Each quarter, all employers who pay wages subject to income tax withholding or Social Security and Medicare taxes must file Form 941, Employer’s Quarterly Federal Tax Return.
Form 941 is used to report gross wages, wages subject to Social Security and Medicare taxes, withholdings for the quarter and reconciles the churches tax liability with its tax deposits, if any.
The pastor’s salary must be included in the Gross Wages amount since clergy are considered W-2 employees for income tax purposes. The pastor’s salary must be excluded from the Social Security and Medicare wages amount since clergy are considered self employed for Social Security and Medicare purposes.
When the church has not made deposits because its quarterly liability is less than $1,000, Form 941 computes the balance due for the quarter.
The Internal Revenue Service reconciles amounts reported on Form 941 with amounts reported on Form W-3. Local church treasurers should also reconcile all amounts on Form W-3 to amounts reported on Form 941 to insure that they agree.
If there are any discrepancies, the appropriate forms should be revised. If the 941’s need to be amended, a Form 941c (corrected) may need to be filed. See the instructions for Form 941 for details on filing amended returns.
Forms W-2 and W-3
Local church treasurers are required to provide a Form W-2, Wage and Tax Statement, to all persons that were employed by the local church during a calendar year. The W-2 must be sent to the employee no later than January 31 of the following year. Copies of all W-2’s must be filed with the Social Security Administration (not the Internal Revenue Service) by Feb. 28 of the following year, along with Form W-3, Transmittal of Wage and Tax Statements. Forms W-2 and W-3 may be obtained from the Internal Revenue Service. They are also generally available for purchase at office supply stores.
Prior to filing, appropriate totals on Forms W-2 and W-3 should be reconciled to the annual totals reported on Forms 941 for the year. The Internal Revenue Service computers will perform this reconciliation and issue notices to local churches if the amounts do not agree.
The federal payroll tax withholding and reporting process starts with the employer obtaining a completed and signed Form W-4, Employees Withholding Allowance Certificate, from each employee. The W-4 must be kept on file for each employee.
All new employees should provide the employer with a signed W-4 at the start of their employment to be effective with the first wage payment. If the employee does not provide a signed W-4, the church is required to withhold as if the employee is single with no withholding allowances. Once a signed W-4 is on file, it is in effect until the employee files a new one.
Some employers make it a practice to ask employees to file a new W-4 each year. This is an acceptable practice; however, in the local church setting it is probably unnecessary. If the church cannot locate the W-4’s for all its current employees, new W-4’s should be completed as soon as is practical.
The amount of withholding is based on marital status and “withholding allowances”. Withholding allowances are calculated using worksheets on Form W-4. Each withholding allowance reduces the amount required to be withheld by the employer. The number of withholding allowances is based on each person’s individual circumstances, such as the amount of itemized deductions taken on Schedule A of Form 1040, two earner families, child tax credits, etc. The employee is not required to show or provide the employer the worksheet calculations. For reasons of personal privacy, the employer should only have the Form W-4 without the worksheets on file.
Employees may request withholdings in addition to the amount based on marital status and withholding allowances. Employees may also claim less withholding allowances than they are entitled to claim and thus have a higher withholding amount.
In certain circumstances employees will be exempt from federal withholding. Generally, an employee may claim exemption from income tax withholding because he or she had no income tax liability last year and expects none this year. See the Form W-4 instructions for more information. However, the wages are still subject to Social Security and Medicare taxes.
A Form W-4 claiming exemption from withholding is valid for only one calendar year. To continue to be exempt from withholding in the next year, an employee must file a new Form W-4 by Feb. 15 of that year. If the employee does not give you a new Form W-4, withhold tax as if the employee is single with zero withholding allowances.
In some rare cases, the local church treasurer is required to send copies of W-4’s to the Internal Revenue Service. Copies must be sent when the employee claims:
You are not required to send any other Forms W-4 unless the Internal Revenue Service notifies you in writing to do so. If you encounter a situation such as this, please call the Conference Treasurer’s office at the number in the front of this handbook for assistance.
Forms 1099 and 1096
Local church treasurers may be required to issue a Form 1099-MISC, Miscellaneous Income, to report payments for services totaling $600 or more to persons not treated as employees, i.e., independent contractors, during a calendar year.
The instructions for Form 1099 include a description of the types of payments that must be reported. The most common type of 1099 reporting is for payments over $600 to self-employed individuals such as contractors or repairmen.
If your church has a separate Trustees Treasurer, please make sure they are aware of the 1099 reporting requirements.
Generally, payments to partnership and corporate businesses do not require 1099 reporting; however, there are exceptions. All payments to attorneys and health care providers must be reported.
The 1099 must be sent to the independent contractor by Jan. 31 of the following year. Copies of all 1099’s must be sent to the Internal Revenue Service by Feb. 28 of the following year, along with Form 1096, Annual Summary and Transmittal of U. S. Information Returns.
Forms 1099 and 1096 may be obtained from the Internal Revenue Service. They are also generally available for purchase at office supply stores.