to 15-percent deferral rate. Annual deferrals are capped at $6,000, with another $1,000 available for catch-up contributions after age 50. Section 121 becomes effective for plan years beginning after Dec. 31, 2023.

Emergency savings accounts linked to individual account plans (Section 127)

Employers can offer pension-linked emergency savings accounts to employees earning less than $150,000 in the previous year.

They can also opt employees into these accounts at no more than 3 percent of an employee’s salary up to $2,500, at which time additional contributions can shift to the employee’s Roth-defined contribution plan.

Contributions are made on a “Roth-like” basis (contributions are taxed upon deposit, but future withdrawals are not taxed) and can be matched dollar-for-dollar up to $2,500.

Employees can then pull from the accounts no more than four times a year without fees or charges and, upon separation from service, employees can cash these accounts out or roll them into another plan.

Updating dollar limits for mandatory distributions (Section 304)

Section 304 allows employers to transfer former employees’ retirement accounts from a workplace plan into an IRA if the balance is between $1,000 and $7,000, effective for distributions made after Dec. 31, 2023. (The previous balance limit for such transfers was $5,000.)

Penalty-free withdrawals for domestic abuse victims (Section 314)

Section 314 allows penalty-free withdrawals from retirement plans for domestic abuse victims.

A domestic abuse survivor may need to access his or her money in their retirement account for various reasons, such as escaping an unsafe situation. Section 314 allows retirement plans to permit participants that self-certify that they experienced domestic abuse to withdraw a small amount of money (the lesser of $10,000, indexed for inflation, or 50 percent of the participant’s account).

A distribution made under Section 314 is not subject to the 10 percent tax on early distributions. Additionally, a participant may repay the withdrawn money from the retirement plan over 3 years. They can then receive refunded income taxes on money that is repaid.

New hardship withdrawal rules for 403(b) plans (Section 602)

Historically, distribution rules for 403(b) plans have been more restrictive than those of 401(k) plans. SECURE 2.0 conforms 403(b) distribution rules to less restrictive 401(k) rules.

Effective after Dec. 31, 2024

Expanding automatic enrollment in retirement plans (Section 101)

Many Americans reach retirement age with little or no savings because they don’t participate in employer-sponsored retirement plans or they aren’t offered ones in the first place.

Section 101 requires 401(k) and 403(b) plans to automatically enroll all eligible participants (who can then opt-out if they so choose).

There is an exception for church plans, small businesses with 10 or fewer employees, new businesses (i.e., those that have been in business for less than 3 years), and governmental plans.

The automatic enrollment amount is at least 3 percent but not more than 10 percent. It is set to increase by 1 percent each year until it reaches at least 10 percent, but not more than 15 percent.

All current 401(k) and 403(b) plans are grandfathered.

Higher ‘Catch-Up’ limits based on certain ages (Section 109)

Per section 109, maximum catch-up contributions starting in 2025 jump from $6,500 ($3,000 for SIMPLE plans) to the greater of either (a) $10,000, or (b) 50 percent more than the regular catch-up amount for those ages 60 to 63. Increased amounts will be indexed for inflation after 2025. This takes effect for taxable years beginning after Dec. 31, 2024.

Retirement savings lost and found (Section 303)

Section 303 creates a national online searchable lost and found database for Americans’ retirement plans at the US Department of Labor (DOL). The database will help those who have lost track of a pension or 401(k) plan a way to search for contact information of their plan administrator. The DOL has until the end of 2024 to create the database.

Effective on or after Jan. 1, 2025

Improving coverage for part-time workers (Section 125)

For plans years starting on or after Jan. 1, 2025, employers will be required to allow long-term, part-time workers to participate in 401(k) and 403(b) plans either after 1 year of service (with the 1,000-hour rule) or 2 consecutive years of service (where the employee completes at least 500 hours of service).

Long-term care contracts purchased with retirement plan distributions (Section 334)

Permits retirement plans to distribute up to $2,500 per year for the payment of premiums for certain specified, high-quality, long-term care insurance contracts.

Effective after Dec. 31, 2026

Saver’s Match (Section 103)

Prior law provided for a nonrefundable credit for certain individuals who make contributions to a 403(b) plan or some other retirement plans.

Section 103 repeals and replaces the credit. It changes it from a credit paid in cash as part of a tax refund into a federal matching contribution. This contribution must be deposited into a taxpayer’s retirement plan.

