Payroll Taxes: Withholding, Matching, and Remitting

Is the church or nonprofit required to withhold payroll taxes from its employees' paycheck?

If you are a nonprofit, you are required to withhold and pay payroll taxes. If you are a church and if you have any non-minister employees, you must withhold Income tax, Social Security tax, and Medicare tax from their paychecks.

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.

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

For information on handling the gifts you gave your minister and staff...read this article: "How do we report the gifts the church provides to volunteers?"

How is payroll tax withholding figured?

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 withholding charts from IRS Publication 15, also known as Circular E)
2. Social Security withholdings is 6.2% of gross wages.
3. Medicare withholdings is 1.45% of gross wages.

Does the church or nonprofit have to match FICA tax?

Yes. Your organization must match the FICA tax withheld from non-minister employees’ paychecks. The amount of the matching is:

• Social security 6.2%
• Medicare 1.45%

Total matching 7.65%

Regarding FICA tax and minister's paychecks...see my Clergy Tax page

It depends on whether your payroll liability is determined to be small, medium, or large.

Your payroll tax liability is considered small if, for the entire quarter, your tax liability is less than $2,500.

If you fall within this category and most of you probably will, simply prepare the IRS Form 941 on or before the due date the IRS has set up.

Indicate the amount of tax due on the bottom of the form. Include a check payable to the United States Treasury for the amount of the tax due. Put the Form number, year, and which quarter it is for on your check.

Make sure you include the 941-V with your check. Mail to the address provided on the Form 941 Instruction booklet.

See payroll tax forms.

Your tax liability is considered large if for the previous two years, the average payroll tax liability is more than $50,000 per year. If your payroll liability is this high, my recommendation for you is to hire an experienced CPA.

If your payroll tax liability is more than $2,500 pr quarter and less than $50,000 per year, you fall into the medium category.

You must remit your payroll tax liability to the IRS on a monthly basis. For more information, read the Form 941 Instructions booklet.

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

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Recommended Reading and Products:

Clergy Tax: For 2008 Returns By J. David Epstein / Gospel Light IRS regulations are ever changing, and to avoid costly mistakes you must stay current. Written by an attorney specializing in church tax law, this user-friendly step-by-step manual will assist you in accurately preparing your return and avoiding troublesome audits. Get up-to-date answers to your specific questions about housing allowances, medical reimbursements, social security, and more. 64 pages, softcover from Regal.

Zondervan 2009 Minister's Tax & Financial Guide: For 2008 Returns By Dan Busby, CPA / Zondervan If you find April 15th taxing in more ways than one, let Busby's easy-to-follow manual come to the rescue! The 2009 edition features a line-by-line explanation of the 1040 Form and recent changes in the tax code---with valuable hints about how to reduce next year's bill. Also includes guidance on compensation, retirement planning, and medical expenses. 192 pages, softcover.

The Church Treasurer's Manual: A Practical Guide for Managing Church Finances - Book & CD-ROM By Bruce Nuffer / lifestream Have you been appointed church treasurer? This handy manual will help you do your job efficiently and effectively! Packed with time-saving tips and practical suggestions, it offers an easy-to-understand overview of basic accounting principles; explanation of tax regulations; record keeping forms for taxes, individual contributions, and weekly offerings; advice for handling payroll and other compensations; and more. 160 pages, softcover from Beacon Hill.

The Church Administrative Assistant's Handbook: A Practical Guide to Maximize the Ministry of the Pastor and Staff By Rose Graham / lifestream Optimize the efficiency of your church staff with this tried-and-tested tool! Includes position profiles and hiring expectations; questionnaires to help determine work style, personality, and spiritual gifts; guidelines for accomplishing daily tasks; tips for working with volunteers; policies and procedures; event planning; a CD-ROM with reproducible adaptable forms, checklists, and templates; and more. 176 pages, 3-ring binder from Beacon Hill.

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