When Churches Neglect Payroll Taxes
July 10, 2019 / By Rev. Susan M. Ranous
Your Council on Finance and Administration (CF&A) want to share the following information with you:
An article written by Bobby Ross, Jr., in the Church Law and Tax Report, titled “When Churches Neglect Payroll Taxes,” stated that “failure to file payroll taxes on time is a fairly common issue” in churches. Some churches prioritize their electric bill over the IRS; others assume that because churches are tax-exempt that they don’t have to worry about anything from the IRS. The article even cited an example of one church that had to dissolve and sell its property in order to pay the taxes due to the IRS.
Most churches have employees. When a church has employees, there are certain requirements:
- Clergy appointed to a church is typically an employee.
- When a church has employees, clergy or not, payroll tax returns, including, but not limited to quarterly payroll reports and annual W-2 forms must be prepared and filed with the Internal Revenue Service. W-2 forms must also be provided to employees.
- If a church has non-clergy employees, Social Security, Medicare, federal and state taxes must be withheld and timely paid to the Internal Revenue Service and the state, as appropriate.
- If a church has clergy employees who have elected to have federal or state income taxes withheld, those taxes must be withheld and timely paid to the Internal Revenue Service and the state, as appropriate.
- If a church has clergy employees, the church MAY NOT withhold Social Security or Medicare tax from the employee.
The article goes on to talk about the two main risk scenarios:
“One is where the payroll processing is done internally by church staff, using the church’s payroll software and the risk is that the person(s) responsible for payroll do not actually remit the payroll taxes to the government.”
“The second scenario involves an outside payroll firm. “The church uses an outside payroll processing company to process payroll and the church remits the payroll taxes to the processing company, but the processing company doesn’t remit them to the government.”
Both scenarios can carry serious consequences. These consequences can include interest and penalty charges assessed to the church, as well as penalties assessed to any persons considered to be “responsible” by the Internal Revenue Service. These persons can include the persons who sign checks, persons who prepare payroll and the pastor.
If you have any questions about any of this information, please contact a Certified Public Accountant or a member of the finance staff of the Upper New York Conference, who can direct you.