A few details about the match:
  1. It is 50 percent of retirement plan contributions up to $2,000 per individual.
  2. It phases out between $41,000 and $71,000 in annual income in the case of taxpayers filing a joint return ($20,500 to $35,500 for single taxpayers or those married filing separate, and $30,750 to $53,250 for head-of-household filers).

SECURE 2.0 also directs the Treasury Department to increase public awareness of the Saver’s Match to increase use of the match by low- and moderate-income taxpayers.
Image: getty/Mike Kemp

Busted Pipes, Busted Budgets: Fighting Back Against Winter’s Hidden Risks

Eye-popping property damage insurance claims show why churches even in warmer states need to prepare and respond when winter weather looms large.

Matthew Branaugh, Attorney and Editor
Bio

The nation’s three largest church insurers say massive winter storms hitting warm-weather states have created spikes in property damage claims—many of them triggered by busted frozen pipes that not only cause thousands of dollars in damages but disrupt worship services and other events.

Stay informed, keep learning! Become a Church Law & Tax Advantage member today.

Greater awareness and responsiveness, particularly in regions unaccustomed to severe winter weather, can potentially thwart problems.

“As you get down into the warmer Southern states, the nature of the freeze and the damage that can be done can be pretty eye-opening,” warns Eric Spacek, assistant vice president of risk control for Church Mutual Insurance Company, which covers about 90,000 congregations. “This is a matter of stewardship. We’re always talking about how much better it is to prevent things from happening than to deal with it on the back-end.”

But pastors and leaders, particularly in the lower Midwestern, Southern, and Southeastern portions of the United States, often get caught off-guard by extreme winter weather. Frustrating and costly problems often ensue.
Planning a time of outdoor fun and fellowship for your church’s staff, students, or members this winter? James Cobble offers tips on how to not only arrive safely, but how to stay safe once there.

Historic storms, high claims

Two specific storms in recent memory—Winter Storm Uri (about $200 billion in damages) in February of 2021 and Winter Storm Elliott (about $5 billion in damages) during Christmas of 2022—underscore the size and scope of the emerging problem.

Claims poured in from churches immediately after both storms.

The average number of claims typically filed in December with Brotherhood Mutual Insurance Company, an insurer of more than 65,000 houses of worship in 47 states, hovers between 460 and 560, says Thomas Lichtenberger, the company’s assistant vice president of property claims.

Lichtenberger adds that, within a week of Elliott’s conclusion, 1,300 claims came in — 963 related to frozen pipes.

“Water damage from broken pipes—that’s not new,” says Tom Strong, director of risk control for GuideOne Insurance, which covers about 40,000 houses of worship in 48 states and received 257 claims tied to frozen pipes in the days following Elliott. “Where they occur—that’s the big change.”

Georgia, Texas, Missouri, and Alabama ranked among the top five for pipe-related claims for GuideOne, Strong says, with New York the lone cold-weather state to join them.

Meanwhile, the average size of GuideOne’s claims after Uri was about $30,000, a tally Elliott is expected to match based on early indicators, says James Balzarine, property claims director for the company.

Awareness and anticipation

Pastors and church leaders in traditionally warm weather states rarely encounter temperatures brought on by storms like Uri and Elliott, meaning their first-time experiences likely are unpleasant ones.

During Elliott, Charleston, South Carolina, broke a 33-year record low—20 degrees Fahrenheit—on Christmas Eve of 2022, while Athens, Georgia, did the same one day earlier, dropping to 11 degrees.

“Their history has not given them the idea that they should be prepared for this,” Strong says.

Even places better conditioned for wintry cold got socked by Elliott, leaving leaders scrambling.

Brotherhood Mutual still received 24 pipe-freeze claims from churches in Michigan after Elliott. Another 36 came from Indiana-based churches.

Denver plummeted to -20 degrees on December 22, 2022. One Colorado church insured by Church Mutual was alerted to a temperature drop in its building thanks to a sensor purchased through a company-sponsored program. A church leader discovered a propane outage upon arriving. A refill restored heat before pipes could freeze, Spacek says.
When bad weather comes, Sally Wagenmaker reminds churches that there are several logical—and legal—considerations when shutting things down and sending folks home.

“You want to make sure to have the mindset that this could happen,” Lichtenberger says, adding many churches use their buildings a few hours on Sundays and maybe only one or two other days of the week.

