April 23, 2013

Review: Church Employee Withholding

Question:

How does a church determine a non-clergy employee's withholding? How does a church match an employee's withholding and where do they send the money?

Answer:

Typically, non-clergy employees and employers incur the following taxes:

  • 7.65% FICA tax - While ministers are not subject to FICA tax and may not be erroneously classified as non-clergy for the sake of withholding and matching, non-clergy employees must have 7.65% withheld from their pay and an additional 7.65% contributed by the church. This is true unless the church has previously opted out of paying its share of FICA tax by virtue of filing Form 8274 and gaining approval from the IRS. This puts the entire 15.3% burden on the employee.
  • Federal and State unemployment taxes - Generally churches are exempt from these taxes; however, some states may require state unemployment taxes be paid even by a church.
  • Federal and State income taxes - Determined based upon withholding tables in IRS Pub 15 and allowances communicated by employees on Form W-4. Church employers must collect Form W-4 from each non-clergy employee.
Churches use IRS Form 941 to report on a quarterly basis the wages paid to employees and any Federal withholding. Instructions for filing Form 941 can be found here.

Alternatively, churches may file annually IRS Form 944 (this does requires pre-approval). Instructions for filing Form 944 can be found here.

In accordance with Publication 15, churches must submit payments for any federal income tax withheld and both the employer and employee social security and Medicare taxes. In addition, most states have similar income tax withholding requirements.

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