Payroll Taxes

Is the church or nonprofit required to withhold federal payroll taxes from its employee(s) paychecks?

Pyroll taxes for a church

If you are a nonprofit, you are required to withhold and pay federal taxes on your payroll.

If you are a church and if you have any non-minister employees, you must withhold and match Social Security tax, and Medicare tax (FICA). You are also required to withhold income taxes when applicable.

Even if your church only has minister employees, you still may have to withhold income tax, if your minister has elected voluntary income tax withholds on his W-4. So, most churches will be required to withhold payroll taxes and remit them to the IRS.

The only exception to the church not being required to match Social Security and Medicare taxes for their nonministerial employees is rare cases where a church has filed an IRS Form 8274, (Certification by Churches and Qualified Church-Controlled Organizations Electing Exemption from Employer Social Security and Medicare Taxes) and been approved.

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

Calculating taxes for a payroll...

Each employee, including the minister if he has elected voluntary income tax withholding, must complete a W-4.

For non-minister employees, you must withhold the following taxes:

  1. Federal income taxes (based upon information provided in a W-4)(Use the federal tax tables from IRS Publication 15, also known as Circular E)
  2. Social Security tax is 6.2% of gross wages. 
  3. Medicare tax is 1.45% of gross wages.

Matching payroll taxes...

Your organization must match the FICA tax withheld from your non-minister employee payroll checks.(Exception stated above)

The amount of the matching federal taxes for a payroll is:

  • Social security 6.2%
  • Medicare 1.45%

Total matching 7.65%

Regarding Medicare and Social Security tax and minister's paychecks...see my Clergy Tax page

Is your organization considered small, medium, or large by the IRS? Your payroll tax liability determines how often you have to pay your taxes for a payroll to the IRS. See section 11 of Pub 15 (Circular E) for more details.

Unemployment taxes...

Churches are exempt from federal unemployment taxes. Many states also grant exemption to churches from state unemployment taxes.

Consult the state unemployment tax agency for your particular state to make sure your state grants an exemption to churches.

Workers compensation...

Most states require churches to provide Workers’ Compensation. Please check with your state to see if your church or nonprofit organization is required to provide this coverage.

Note: Different states have different payroll obligations. A good resource for determining your state's withholding payroll obligations can be found on the Biz Owner's Toolbox: Income Tax Withholding Obligations by State

Make sure you follow up by consulting with your state's appropriate agency to see if the payroll obligation pertains to churches and nonprofits.

Additional Resources

For those of you residing in the beautiful country of Canada, I found a great payroll resource for you... Church Treasurers of Canada Inc.

Need a Consultation, help setting up an effective Accounting System, or someone to do your monthly bookkeeping?