Skip to main content

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.

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

Post a Comment

Popular posts from this blog

Review: Form 1099 Payments to 501(c)(3) Organizations

Question: A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC? Answer: Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The IRS Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC.  The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC: Rent paid to an individual (non-corporation) Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers) Support sent directly to missionaries

Special Topic: U.S. Olympic Champion Ben Peterson's Autobiography "Road to Gold"

Road to Gold , by Ben Peterson We are privileged to serve our client Ben Peterson and Camp of Champs, the wrestling ministry he founded   and directs. Ben wrestled for more than 16 years, coached on a collegiate level for 28  years, and has directed Camp of Champs for more than 40 years. We have read his autobiography and found Ben's dedication to the sport and his faith to be inspiring. If you are looking for a good story we highly recommend Ben's  Road to Gold. In Road to Gold , Ben shares the lessons he learned throughout his upbringing and how they led him to achieve Olympic victory. Ben states a key element of his youth was the consistency of his parents. He was encouraged to read the Bible every day from an early age, which he now describes as the most stabilizing habit in his life. Throughout his story Ben also emphasizes the importance of confidence, solid goals, hard work, and consistency. These qualities helped Ben throughout his life and wrestling career, from learni

When you don't know what you don't know

Here at MinistryCPA, we recognize that many churches rely on volunteers and/or part-time treasurers and financial secretaries.  With this in mind, we seek to come alongside ministries in providing the much-needed support to ensure that they are operating in a manner that is both compliant with governing authorities and taking advantage of opportunities for improved stewardship of ministry and employer financial resources.  Please consider this brief checklist to determine if your ministry needs to look further into areas that could be classified as “We don’t know if we are compliant.” Please check all compliance requirements that are currently being met: File quarterly Form 941 or annual Form 944 with the IRS Issue Forms W-2 to all employees and File Forms W-2/ W-3 with SSA Ministerial Housing Allowance is only listed in box 14 of the Form W-2 – it is not included in box 1 Obtain Form W-9 from all individuals/businesses that are paid the cumulative total of $600 or more in the year f