Managing payroll can be complex for any organization, but churches face unique challenges and considerations. Whether you’re part of a large congregation with multiple staff members or a small church with a few employees, understanding payroll for churches is crucial to complying with legal requirements and maintaining financial integrity.
Join us as we explore church payroll basics and navigate essential information. (Note: This article is for informational purposes only and does not constitute legal or tax advice. For specific guidance related to your church’s payroll and compliance, please consult with a qualified legal or tax professional.)
5 Foundational Pillars of Church Payroll
1. Classification of Workers
Employees vs. Independent Contractors: One of the first steps when setting up church payroll is to correctly classify your workers. Employees are generally subject to more control over how they perform their tasks and are entitled to benefits such as Social Security and Medicare. Independent contractors, on the other hand, work independently and do not receive these benefits. Misclassification can lead to penalties and back taxes.
Ministerial Employees: Ministers have a unique status under IRS rules. They are considered self-employed for Social Security and Medicare purposes but are employees for federal income tax purposes. This dual status requires careful handling.
2. Tax Withholding and Reporting
Federal and State Taxes: Unlike regular businesses, churches are exempt from federal unemployment tax (FUTA). However, they must still withhold federal income tax and, if applicable, state taxes from employees’ wages.
Housing Allowance: Ministers can receive a housing allowance that is exempt from federal income tax. This allowance must be designated in advance by the church’s governing body and must be used for housing expenses.
Form W-2: At the end of the year, churches must provide employees with a Form W-2, which details their earnings and tax withholdings. Ministers, who are treated as self-employed for Social Security and Medicare, will need a Form W-2 for federal income tax purposes but will pay SECA taxes on their income.
3. Payroll Systems and Software
Choosing the Right Software: Selecting payroll software tailored for churches can simplify the payroll process. Many options are available, ranging from general payroll software with customizable options to specialized church management software with built-in payroll features.
Record Keeping: Accurate record-keeping is essential. Maintain detailed records of all payroll transactions, including wage payments, tax withholdings, and benefits provided. This documentation is crucial for tax filings and in the event of an audit.
4. Benefits and Compensation
Salary and Wages: Be sure that your church’s salaries and wages are fair and competitive. Consider the cost of living in your area and the church’s budget.
Health Insurance and Retirement Plans: Many churches offer benefits such as health insurance and retirement plans. Understand the tax implications of these benefits and ensure they comply with both federal and state regulations.
5. Legal and Ethical Considerations
Compliance with Labor Laws: Churches must comply with federal and state labor laws, including minimum wage requirements, overtime pay, and child labor laws. Non-compliance can result in penalties and damage to the church’s reputation.
Ethical Considerations: Transparency and fairness in payroll practices are essential. Church leaders should ensure that payroll decisions are made ethically and in the best interest of the congregation and employees.
Get the Church Payroll Help You Need
Managing payroll for a church involves navigating a complex landscape of tax regulations, employee classifications, and legal requirements. However, seeking professional advice when needed can help your church maintain financial health and integrity.
Churches across the U.S. trust Finch Accounting to handle their church payroll needs. Finch’s team of financial experts and analysts ensure that your payroll is handled properly and on time. They also take care of your budgeting, accounting, donor tracking, and much more—all for much less than the cost of hiring an accountant or bookkeeper in house!
Corey has 10 years of professional experience in financial planning and analysis. His previous areas of focus involved helping launch the Financial Services department of a large government contractor, where he developed the various reporting and budgeting systems.
Corey also actively manages Shorebird, a Registered Investment Advising firm that focuses on Financial Advising, Planning, and Investment Management for clients. He is also an adjunct finance professor at the University of California, Riverside for their graduate-level programs.
Corey received a B.A. in Business Administration at the California State University, San Bernardino; a Masters in Business Administration and a Masters in Finance from Indiana University’s Kelley School of Business.
Jonathan has more than 7 years of professional experience in corporate taxation and strategy with both public and private companies. His industry experience includes entertainment, church finances, medical device, and technology. Jonathan is also an adjunct professor at the University of California, Riverside (named a Best Business School by Princeton Review and named a Best Undergraduate Business School by Businessweek) and speaks at conferences on topics such as leadership and management.
Jonathan is a graduate of the University of California, Riverside and an MBA candidate at UCLA Anderson School of Management. He is a licensed Certified Public Accountant (CPA) in California.
Jonathan previously worked at PricewaterhouseCoopers, LLP where he specialized in corporate taxation.
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