Regardless of geography, when the forecast calls for storms bearing frigid cold, leaders should plan to visit their buildings multiple times each day throughout the storm.

“Be your own sensor,” Lichtenberger says.

Take Action: Fight back against freezes

Awareness and anticipation are valuable. Advanced preparation is, too. Note these tips from the American Red Cross and church insurers.

When cold is on its way or already arrived
  • Identify all the ways to shut off water in the building.
  • Know the location of the building’s main valve and how to turn it off.
  • Also know how to turn off water to the fire sprinkler system. One church hit by Elliott spent an hour searching for its system’s key and “just had to sit there and watch the water run” from a broken line, Spacek says.
  • Keep building thermostats above 55 degrees around the clock, despite the added expense.
  • Remember that buildings with one thermostat naturally hold that temperature in the surrounding area, but colder air will build outside its immediate radius, Spacek adds. Setting the temperature higher may be necessary to help rooms further away from the thermostat.
  • Also recognize situations when a higher thermostat setting may be needed because pipes exist in basements, crawl spaces, and attics or run along exterior walls.
  • Open cabinet doors below sinks so that warmer room air contacts pipes.
  • When applicable, temporarily remove ceiling tiles located below plumbing, including fire sprinkler lines, so that warmer air circulates around it. Leaders often forget about fire sprinkler lines, and those often freeze and break. The resulting damage can be worse since water cascades down and spreads.
  • Allow sink faucets to continuously trickle with hot and cold water—the movement makes it harder for water in the pipes to freeze.
  • Visit the building multiple times each day during the storm.

When a frozen pipe is suspected or discovered
  • Turn on faucets throughout the building to try and relieve pressure, especially as efforts to thaw a pipe begin, and to prevent other freezes from developing.
  • A plumber may be needed to find the location of a frozen pipe and resolve it. Remember that pipes can also freeze in multiple spots.
  • If you know the location (or locations) of a freeze:
    • Wrap an electric heating pad around the frozen section, advises the Red Cross.
    • An electric hair dryer or portable space heater also can be used, the Red Cross notes, but keep them away from flammable materials. Avoid using extension cords with devices, adds Spacek.
    • Towels soaked in hot water (if another water source is available) and wrapped around a pipe also can help.
    • Never use an open-flame device, such as a blow torch or propane heater, to thaw pipes.
    • If thawing occurs, but water pressure isn’t fully restored, call a plumber.
    • If a break occurs, immediately shut off the water source.

Warm weather steps
  • Consult with professionals about the type of insulation to use in walls and attics. When work gets done in walls or attic spaces, make sure insulation gets put back into place, Lichtenberger says.
  • Consider using pipe insulation, especially in basements, crawl spaces, and attics, notes Brotherhood Mutual.
  • Re-caulk around doors, windows, and recessed lighting fixtures.
  • Research costs for wireless monitors or sensors that detect water leaks as well as air temperature changes. During Elliott, Church Mutual estimates $2.36 million in property damage was avoided because of alerts triggered by sensors installed by its insured churches, Spacek says.
  • A portable generator may be worth an investment, although these should only be run outdoors and away from doors and windows, Spacek notes. Permanent generators are ideal, but expensive, and should be considered only when the return on investment is apparent. After all, power outages are a common culprit behind frozen pipes.
Matthew Branaugh is an attorney and editor for Church Law & Tax.

Key Tax Dates February 2023

Among other important items, quarterly federal tax returns are due along with Affordable Care Act forms 1095-C and 1094-C for employers with 50 or more FTEs.

Richard R. Hammar, Attorney, CPA
Bio

Monthly requirements

If your church or organization reported withheld taxes of $50,000 or less during the most recent lookback period (for 2023, the lookback period is July 1, 2021, through June 30, 2022), then withheld payroll taxes are deposited monthly. Monthly deposits are due by the 15th day of the following month.

The 2023 Church & Clergy Tax Guide is available—preorder your print copy today or download the .pdf version now.

Note, however, that if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church need not deposit the taxes.

Instead, it can pay the total withheld taxes directly to the IRS with its quarterly Form 941.

Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes.

Semiweekly requirements

If your church or organization reported withheld taxes of more than $50,000 during the most recent lookback period (for 2023, the lookback period is July 1, 2021, through June 30, 2022), then the withheld payroll taxes are deposited semiweekly. This means that for paydays falling on Wednesday, Thursday, or Friday, the payroll taxes must be deposited on or by the following Wednesday.

