November 28, 2012

Churches Filing Annual/Quarterly Federal Tax Return

Question:

A church recently received notification of its new federal Employer's Identification Number (EIN) which stated that it must file Form 940, Form 941, and Form 1120. Why does the church have to file these and can it avoid doing so?

Answer:

Churches as tax exempt organizations are not subject to filing corporate income tax returns (Form 1120). Further, as tax exempt organizations, churches are not subject to federal unemployment tax (Form 940). 

Most churches are however responsible to file Form 941 on a quarterly basis. On this form, churches report employee earnings and withholdings, and employer taxes due.

Form 944 may be requested instead of Form 941. But a new employer must request the opt out by calling or writing the IRS. For the opt-out deadline, see Rev. Proc. 2009-51: Rev. Proc. 2009-51. Smaller churches will find it advantageous to file the Form 944 as it is filed only once a year. 

However, some small churches with only a solo-pastor who has no federal withholding submit only an annual Form W-2 and file neither Form 941 nor Form 944. Be aware, once a church begins filing Form 941 or Form 944, the church needs to continue filing even if the church has no employees for a period of time.

4 comments:

  1. How do I report the pastor's salary on the 941 since he has no withholdings? I was told not to report on a 941 but now my 941's do not match my W2's, so I dont know how to report my W3.

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  2. Misty,
    Report your pastor's taxable salary along with other employees' compensation on Line 2 of Form 941. Do not include housing allowance compensation on any of the Form 941 lines.
    Further, because a minister is not an employee eligible or subject to FICA tax withholding, none of his compensation should be included on lines 5a or 5c.

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  3. Are churches required to complete Form 941/944 if they have only one employee (the minister) who doesn't have any withholdings? The church has been completing W2s for the minister the past couple of years but has never received a notification to complete Form 941 or 944 - should they start this year?

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  4. Elizabeth,

    I apologize for the late response. In the past two weeks, we have actually been very busy filing Form 941/944 for a number of our clients.

    Some of our clients have received IRS correspondence stating that they are required to file Form 941 or Form 944. After much inconclusive communication between the church and the IRS, some churches opted to file Form 941 and then request permission to file Form 944.

    Each situation is different, we suggest you consult your personal tax professional for guidance on how your church should handle Form 941/944 filings.

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