March 21, 2011

Church Withholding of FICA Taxes

Question:

Businesses withhold and match 7.65% of employees' pay for their social security and Medicare taxes. Can a church pay an employee’s 7.65% or not?

Answer:

We must segregate ministerial and non-ministerial employees in this consideration. Churches must withhold and match FICA for non-ministerial employees unless they have filed Form 8274-Certification by Churches ... Electing Exemption From Employer Social Security and Medicare Taxes. Then the church employee is responsible to pay the full 15.3% himself or herself on Schedule SE, Section B, line 5a.

Churches may not withhold and match FICA for ministerial employees. I encourage churches to help their pastors with these costs but they cannot treat them as non-ministerial. It can actually hurt the pastor’s tax situation. Let me illustrate.

1. If a church wishes to “help” – a) calculate a 7.65% bonus to add to his pay by multiplying his cash compensation + housing allowance X 7.65%, b) then withhold an identical amount as federal income tax withholding. When he files his return and calculates his 15.3% self-employment tax (entered on Form 1040, line 56 from Schedule SE), he will have an extra large amount entered on line 61 as federal income tax withholding to offset his total SE + income tax. Of course, the “bonus” is also taxable income.

2. How can a church’s erroneous classification of its pastor as a non-ministerial employee “hurt”? – when a pastor calculates his 15.3% SE tax on Schedule SE, he can reduce the self-employment income amount by employee business expenses and 403(b) retirement contributions. This reduces his SE tax rather than having it withheld as FICA tax before these items are subtracted.

3. Further, by classifying a minister as a non-minister he becomes ineligible for a housing allowance and SE tax-reducing 403(b) contributions.

Numerous entries in this blog document these statements and examples.

2 comments:

  1. Regarding ministers and Schedule SE: Can ministers reduce SE income for 403b contribution the minister makes?
    Where is that stated by the IRS?

    I thought ministers 403b contribu- tions were still taxable for Social Security taxes.

    Or is it just the employer's contributions that are not taxable?

    ReplyDelete
  2. Perhaps the easiest way for me to respond to the March 29 comment is to ask readers to type the search term "403" in the above window. I believe it will offer a good review and citations for authority that may be helpful.

    ReplyDelete