For all other paydays, the payroll taxes must be deposited on the Friday following the payday. Note further that large employers having withheld taxes of $100,000 or more at the end of any day must deposit the taxes by the next banking day.

The deposit days are based on the timing of the employer’s payroll. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes (7.65 percent of wages), and the employer’s share of Social Security and Medicare taxes (an additional 7.65 percent of employee wages).

February 10, 2023: Employer’s quarterly federal tax return due

Churches having nonminister employees (or one or more ministers who report their federal income taxes as employees and who have elected voluntary withholding) may file their employer’s quarterly federal tax return (Form 941) by this date instead of January 31 if all taxes for the fourth calendar quarter (of 2022) have been deposited in full and on time.

February 28, 2023: Filing 1095-C and 1094-C for applicable large employers and ACA compliance

Applicable large employers, generally employers with 50 or more full-time employees (including full-time equivalent employees) in the previous year, must file a Form 1095-C for each employee who was a full-time employee of the employer for any month of the previous calendar year by this date. Generally, the employer is required to furnish a copy of Form 1095-C (or a substitute form) to the employee.

The employer also files a Form 1094-C transmittal form with the IRS (including copies of each Form 1095-C). The purpose of this form is to ensure that applicable large employers are complying with the shared responsibility provisions of the ACA. Generally, you must file Forms 1094-C and 1095-C by February 28 if filing on paper (or March 31 if filing electronically) of the year following the calendar year to which the return relates. For calendar year 2022, Forms 1094-C and 1095-C are required to be filed by February 28, 2023, or March 31, 2023, if

filing electronically.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Key Tax Dates January 2023

Noting the key tax forms due this month, along with other recurring deadlines.

Richard R. Hammar, Attorney, CPA
Bio

Monthly requirements

If your church or organization reported withheld taxes of $50,000 or less during the most recent lookback period (for 2023, the lookback period is July 1, 2021, through June 30, 2022), then withheld payroll taxes are deposited monthly. Monthly deposits are due by the 15th day of the following month.

Tip: The 2023 Church & Clergy Tax Guide is out—preorder your copy today (it will ship in January).

Note, however, if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church need not deposit the taxes.


Instead, it can pay the total withheld taxes directly to the IRS with its quarterly Form 941. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes.
Non-compliance with IRS tax guidelines can be painful. And as this Florida minister learned, the IRS can–and will—attach a lien on church property in pursuit of an unpaid tax bill.

Semiweekly requirements

If your church or organization reported withheld taxes of more than $50,000 during the most recent lookback period (for 2023, the lookback period is July 1, 2021, through June 30, 2022), then the withheld payroll taxes are deposited semiweekly.

This means that for paydays falling on Wednesday, Thursday, or Friday, the payroll taxes must be deposited on or by the following Wednesday. For all other paydays, the payroll taxes must be deposited on the Friday following the payday.

Note further that large employers having withheld taxes of $100,000 or more at the end of any day must deposit the taxes by the next banking day. The deposit days are based on the timing of the employer’s payroll. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes (7.65 percent of wages), and the employer’s share of Social Security and Medicare taxes (an additional 7.65 percent of employee wages).

January 1, 2023: Payroll taxes

Social Security and Medicare taxes

Employees and employers each pay Social Security and Medicare taxes equal to 7.65 percent of an employee’s wages. The tax rate does not change in 2023.

While federal law exempts ministers from mandatory federal income tax withholding, many states may not have the same exemption available for ministerial employees. Check your specific state for details. Meanwhile, for a more comprehensive guide to church compensation and taxation, check out CPA Elaine Sommerville’s Church Compensation, Second Edition.

The 7.65 percent tax rate is comprised of two components: 1) a Medicare hospital insurance tax of 1.45 percent, and 2) an “old age, survivor and disability” (Social Security) tax of 6.2 percent. There is no maximum amount of wages subject to the Medicare tax. The tax is imposed on all wages regardless of amount.

For 2023, the maximum wages subject to Social Security taxes (the 6.2 percent amount) is $160,200. Stated differently, employees who receive wages in excess of $160,200 in 2023 pay the full 7.65 percent tax rate for wages up to $160,200, and the Medicare tax rate of 1.45 percent on all earnings above $160,200. Employers pay an identical amount. The Medicare tax rate for certain high-income taxpayers increases by an additional 0.9 percent.

