Payroll for churches can be challenging due to the regulatory burdens on charitable organizations. Incorrect filings can result in penalties for a church to pay the IRS. Simplifying church payroll processes is the best way to stay in compliance with regulations while efficiently managing and streamlining operations. Here are some tips for accurate and efficient management when it comes to church payroll solutions.
Classify Church Employees Correctly
Most paid workers at a church are going to be classified as either independent contractors or employees. This is an important distinction and the IRS has strict guidelines for how these two different types of employees are to be classified. Employees have income tax, Social Security, and Medicare withheld from their paychecks. For independent contractors, no taxes are withheld and those workers are required to file their own taxes.
Understand Withholding for Pastors
The IRS considers church pastors to have dual tax status. This means they are considered traditional employees for income taxes but are treated as independent contractors for Social Security and Medicare.
Pastors also have the option to enter a voluntary withholding agreement with the church, in which payroll deducts Social Security and Medicare from their paychecks. If a pastor does not opt for a voluntary withholding agreement, they are responsible for filing Form 1040-ES and paying estimated taxes for each fiscal quarter.
Housing allowances for ministers also have to be properly accounted for in payroll. Depending on how a housing allowance is structured, it could qualify as taxable income. Any benefits such as paid time off or retirement accounts must also be included. Payroll software for churches that understands how to account for pastoral wages and withholding can simplify all this for a church.
Collect Proper Forms from All Employees
As soon as a new employee is hired, including a pastor, churches must collect Form W-4 from them. This form provides the information that the payroll team needs to withhold the proper amount of taxes from their paychecks. It includes information like exemptions and the number of dependents the employee has.
Churches are required to keep a current Form W-4 on all employees in their records at all times, just like for-profit businesses. The form doesn't need to be submitted to the IRS; it is for internal church use only.
Choose a Payroll Frequency That Works for Your Church
Employees can be paid weekly, biweekly, or monthly. The frequency can depend on the size of your church and your payroll team. If you have a large church and a small payroll team, it might be difficult to issue payroll every week, unless you're using software that can simplify the process greatly. Select a frequency that works for the size of your church staff, with the knowledge that it can be adjusted later if the church grows.
Manage Fund Allocations Properly
Churches often rely on tithes and donations to pay their operating costs. While tithes and donations are not taxable, they still have to be managed properly to ensure that all employees are paid accurately and on time. Transparent accounting with payroll software for churches is crucial for getting funds distributed properly every time.
Submit Correct Informational Returns
This can be one of the most complicated aspects of church payroll. Churches have to file a Form 941 for each fiscal quarter throughout the year. The church has to send a Form W-2 to every worker classified as an employee and a Form 1099-MISC for anyone classified as an independent contractor (so long as the contractor earns more than $600 in a calendar year). A Form W-9 is required from paid guest speakers.
Churches also need to submit copies of all Form W-2 and 1099-MISC statements to the IRS, along with a Form W-3 or Form 1096, respectively. This can be a lot of paperwork, and this is why efficient payroll for religious organizations is so important.
Church Payroll Solutions with Workforce PayHub
Church payroll management can be complicated due to the regulatory burdens placed on nonprofits and charitable organizations. Withholding works differently for ministers, employees, and independent contractors. However, specialized software and training can help address these unique challenges and achieve more effective church payroll management.
Discover how Workforce PayHub can help streamline your church's payroll process. Contact us today for a free consultation and see how our solutions can simplify payroll management for your church.
