Do Churches Pay Payroll Taxes?

do churches pay payroll taxes?

Tax exemption for churches may seem simple enough to some, but certain intricacies must be acknowledged. Yes, churches are tax-exempt for federal and state income tax purposes but there are tax considerations in other areas for churches. Churches are not required to file the annual tax return (From 990) that other 501(c)(3) organizations are responsible for, churches do have some filing obligations in other areas, particularly payroll tax.

Church payroll differs from traditional payroll because it has unique laws and exceptions that are afforded to churches and ministers. But these differences don’t exempt churches entirely from payroll tax and the corresponding filings.

Payroll Taxes for Church Employees

Navigating church payroll taxes can be surprisingly complex, so let’s break down how churches handle payroll taxes, covering aspects like employee status, state-specific considerations, key forms to consider, and more.

Ministers vs. Regular Employees

For ordained ministers who are paid in a ministerial capacity, churches are not permitted to withhold and remit payroll (Social Security and Medicare) taxes. Therefore, a church does not pay payroll taxes on behalf ministerial employees.

For non-ministerial or regular employees, churches do pay standard employer half payroll taxes.

Interestingly, for churches who have filed IRS Form 8274 Certification by Churches Electing Exemption from Employer Social Security and Medicare taxes, the church does not pay payroll taxes on behalf of any employee.

Self-Employment Taxes for Ministers

Just because the church is not permitted to withhold and remit Social Security and Medicare on behalf ministerial employees does not mean that these ministers do not have an obligation to pay this tax. As Ryan explained, “The payroll tax that is not withheld from their paychecks is instead due when a minister files their personal tax return in the form of Self-Employment tax.”

Important caveat: Ministers can be exempt from this tax by filing Form 4361. If not exempt, they pay all of the payroll tax due on their income – both their half and the church’s half – when filing their personal tax return.

State-Specific Considerations

Most states exempt churches from unemployment taxes (SUTA), but there are exceptions. States like Oregon, Washington, and Colorado have specific requirements for church payroll taxes. For this reason, it’s important to work with a payroll team that knows the laws by state and can help you stay within guidelines.

Key Payroll Tax Forms

Churches typically need to file:

  • Form 941 (quarterly employment tax reconciliation)
  • W-2 forms
  • State-specific tax forms (varies by state)

Form 941 should be filed quarterly to report the federal income tax, Social Security, and Medicare taxes that are withheld on staff paychecks. Proper classification of employees is also essential, as employee vs contractor status will influence tax compliance. While churches are considered as tax-exempt organizations, they are still responsible for the payroll tax obligations for non-clergy employees.

Common Payroll Mistakes

“From our personal experience, a majority of the clients who come to us asking us to review their payroll records for the first time have errors or misunderstandings that need to be addressed,” Ryan says. “Probably the number one mistake that we see is the mishandling of ministerial payroll tax.”

This is because a lot of the processing is done an understanding of corporate payroll, as opposed to a proper understanding of church payroll. The top mistakes include:

  • Incorrectly withholding payroll taxes for ministers
  • Misunderstanding housing allowance allocation rules

A Noteworthy State Quirk

Housing allowance is defined by Section 107 of the Revenue Code. It allows ministers to exclude a portion of their income that is used for housing expenses from federal income tax as well as most states. As noted above, some states have unique rules when it comes to church payroll. For example, in Pennsylvania, housing allowance for ministers is not taxable for federal purposes but is taxable for state income tax.

Social Security and Medicare

Churches pay the 7.65% Social Security and Medicare tax (a combination of 6.2% Social Security and 1.45% Medicare) for non-ministerial employees but not pay any of this tax for ministerial employees.Understanding church payroll taxes can be complex, but these guidelines can help navigate the intricate tax landscape for religious organizations.

Need Payroll Help? ChurchShield Has You Covered

When you’re left wondering “Do churches pay payroll taxes?” and “How can I make sure my organization is compliant?” look no further than ChurchShield. Our experts can step in and provide efficient church payroll services. We are also able to correct any previous mistakes we see to get your financials back on track, ready for any audit that comes your way.

ChurchShield has over 100 years of combined experience working in church payroll, accounting, and related areas. We know industry best practices, adhere to essential regulations, and partner with you to achieve your desired outcome. Work with Kristin Oechsle, Ryan Foust, and the rest of the ChurchShield team to get customized help for your nonprofit.

Payroll Taxes for Church Employees

Contact us today for church-specific payroll assistance. We look forward to hearing from you.

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