Self-employment taxes

The self-employment tax rate (15.3 percent) does not change in 2023. The 15.3 percent tax rate consists of two components: (1) a Medicare hospital insurance tax of 2.9 percent, and (2) an “old age, survivor and disability” (Social Security) tax of 12.4 percent. There is no maximum amount of self-employment earnings subject to the Medicare tax. The tax is imposed on all net earnings regardless of the amount.

For 2023, the maximum earnings subject to the Social Security portion of self-employment taxes (the 12.4 percent amount) is $160,200. Stated differently, persons who receive compensation in excess of $160,200 in 2023 pay the combined 15.3 percent tax rate for net self-employment earnings up to $160,200, and only the Medicare tax rate of 2.9 percent on earnings above $160,200. The Medicare tax rate for certain high-income taxpayers increases by an additional 0.9 percent.

These rules directly impact ministers, who are considered self-employed for Social Security with respect to their ministerial services. Ministers should take these rules into account in computing their quarterly estimated tax payments.

Federal income taxes

Beginning on this date, churches having non-minister employees (or a minister who has elected voluntary withholding) should begin withholding federal income taxes from employee wages. To know how much federal income tax to withhold from employees’ wages, employers should have a Form W-4 on file for each employee. Employees should file an updated Form W-4 for 2023, especially if they owed taxes or received a large refund when filing their previous tax return. Employees should use the IRS Tax Withholding Estimator to determine accurate withholding.

January 17, 2023: Fourth quarter estimated taxes due

Ministers (who have not elected voluntary withholding) and self-employed workers must file their fourth quarterly estimated federal tax payment for 2022 by this date (a similar rule applies in many states to payments of estimated state taxes).

Employees of churches that filed a timely Form 8274 (waiving the church’s obligation to withhold and pay FICA taxes) are treated as self-employed for Social Security purposes, and accordingly are subject to the estimated tax deadlines with respect to their self-employment (Social Security) taxes unless they have entered into a voluntary withholding arrangement with their employing church or organization.

January 31, 2023: Tax forms due

Churches must furnish Copies B, C, and 2 of Form W-2 (“wage and tax statement”) by this date to each person who was an employee during 2022. 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 income tax (or FICA) withholding. Non-minister church employees must also receive a W-2.

Churches must send Copy A of Forms W-2, along with Form W-3, by this date to the Social Security Administration. If you file electronically, the due date is also January 31, 2023.

Churches must issue Copy B of Form 1099-NEC (“nonemployee compensation”) by this date to any self-employed person to whom the church paid nonemployee compensation of $600 or more in 2022. This form (rather than a 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 W-2 rather than a 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.

Churches must send Copy A of Forms 1099-NEC, along with Form 1096, to the IRS by this date.

Churches must distribute a 2022 1099-INT form to any person paid $600 or more in interest during 2022 by this date (a $10 rule applies in some cases).

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
Image: Getty Images/Nora Carol Photography

The Respect for Marriage Act Does Less for Religious Liberty Than Meets the Eye

The Respect for Marriage Act (RMA) should be met with a healthy dose of realism

Erik Stanley, Law professor and attorney
Bio

The Respect for Marriage Act (RMA) should be met with a healthy dose of realism and skepticism. The Act provides limited protection for the religious liberty of churches and religious organizations, but it does not ultimately do much to change the status quo and it instead may invite more litigation against religious organizations, churches, and individuals who own businesses.

The reality is this: We cannot yet fully understand what it means for same-sex marriage to be enacted into federal statutory law. Given the breadth and complexity of federal law, we do not fully know, and cannot conclusively predict, how this law ultimately will impact churches, religious organizations, and people of faith.
Though legal scholars have much to say about how—and whether—the RMA addresses important religious liberty concerns, Church Law & Tax’s Richard R. Hammar says the law will have little immediate effect on churches.

Federal statutes and regulations represent a massive and complex web that connects to more areas of our life than we can comprehend. The Act’s statement that “any Federal law, rule, or regulation in which marital status is a factor,” should give us pause.

A search of the United States Code shows that the phrase “marital status” appears 248 times. The Code of Federal Regulations contains 350 uses of the phrase “marital status.” And each of these statutes or regulations likely is accompanied by a body of judicial decisions and complex interpretive rules.

The religious liberty protections contained in the Act are a slight improvement from the current state of the law but offer little more than the status quo—or an invitation for more litigation. For instance, there is this substantial question: Will this Act supersede state and local public accommodations laws, which are the primary legal vehicles for lawsuits? The answer likely only can come from court decisions rendered through future lawsuits.

