When a Church Incorrectly Withholds FICA from a Minister

Question:

Our church withheld FICA from our pastor's prior paychecks. Is the church required to correct prior payroll reports?

Answer:

Yes, if the church incorrectly withheld FICA from its pastor's paychecks, the church is required to file corrected federal payroll forms, including Forms 941 or 944, and Forms W-2 and W-3. If the employee is to be treated as a minister, the church must follow IRS requirements for ministers, which are different than general employee requirements.

Churches are fully subject to the provisions of Internal Revenue Code sections 1402(c) and 3121(b)(8) and Treasury Regulations under section 1402(c). The Internal Revenue Service's Minister's Audit Techniques Guide explains to IRS auditors, in brief, key ministerial tax matters that they must understand before conducting an audit on a minister's tax return. A quote from the Guide follows:

Although a minister is considered an employee under the common law rules, payments for services as a minister are considered income from self-employment pursuant to IRC §§ 1402(c) and 3121(b)(8). A minister, unless exempt, pays social security and Medicare taxes under the Self-Employment Contributions Act (SECA) and is not subject to Federal Insurance Compensation Act (FICA) taxes or income tax withholding.

It is important to note that this treatment is non-elective; the church must correct the federal payroll forms.

For a review on FICA taxes, read the following blog posts:

Refund of Incorrectly Withheld FICA Taxes from a Minister

Church Withholding of FICA Taxes

Review of Form W-2 Reporting for Ministers

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MinistryCPA - Corey A. Pfaffe, CPA, LLC

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