- Thursday, 17 November 2016 20:03
Generally, just like all nonprofits, churches and religious organizations are required to withhold, report, and pay income and Federal Insurance Contributions Act (FICA) taxes for employees, and penalties can be imposed if an organization fails to comply. However, in certain circumstances churches are provided with special treatment with regard to their FICA taxes (which are made up of Social Security and Medicare taxes).
Employees of churches or religious organizations are subject to these taxes except in the following instances:
1. the wages are paid for services performed by an ordained, commissioned, or licensed minister of a church in the exercise of his/her ministry, or by a member of a religious organization in the exercise of duties required by their order; or
2. a church that is opposed to the payment of Social Security and Medicare taxes for religious reasons and files IRS Form 8274 in accordance with the very specific timing rules that apply to the filing of that Form.
Even if one or more of the organization’s employees is subject to one of the above exceptions, it does not mean the organization is not obligated to withhold income tax on wages paid to its other employees. However, like all 501(c)(3)s, churches and religious organizations do not have to pay Federal Unemployment Tax (FUTA) on wages paid to their employees.
There are also special rules for compensation of ministers. A church is not required to withhold income tax for compensation paid to a duly ordained, commissioned or licensed minister for performing services in the exercise of their ministry. However, a minister may choose to complete a W-4 to enter into a voluntary withholding agreement with the church. The church should report the minister’s compensation on a W-2 if the minister elects to be treated as an employee, or a 1099-MISC if they are an independent contractor. Organizations that believe one or more of their staff are subject to this exception should ensure that individual meets the requirements. Just because an individual is a minister does not necessarily mean that they meet all of the requirements.
Ministers are also the beneficiaries of another benefit unique to churches in that their income generally doesn’t include the fair rental value of a home provided, or a housing allowance paid, as part of their compensation. If a minister is provided with a parsonage, they can exclude from their income the fair rental value of the parsonage, including utilities, as long as the amount excluded isn’t more than the reasonable pay for their services. If they receive a housing allowance, it can be excluded from their income to the extent that it is used to pay expenses in providing a home (rent, mortgage payments, utilities, repairs, etc.). If they own a home, they can exclude from income the lesser of: the amount used to provide a home; the amount designated as a housing allowance by their church employer; or the fair rental value of the home. The housing allowance must be designated by the church in advance of the payment.
Tax information from IRS website including requirements for filing, restrictions, etc. can be found here:
Churches and religious organizations are not afforded any special treatment with regard to reimbursing for business expenses. All expense reimbursements should be subject to an accountable plan. If they are not, they may be taxable income and may even be an automatic excess benefit transaction.