This document discusses church payroll compliance requirements. It states that churches are required to withhold and pay income taxes and FICA taxes for employees, unless a specific exception applies. It provides details on filing various tax forms such as Form 941, W-2, and 1099-MISC. The document also discusses accountable reimbursement plans, automobile mileage rates, record keeping requirements, and penalties for failure to comply with tax payment and filing obligations.

1. Church Payroll Compliance
Nexus Financial
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2. Employment Tax Returns
• Every
employer, including an
organization exempt from federal
income tax, who pays wages to
employees is responsible for
withholding, depositing, paying and
reporting federal income tax, social
security and Medicare (FICA) taxes,
and federal unemployment tax
(FUTA), unless specifically excepted
by law

3. Employment Tax
•
Employment tax consists of
•
•
•
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Income tax withheld and paid on behalf of an
employee
FICA taxes withheld and paid on behalf of an
employee
Generally, churches are required to withhold,
report and pay income and FICA taxes only

4. Social Security and Medicare Tax
•
Wages paid to church employees subject to
FICA unless
• Wages paid for services performed by a duly
ordained, commissioned or licensed minister
of a church in the exercise of his/her ministry
OR
• Employee is paid wages of less than $108.28
in a calendar year OR
• A church that is opposed to the payment of
Social Security and Medicare taxes for
religious reasons
• File
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Form 8274

5. Federal Unemployment Tax Act (FUTA)
• Churches
and religious organizations
are exempt from federal
unemployment (FUTA) tax
withholding
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6. Family Employees
• Child
employed by parents
Any age – subject to income tax
withholding
• Under age 18 – not subject to social
security and Medicare taxes
• Under age 21 – not subject to FUTA tax
•

7. Reporting Requirements
Withheld employee income tax and FICA
taxes are reported on Form 941,
Employer’s Quarterly Federal Tax Return
• Some small employers are eligible to file
an annual Form 944 instead of quarterly
returns – must have received
authorization from the IRS
• Employers who made all federal tax
deposits for the quarter on time are
granted an automatic 10-day extension
to file Form 941 or 944
•
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8. Trust Fund Recovery Penalty (TFRP)
• Money
withheld from an employee’s
wages by an employer and held in
trust until paid to the Treasury
• If trust fund taxes are not paid in a
timely manner, the IRS may assess
the TFRP
• Amount of penalty is equal to the
tax evaded, not collected or not
accounted for and paid over

9. Trust Fund Recovery Penalty (cont’d)
• The
TFRP may be assessed against
any person who
Is responsible for collecting or paying
withheld income and employment
taxes, and
• Willfully fails to collect or pay them
•

10. Form 944
• Employer’s annual liability for social
security, Medicare and withheld
federal income taxes is $1,000 or less
• New employers are eligible to file
Form 944 if they will meet the
eligibility requirements
•
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When filing Form SS-4, Application for
Employer Identification Number, check
box on line 14 to indicate whether you
expect to have $1,000 or less and
would like to file Form 944

11. Employee Business Expenses
• Church
treated same as any other
employer
• Rules differ if expenses paid under an
accountable or non-accountable
plan
•
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Plan determines whether payment for
expenses is included in employee’s
income

12. Accountable Reimbursement Plan
• Three
requirements
Involves a business connection
• Requires the employee to substantiate
expenses incurred
•
• Within
•
Requires the employee to return any
excess amounts
• Within
12
a reasonable period of time
a reasonable amount of time

13. Accountable Plan (cont’d)
• Employee
business expenses
reimbursed under an accountable
plan are
Excluded from an employee’s gross
income
• Not required to be reported on the
employee’s W-2
• Exempt from the withholding and
payment of wages subject to FICA and
income tax withholding
•
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14. Non-accountable Reimbursement Plan
• If
church reimburses or advances an
employee funds for business
expenses, but does not require or
receive substantiation of expenses
•
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Amounts paid considered wages to
employee and subject to income and
FICA tax withholdings and reportable
on W-2

15. Example
• If
a church pays its secretary $200
per month allowance to reimburse
monthly business expenses the
secretary incurs while conducting
church business, and the secretary is
not required to substantiate the
expenses or return any excess, then
the entire $200 must be reported on
Form W-2 as wages subject to FICA
and income tax withholding.
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16. Automobile Mileage
• If
a church pays a mileage
allowance at a rate less than or
equal to the federal standard rate,
the amount of the expense is
deemed substantiated
Not included as wages
• Employees must substantiate the time,
place and business purpose of the
mileage being reimbursed
•
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17. Automobile Mileage (cont’d)
• Mileage
reimbursement considered
wages, and included in income, if
mileage rate exceeds the standard
mileage rate
• Time, place and business purpose not
documented
•
• No
income attributed to employees
who use a vehicle owned by the
church to perform church-related
work
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18. Automobile Mileage (cont’d)
• For
2013, the IRS standard mileage
rates for use of a car, van, pickup or
panel truck, are:
56.5¢ per mile for business miles driven,
• 24¢ per mile driven for medical or
moving purposes, and
• 14¢ per mile driven in service of
charitable organizations.
•
Source: IRS Notice 2012-72
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19. Recordkeeping Requirements
• Tax-exempt
organizations required
to maintain books and records
necessary to accurately file federal
tax and information returns
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20. Record Retention
• Records
of revenue and expenses,
including payroll records
•
Retain at least four years after filing the
return(s) to which they relate
• Records
relating to acquisition and
disposition of property (real, personal
and investment)
•
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Retain at least four years after the filing
of the return for the year in which
disposition occurs

21. Filing Requirements
Form
How Form Used
When to File
W-2, Wage and
Tax Statement
- Give to each
employee by
Jan. 31st
- File with the
SSA by the last
day of February
W-3, Transmittal
of Wage and
Tax Statement
- File with the
SSA by the last
day of February
941, Employer’s
Quarterly
Federal Tax
Return OR
944, Employer’s
Annual Federal
Tax Return*
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To report Social
Security and
Medicare taxes
and income
taxes withheld
and paid by
employer
- Quarterly
reports due Apr.
30, Jul. 31, Oct.
30, and Jan. 31
- Annual report
due January 31

22. Filing Requirements (cont’d)
Form
When to File
1096, Annual
Summary and
Transmittal of
U.S. Information
Returns
To transmit
Forms 1099MISC, W-2G and
certain other
forms to the IRS
- File by last day
of February in
the year
following the
calendar year in
which the
payments were
made
1099-MISC,
Miscellaneous
Income
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How Form Used
Use if church
pays an
unincorporated
individual or
entity $600 or
more in any
calendar year
-Give recipient
a copy of 1099
by Jan. 31st
-File Copy A of
1099 with IRS by
last day of
February

23. Sources
• IRS
Publication 557 – Tax-Exempt
Status for Your Organization
• IRS Publication 15 (Circular E) –
Employer’s Tax Guide
• IRS Publication 517 – Social Security
and Other Information for Members
of the Clergy and Religious Workers
• IRS, Tax Guide for Churches and
Religious Organizations
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24. Church and Nonprofit Payroll
Compliance Presented by Nexus Financial as part of the
Small Business Profitability Series
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