Federal Payroll Tax Issues

Treasurers and Pastors can be personally liable for federal payroll taxes!

By William D OConnell, CPA, CGMA

The IRS has the authority to assess a 100% penalty against the individual(s) responsible for withholding and paying federal payroll taxes, even if the person is an unpaid volunteer such as a church Treasurer. 

The IRS aggressively uses this authority.

The government successfully asserts that all organizations have one or more “responsible persons” who are charged with compliance with the federal payroll tax laws. 

Consequently, the IRS Code states that “any person” who exercises authority over the payment of creditors can be held liable, regardless of title or other roles. 

Simply stated, Treasurers and Pastors who are active in the administration of the church’s business affairs are at risk to be held personally liable for non-payment of payroll taxes.

Some will assert that non-payment of payroll taxes is simply a cash management technique.  That is not the case.  FITW and employee FICA withholding are funds that are held as “Trustee Funds” - monies that belong to employees to be paid to the government for the future benefit of the employees.

The Church Accounting: How To Guide devotes a whole section of the book to payroll for churches. It covers payroll terminology and forms and then takes you through the steps necessary to set up a payroll, calculate and file the necessary taxes and forms, and even details how to handle the minister's payroll. It also includes sections on filling out IRS forms: 1099 and 1096.

If you have QuickBooks or are considering using it in the future, go ahead and purchase the QuickBooks for Churches and the How To Guide combo for a complete package on setting up and administering a payroll using QuickBooks.

QuickBooks for Churches & Church Accounting Combo Bundle

Our office was recently contacted by a modest sized church that discovered a $51,000 “Accrued Payroll Tax Liability” on its Balance Sheet that had been accumulating for years. 

The discovery was made by a new bookkeeper who replaced the retiring long-time and trusted bookkeeper.  The former bookkeeper stopped making payments because “the IRS stopped sending the forms” when the electronic collection system went into effect in January 2011. 

The failure of the Treasurer, and possibly the Pastor, to question this growing liability would likely have been sufficient to hold one or both of them personally liable for the unpaid taxes if the church had closed before the accounts were fully paid.

Please call me at 617-921-9321 for a free consultation on any payroll tax question you may have.

More on Manage Payroll Issues

Wisdom Over Wealth Payroll

When it comes to paying employees, laws and the IRS have made the payroll function a time consuming nightmare for churches, nonprofit organizations, and small businesses alike.

This especially holds true with many churches and nonprofit organizations that rely on volunteer or non-accountant staff to handle their payroll.

Many believe that because they use a payroll service or software they are compliant. However,  church payroll and the tax issues that surround them should be done by church experts, not by the everyday payroll services that do not understand church compensation issues like the pastoral housing allowance and how to handle minister's special tax requirements.

As Trusted Church Advisers, we offer payroll solutions that meet your organization's needs and ensures your payroll is done correctly.

About the Author

William OConnell is the founder of Wisdom Over Wealth, a CPA ministry serving churches, Christian organizations and followers of Jesus Christ. He may be contacted via the website www.wisdomoverwealth.com or at 617-921-9321.

Church Accounting Package

A set of 4 ebooks that covers the following topics...

  • Fund Accounting Examples and Explanations
  • Setting up a fund accounting system
  • Donation management
  • Minister compensation and taxes
  • Internal controls and staff reimbursements
  • Much more - Click here for details