Need a Step-by-Step Payroll Guide to Establish Your Church's Payroll?

If you have a small payroll, there is no need to pay a bookkeeping or payroll service when you can do it yourself with minimum time and effort...even if you do not have any accounting experience.

Here is a step-by-step payroll guide to get you started setting up your Church’s payroll system:

Step One: If you do not already have an Employer Identification Number (EIN), you will need to apply for a number by filling out IRS Form SS-4. You can get the number immediately, either by phone or online.

(See SS-4 instructions)

Step Two: Get state and local identification numbers if they are required in your area. Contact your state revenue department directly for information on applying to be a payroll provider in your state. (Oklahoma only requires your federal EIN number.)

Step Three: Determine who is an independent contractors and who is a full time employee.

You don't have to withhold taxes from an independent contractor's pay; however, please don't think that you can save yourself some trouble by classifying all of your employees as independent contractors.

The IRS may penalize your Church heavily if you designate regular workers as independent contractors. For details, see the IRS Publication 15, also known as Circular E, The Employer's Tax Guide.

Step Four: Determine a pay period. Your Church is entitled to pay based on any schedule you want; however, most states require you to pay your employees on regular paydays.

Typically Churches pay weekly, bi-weekly, semi-monthly, or monthly. A few states allow some employees to be paid once a month, but most require that you pay your employees at least twice a month. Check with your state department of labor for your state's specific guidelines.

Step Five: Have each employee fill out and sign IRS Form W-4.

This form provides two critical pieces of information:

1. the employee's Social Security Number
2. the allowances the employee is claiming for income tax withholding purposes.

Remember...if at any time...your employees marry or divorce, have children, gain or lose a dependent or want to change withholding amounts for any other reasons, they will need to complete and sign a new W-4.

Also, you are required by law to treat an employee as a single person with no exemptions for withholding purposes, if you do not have an employee's W-4 on file.

So make very sure you have a W-4 in your Church files for each of your employees.

Step Six: Establish payroll records. For federal tax purposes, you must keep the following information on file:

• the name, address and Social Security Number of each employee
• the total amount and date of each payment
• the portion of each payment that constituted taxable wages
• copies of each employee's W-4
• copies of returns you filed
• copies of any undeliverable W-2 forms

Step Seven: Calculate withholdings. For income tax purposes the federal government provides tax tables (IRS’s Circular E)that calculate the amount you must withhold once you have established the appropriate amount of taxable wages.

Also most of your state and local governments require withholding too, so be sure you request a similar payroll tax publication from them (most have them online).

All states except Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming impose a personal income tax.

Some employees may ask you to withhold an extra amount, especially your ministers as they are required to pay their own self employment tax. (see the clergy tax page). Have them put the extra amount they want withheld from each paycheck on line 6 in their W-4.

For all employees, except ministers, you will be matching and withholding FICA tax.

See this page for exact amounts and procedures for withholding Social Security and Medicare tax (FICA).

Remember, ministers are considered dual employees and you will not be withholding any FICA tax form their paychecks.

Also, 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

Step Eight: Prepare and file payroll tax returns. The IRS requires that you file a quarterly Form 941, reconciling the amount of tax you owe and the amount you have paid.

See this page for step-by-step instruction on filling out your Form 941.

This form is due by the end of April for the first quarter’s payroll taxes, end of July (2nd Q), end of October (3rdQ), and by the end of January for the fourth quarter’s payroll tax.

Most states have their own payroll tax forms due in the same month as the form 941s. Oklahoma’s is an OW-9 (Oklahoma Employers Withholding Tax Return) and is due by the 20th of the month following the close of the quarter (April 20, July 20, Oct. 20, and Jan. 20).

Step Nine: Prepare annual W-2 forms each January for all of your employees, showing how much they were paid and summarizing their withholding for the previous year. These forms are filed with the Social Security Administration and copies are sent to your employees.

See this page for more information on preparing and filing W-2s and a W-3.

Last of all, make sure you have a secure and private place to store payroll information. You will need a file for each employee, with records of all deductions and all pay calculations and payments. If you are audited, you will need to show these records, and they must be complete and accurate.

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