Additionally, while the Act does contain some protections from the loss of tax-exempt status, grants, and contracts for religious organizations, the wording is vague and yet again may invite more litigation against religious organizations and churches.

The RMA also leaves out protections for individuals—those who sit in the pews and own for-profit businesses that they wish to closely align with their religious beliefs and practices. If the wording of the Act is true that, “Diverse beliefs about the role of gender in marriage are held by reasonable and sincere people based on decent and honorable religious or philosophical premises,” then why are individuals with sincerely held religious beliefs left unprotected?

Finally, we would be naïve to expect that this law will remain unchanged into the future. Statutes often are frequently amended and protections now in the law only exist as long as a majority in Congress wants them to remain.
Erik Stanley is an assistant professor of law at Liberty University School of Law, where he teaches and writes on litigation, church autonomy, and religious liberty issues. Stanley also is a partner at Provident Law in Scottsdale, Arizona, and has more than 20 years of experience handling religious liberty cases and advising religious institutions on various matters, including employment, tax, zoning and land use, and bylaws and policies.
Image: Getty Images/zimmytws

Why the Respect for Marriage Act Preserves Religious Liberty

I’m among four scholars who submitted an analysis to US Senators arguing that the Respect

Thomas Berg, Law Professor
Bio

I’m among four scholars who submitted an analysis to US Senators arguing that the Respect for Marriage Act (RMA) addressed religious liberty concerns for organizations that hold traditional views of marriage—and indeed offers potentially valuable protections for the future.

Let me summarize why.
The US Supreme Court’s 2015 decision in Obergefell v. Hodges already requires states to recognize same-sex marriages. But the Act is an insurance policy against the Court overturning Obergefell. It requires anyone acting “under color of state law” to recognize a marriage “valid in the state where [it] was entered.”
Though legal scholars have much to say about how—and whether—the RMA addresses important religious liberty concerns, Church Law & Tax’s Richard R. Hammar says the law will have little immediate effect on churches.

This does not make private organizations that support only man-woman marriage liable for who they employ or the services they provide. The Supreme Court has repeatedly held that private organizations do not act “under color of state law” even when they’re heavily state-regulated and receive all their income from state funds.

The Court will not overrule those decisions.

Moreover, the Act explicitly protects both churches and religious nonprofits from having to provides services, facilities, or goods “for the solemnization or celebration of a marriage.”

Critics of the RMA still warn that the Act could serve as a bootstrap to justify separate restrictions on conservative religious organizations. By analogy, they reference the Supreme Court’s 1983 decision in Bob Jones University, which allowed the IRS to strip tax exemptions from racially discriminatory private schools—including religious schools—on the basis of a “firm and unyielding” national policy, shown in numerous statutes, against racial discrimination.

But the Act addresses that concern. First, Section 7(a) of the RMA says the Act does not “deny or alter” any tax exemption, funding, license, accreditation, or other “benefit, status, or right of an otherwise eligible entity or person” (including, plainly, a religious organization). Because the Act does not even “alter” such rights (beyond just not “deny[ing]” them), it’s fair to infer that it can’t even be cited as one ground among many for such a step.

Moreover, Section 2(2) states that “[d]iverse beliefs about the role of gender in marriage” (including, plainly, the belief in man-woman marriage) “are held by reasonable and sincere people based on decent and honorable philosophical premises” and “are due proper respect.” This statement distinguishes traditional-marriage beliefs from those opposing interracial marriage, which receive no such affirmation (even as the statute protects interracial marriages). The finding counters the analogy to the Bob Jones University case and racism. It can—and will—be cited as a statement of “national policy” to respect, rather than penalize, organizations adhering to man-woman marriage.

Religious liberty bills that protect conservatives alone have failed in our closely divided times. Although the RMA doesn’t solve all of the religious liberty problems intersecting with gay and lesbian rights, it solves the problems it raises and offers a hopeful, if limited, model for future bipartisan efforts.
Thomas Berg is the James L. Oberstar Professor of Law and Public Policy at the University of St. Thomas School of Law in Minnesota. He teaches and writes on religious liberty, constitutional law, and intellectual property, and supervises students in the school’s religious liberty appellate clinic, which files briefs in cases before the US Supreme Court and appellate courts. Berg is also co-author of a leading casebook, Religion and the Constitution.
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