Church Payroll is Not Simply Tax Exempt

A general misconception is that churches don’t have to worry about taxes – that they are exempt. As a payroll provider, the staff at The Payroll Department understands how much of a myth that is for churches. There are many different types of taxes on the state and federal levels and being a church actually is a complex situation. The church may be exempt from some taxes but not others and the tax code can vary from state to state. That’s where professional payroll services can be invaluable.

There are three main issues that churches must address when it comes to payroll:

Is the main leader (pastor, priest, minister) ordained or not?

If ordained, the person will pay tax in accordance with the Self Employed Contribution Act (SECA) tax and file a personal tax return. Because the person is self-employed, the church is not required to pay any portion of the SECA.

If the person is not ordained and not designated an exempt employee, Federal Insurance Contributions Act (FICA) taxes will be deducted from the payroll. FICA includes deductions for both Social Security benefits and Medicare benefits. Workers will be eligible for Social Security and Medicare benefits in accordance with their contributions and program guidelines.

Employees will be designated one of two ways – either paying SECA taxes or FICA taxes, but never both.

Is there a housing allowance?

Housing allowances for ministers is part of an employment agreement and surrounded by confusion. In Indiana, a housing allowance from a church is not taxable income on payroll, but will be listed for informational purposes on the pay stub. Because most ordained personnel are classified as self-employed people, the allowance could figure into their annual income tax returns.

Unemployment “insurance”

Deductions for State Unemployment Tax Authority (SUTA) and Federal Unemployment Tax Act (FUTA) are not taken from church employees’ wages. These deductions are always an employer expense, but in the case of churches, they are exempt in most states. Unemployment benefits are funded through these excise taxes and when churches do not pay into the funds on behalf of workers, the workers are not eligible for benefits.

As you can see, there is no blanket “exempt” status for churches and those who work in them. An experienced payroll provider can help guide churches through the complexity of payroll questions for all employees and keep records organized and accurate. Don’t take a chance. Contact The Payroll Department to be sure your church worker’s payroll is being handled properly.

-Elaine of The Payroll Department Blog Team

Posted in: Churches and Non-Profit Employers, Payroll

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