Preparing church payroll is a difficult task because of complex tax purposes. Church payroll is different from the payroll of a secular business. This is because church ministers are considered both self-employed and employed and therefore, they hold a “dual-tax status”. While a church administrator or an experienced volunteer works with the payroll, he or she should have great knowledge and past experience with payroll.
Usually, pastors prefer to pass this job to another person so that they can focus on spiritual practice. However, it is important for pastors to recognize that people tend to make mistakes during doing church payroll. Any mistake or incorrect fillings will make the church accountable for penalties. Therefore, to establish your church’s payroll correctly and pay the church’s staff members, you should clearly understand the payroll requirements. In this article, we will offer you some knowledge about how to establish an effective payroll practice for your church.
The Extension of the Church Audit Protections:
The IRS has certain limitations regarding the conduction of church audits by following section 7611 of the tax code. Earlier, section 7611 used to serve the only purpose of managing IRS inquiries regarding unrelated business income and the tax-exempt nature associated with a church. From December 2015, IRS has extended the audit protections to tax inquiries regarding employment within a church. Therefore, now the IRS follows a strict procedure for your church’s payroll. However, you should not be careless with the payroll practices of your church.
How to Master Church Payroll?
Below are five steps that you need to follow for an effective payroll practice-
1. Distinguish an Employee from a Contractor:
First of all, you have to make an appropriate decision on who will handle the church’s payroll. Before you pay an individual for his/ her work, you have to determine whether he or she is an employee or a contractor. This classification will help your church to decide whether an individual will come on payroll or not. In this case, a church should follow the common-law rules of the federal government to determine whether an individual is a contractor or an employee.
2. Collect the Fill Out Forms of W-4 and I-9 from All the Employees:
The I-9 form is used to verify the identity and eligibility of the employees, whereas the purpose of the W-4 form is to collect necessary information for withholding the correct tax amounts. Therefore, to ensure the deduction of correct tax amounts from the employees of your church, you have to ask your employees to fill out these forms. However, you do not need to submit these forms to the IRS.
3. Calculate the Taxable Wages of Every Employee:
In the case of the in-house payroll, you have to calculate the federal income tax that you need to withhold from the employees. You can not withhold the Medicare and social security tax from the church ministers except that made a voluntary withholding agreement. IRS Publication 517 states that a minister can make a voluntary withholding agreement to cover due tax or any income. He can also pay quarterly instalments of tax by using Form 1040-ES. You can use a convenient church payroll software to calculate and manage tax deduction of your employees.
4. Maintain the Payroll Frequency:
Whether you want to establish a payroll for a weekly pay schedule or prefer a biweekly or monthly payroll, you must maintain the payroll frequency. Therefore, your church should choose a manageable payroll schedule.
5. Make Effective Use of the Information:
The employees and the contractors will receive different forms, such as Form W-2 and Form 1099-MISC, respectively from the church. Once you have all Form W-2 statements and all Form 1099-MISC statements, you have to submit them to the IRS. Effective use of the information will help you to establish the church’s payroll efficiently.
Even though establishing a church’s payroll is a complex tax, if you follow the above-mentioned steps, the process can be smoother for you.