Do Churches Pay Payroll Taxes as Employers?
Churches have specific payroll tax responsibilities as employers. Understand their unique obligations and ensure proper compliance.
Payroll taxes encompass contributions to Social Security and Medicare (FICA taxes) and Federal Unemployment Tax Act (FUTA) taxes. While churches and religious organizations are typically income tax-exempt, their role as employers introduces specific payroll tax responsibilities. These obligations differ from standard for-profit entities, featuring notable exemptions and unique considerations, especially regarding ministerial compensation. Understanding these nuances helps religious organizations ensure compliance with federal tax regulations.
Payroll Tax Obligations of Religious Organizations
Religious organizations, including churches, are exempt from the Federal Unemployment Tax Act (FUTA). This means they do not pay federal unemployment taxes. The Internal Revenue Code, Section 3306, outlines this exclusion for services performed by employees of religious, charitable, educational, or other tax-exempt organizations. However, churches are not exempt from FICA taxes for their lay employees.
Churches must withhold and pay Social Security and Medicare taxes for their lay employees. These FICA taxes are split between the employee and the employer. The church withholds the employee’s portion and contributes its own matching share to the IRS.
Understanding Minister Compensation and Taxes
The tax treatment of compensation paid to ministers is distinct. For Social Security and Medicare tax purposes, ministers are considered self-employed, even if they receive a Form W-2 from their church. Ministers are responsible for paying self-employment tax (SECA), which covers both the employee and employer portions of Social Security and Medicare taxes, totaling 15.3% (12.4% for Social Security up to an annual limit and 2.9% for Medicare with no wage limit). This obligation falls on the minister, not the church, to remit these taxes through estimated payments.
The housing allowance, also known as a parsonage or rental allowance, can be excluded from a minister’s gross income for federal income tax purposes under Internal Revenue Code Section 107. This exclusion applies to the rental value of a home furnished by the church or a rental allowance used to provide a home, up to the fair rental value of the home plus utilities. However, this housing allowance is not excluded when calculating net earnings for self-employment tax purposes, meaning ministers still pay SECA tax on this amount.
Ministers can apply for an exemption from self-employment tax if they are conscientiously opposed to public insurance on religious grounds. This application uses IRS Form 4361, “Application for Exemption From Self-Employment Tax.” If approved, the minister will not pay SECA taxes on their ministerial earnings but also will not receive Social Security or Medicare benefits based on those earnings. The church typically does not withhold FICA from a minister’s pay, but may withhold federal income tax if the minister and church agree to a voluntary arrangement.
Tax Responsibilities for Lay Employees
For lay employees, churches have standard payroll tax responsibilities. These employees are subject to Social Security and Medicare taxes (FICA), with the tax burden split between the employee and the employer. The church withholds the employee’s share of FICA from their wages and remits both the employee’s and the church’s matching share to the IRS.
Beyond FICA, churches must withhold federal income tax from the wages of their lay employees. The amount withheld is determined by the information provided by the employee on their Form W-4. This withheld income tax, along with FICA taxes, must be deposited with the IRS. Churches remain exempt from FUTA obligations for these employees.
Reporting and Remitting Payroll Taxes
Churches are responsible for reporting and remitting withheld taxes and their own share of contributions to the IRS. The primary form for this is Form 941, “Employer’s Quarterly Federal Tax Return,” filed four times a year. This form reports federal income tax, Social Security, and Medicare taxes withheld from employee paychecks, as well as the employer’s share of FICA taxes.
At the end of each year, churches must provide their lay employees with a Form W-2, “Wage and Tax Statement.” For ministers, if the church voluntarily withheld income tax, they will also receive a Form W-2. However, the FICA boxes (boxes 3, 4, 5, and 6) on a minister’s Form W-2 should be left blank, as ministers are responsible for their own self-employment taxes. If a minister is considered an independent contractor for income tax purposes and paid $600 or more, the church issues Form 1099-NEC, “Nonemployee Compensation,” instead of a W-2.
Churches must remit payroll taxes on a monthly or semi-weekly schedule, depending on their total tax liability. These deposits are made through the Electronic Federal Tax Payment System (EFTPS). Adhering to the correct deposit schedule is important to avoid penalties.