Churches and taxes: Attentive adherence to guidelines a must

New requirements from the IRS mean churches must be up-to-date and prepared to follow all guidelines.

That was the message from Lee Wright, coordinator of church compensation services at the Alabama Baptist State Board of Missions, in a recent webinar, “Church Tax Conference for Small Churches.”

“I get many questions about ministers’ taxes, and so much of the confusion is because ministers are employees for federal income tax purposes and receive a W-2 each year, but they are considered self-employed for social security (SECA) taxes,” Wright said.

A minister can ask the church to withhold taxes from his salary and for a higher withholding to cover the self-employment taxes, though the church cannot directly withhold or pay FICA taxes. Wright said he also fields many questions about the ministers’ housing allowance.

“The allowance can be up to 100% of salary in some cases,” he said. “The average bivocational pastor in Alabama, and about half of our pastors are bivocational, makes $19,000 and about $1,500 in benefits.

“These pastors could claim 100% of their salary as housing allowance, though I’d recommend they receive some salary in order to participate in the Church Retirement Plan through GuideStone,” an organization that provides property and casualty insurance, health insurance and retirement savings for faith-based organizations, Wright said.

Quoting the advice that “everything is taxable unless the IRS code says that it isn’t,” Wright noted three familiar tax forms have been redesigned for 2021:

  • Form W-4 — According to the IRS, the new design uses the same information as the old design but reduces the form’s complexity and increases the transparency and accuracy of the withholding system.

“The W-4 form includes the tax deductions the employee wishes to claim,” Wright said. “The new standard deduction, raised to $25,100 this year for married couples, means that most Americans won’t claim other deductions. But ministers may request federal and state withholding, or they can request no withholding and make quarterly estimated payments themselves.”

  • Form 941 — Employers use Form 941 to report income taxes, Social Security tax or Medicare tax withheld from employees’ paychecks and pay the employer’s portion of Social Security or Medicare tax.

The church uses Form 941 to report employee withholding, if there are more employees than the pastor, and may receive a credit for salary paid during time off caring for COVID-19 patients, according to the Family Medical Leave Act of 2020. Churches should submit quarterly tax withholdings but must do so monthly if monthly tax withholding exceeds $2,500, Wright said.

  • Form 1099-NEC — The church uses the 1099-NEC, rather than the traditional 1099-MISC, to report nonemployee compensation, such as payments to contract workers. Examples are evangelists or interim pastors.

Wright also noted that bonuses and love offerings must be reported as taxable income. And with the increase in the standard deduction, “the traditional package salary plan can end up costing the minister more in taxes,” so revisiting the plan in light of 2021 rules is advisable.

For more information, go to alsbom.org/ccs.

SBOM will offer a number of in-person financial issues conferences in July and August.

Contact Lee Wright at 800-264-1225, ext. 2241 or lwright@alsbom.org.

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