Do Churches Have to Pay Employee Taxes?

Churches and religious organizations, while often benefiting from tax-exempt status, still carry responsibilities when it comes to their employees’ taxes. The common understanding that churches are entirely exempt from taxes primarily applies to income tax on the organization’s revenue and certain property taxes, typically under Internal Revenue Code Section 501(c)(3). However, this exemption does not automatically extend to all employer-related taxes. Like any other employer, churches have specific obligations concerning federal, and potentially state and local, employment taxes for their staff. This article will explore the specific tax duties churches face as employers, detailing the nuances for different employee types and the required reporting procedures.

General Federal Employer Tax Obligations

Churches, like other employers, are generally required to handle federal employment taxes for their non-ministerial employees. This includes withholding federal income tax from wages paid to these employees. The church acts as an agent for the government, collecting these taxes directly from the employee’s pay.

Beyond income tax, churches must also pay and withhold Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare. FICA taxes consist of two parts: Social Security tax and Medicare tax. The employer is responsible for withholding the employee’s share from their wages and also paying an employer’s share. For example, the combined FICA tax is 15.3% of wages, with 7.65% from the employee and 7.65% from the employer.

A rare exception exists where a church can elect not to pay FICA taxes by filing Form 8274, “Certification by Churches and Qualified Church-Controlled Organizations Electing Exemption from Employer Social Security and Medicare Taxes.” This election is only available if the church is opposed for religious reasons to the payment of these taxes. If a church makes this election, its non-ministerial employees then become responsible for paying the entire 15.3% self-employment tax themselves, as if they were self-employed. This is an uncommon choice and significantly shifts the tax burden to the employees.

Before a church can fulfill any of these employer obligations, it must obtain an Employer Identification Number (EIN) from the IRS. An EIN is a unique nine-digit number used to identify the church for tax purposes, similar to a Social Security number for an individual. This number is necessary for various financial activities, including filing tax returns and opening bank accounts.

Tax Treatment of Ministers

The tax treatment of ministers stands apart from that of other church employees due to their unique dual tax status. For federal income tax purposes, ministers are generally considered employees of the church, meaning their wages are subject to federal income tax. Churches typically report these wages on Form W-2.

However, for Social Security and Medicare (FICA) purposes, ministers are generally considered self-employed. This means that ministers are responsible for paying the entire 15.3% self-employment tax on their ministerial earnings, rather than having FICA taxes withheld from their paychecks. This self-employment tax includes both the employer and employee portions of Social Security and Medicare taxes.

A significant aspect of ministerial taxation is the housing allowance, also known as a parsonage allowance. This allowance, or the fair rental value of a parsonage provided by the church, is excludable from the minister’s gross income for federal income tax purposes. However, it is explicitly subject to self-employment tax. Ministers must include this allowance when calculating their self-employment tax liability.

While churches are not required to withhold FICA from a minister’s wages, ministers can voluntarily request federal income tax withholding from their church. This voluntary withholding can help ministers cover their income tax and self-employment tax liabilities throughout the year, preventing a large tax bill at year-end. To arrange this, the minister typically provides the church with a Form W-4.

The IRS defines a “minister” for tax purposes based on specific criteria, which may differ from a church’s internal designations. Generally, a minister must be ordained, licensed, or commissioned, and perform sacerdotal functions, conduct religious worship, or have management responsibilities within the religious organization. These rules ensure that the unique tax treatment applies only to those performing recognized ministerial duties.

Reporting and Payment Procedures

Churches must adhere to specific reporting and payment procedures for federal employment taxes. Annually, churches are required to issue Form W-2, Wage and Tax Statement, to all employees, including both ministerial and non-ministerial staff. This form reports the employee’s wages, tips, and other compensation, along with any withheld federal income tax and, for non-ministers, FICA taxes. For ministers, the housing allowance, while excludable from income tax, is not reported in the wage box on Form W-2, but it is considered for self-employment tax. Form W-2 must be provided to employees by January 31st of the year following the tax year.

Churches generally file Form 941, Employer’s Quarterly Federal Tax Return, to report withheld federal income tax and FICA taxes for non-ministerial employees. This form summarizes the wages paid and taxes withheld for each calendar quarter. The quarterly filing deadlines for Form 941 are:
April 30 (for Quarter 1)
July 31 (for Quarter 2)
October 31 (for Quarter 3)
January 31 of the following year (for Quarter 4)

If a church only employs ministers and does not withhold income tax from their wages, it may not be required to file Form 941 unless the minister elected voluntary withholding.

The taxes reported on Form 941 must be deposited with the U.S. Treasury, typically through the Electronic Federal Tax Payment System (EFTPS). The frequency of these deposits (either monthly or semi-weekly) depends on the amount of the church’s total tax liability. Smaller tax liabilities might allow for monthly deposits, while larger amounts necessitate semi-weekly deposits. Along with the Forms W-2, churches must also file Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration. This form summarizes the information reported on all the individual Forms W-2.

State and Local Employment Taxes

Beyond federal obligations, churches must also consider state and local employment taxes, which can vary significantly by jurisdiction. Many states require churches to withhold state income tax from employee wages, mirroring the federal income tax withholding requirement. However, some states do not impose a state income tax, so churches in those areas would not have this particular withholding obligation.

State Unemployment Insurance (SUI) is another area where rules differ. While churches are generally exempt from paying federal unemployment taxes under the Federal Unemployment Tax Act (FUTA), state laws vary regarding SUI. Some states exempt churches from SUI, while others may require participation or offer specific alternatives. For example, some states allow churches to opt for a reimbursement method, where they reimburse the state for any unemployment benefits paid to former employees, instead of making regular contributions. Some states may also have State Disability Insurance (SDI) requirements that could apply to church employees, although these also vary.

Additionally, certain cities or localities may impose their own payroll taxes. These local taxes are less common than state-level taxes but can add another layer of compliance for churches operating within those specific jurisdictions. Due to the wide variations in state and local tax laws, churches should consult their specific state’s revenue department or labor department for precise requirements. Understanding these local differences is crucial for full compliance with all applicable employment tax laws.