Payroll functions differently for a church compared to a private business. There are varying withholding rules for pastors, employees, and contractors, with certain exemptions applicable to some positions but not to others. It is important to follow church payroll best practices to comply with state and federal regulations. Utilizing a payroll partner familiar with payroll for churches can help ensure smooth operations and prevent any fines or penalties.
Challenges of Payroll for Churches
Proper employee classification is one thing that is more complicated about payroll for churches. Workers have to be properly classified as either employees or contractors. The classification and tax rules for clergy are completely different from the other two categories. Part-time workers and volunteers also have to be classified correctly.
Churches also receive tithes and donations, which are tax-exempt. However, some church activities might count as taxable income. To differentiate between the two, excellent record keeping is required.
You need to be aware of church-specific regulations in the tax code as well. Tax laws also change occasionally, so staying on top of the rules is necessary for compliance. The right payroll software for churches that automatically updates with tax laws is essential.
The IRS and Church Payroll
Congress has placed numerous restrictions on the IRS's auditing of churches. Full details are in section 7611 of the tax code.
Even if an examiner should find an employment tax issue with a church, it has to be sent up the chain of command. An audit of a church's books can only happen after a Treasury Department official signs off on it. If that happens, the church will receive a written notice and have a reasonable time to respond.
Churches have more protection than private businesses during IRS audits, but it's still important to handle church payroll carefully.
Clergy Compensation and Payroll
Church ministers usually have dual tax status. This means that they are considered an employee of the church when it comes to income taxes, but they're also considered self-employed when it comes to Social Security. Dual tax status for ministers is one of the most confusing aspects of church payroll.
Sometimes, churches provide a housing allowance for ministers. There are a couple of different ways that churches do this. They can either pay the rent on an apartment or home for the minister, or the church can own a home and allow the minister to live there.
Since ministers do not pay rent or a mortgage, they often receive a lower-than-normal salary from the church. Housing allowances are documented separately from salary and benefits, and churches must ensure that the allowance is not subject to income tax.
If churches provide benefits to ministers or staffers, these can also have tax implications. Health insurance, retirement contributions, and other benefits must be accounted for and reported properly for compliance.
Church Payroll Best Practices
Using payroll software for churches is one of the best ways to streamline and simplify the process. Payroll software can accurately track tax withholdings, paid time off, hours, benefits, and other items while remaining up-to-date with changes to the tax code.
Churches might rely on volunteers or have payroll staffers who are not fully trained accountants. This isn't the end of the world, but it is important to provide the proper training on the latest regulations and best practices. Workforce Payhub offers comprehensive payroll training materials to our clients. These materials can keep your payroll staffers up to date, even if they're not professionals.
A church should also conduct regular audits of its books, to ensure everything is in order. If discrepancies or issues are identified, they can be corrected promptly.
How Workforce PayHub Can Help
Even though the IRS gives churches a certain amount of leeway when handling payroll, churches face specific challenges. Proper classification of employees, contractors, and clergy is essential. Using church payroll, best practices can help you maintain tax compliance while streamlining operations and reducing errors.
Learn more about how Workforce PayHub's training, software, and other resources can simplify your church's payroll process. Contact us today for a free consultation!
