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How to handle voluntary Fed and State tax withholding for pastors with 100% salary as housing allowance

by Mark F
(Phoenix, AZ)

I am the treasurer for a small church. We have 2 employees, both pastors, who have elected to be employees for tax reporting purposes.

Due to their housing allowances being greater than their wages, they have no salary to report. However they have elected (via Form W-4) for voluntary Federal and State tax withholding.

Do I need to file a quarterly Form 941 for them?
The online service I'm using for attempting to file a Form 941, will not allow Line 2 (Wages, tips) to be less than Line 3 (Federal income tax withheld), which is the situation I have, i.e. no salary due to housing allowance, but yet voluntary tax withheld.

As I’m reading comments to questions on this blog, it appears that I do not need to file a Form 941 and that I should not be withholding Federal and State income taxes for our pastors, since I have no way to report them or to deposit them to the IRS. Is that correct?
Thank you.

Comments for How to handle voluntary Fed and State tax withholding for pastors with 100% salary as housing allowance

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May 03, 2020
Housing Allowance is Nontaxable Compensation
by: Vickey

First of all, individuals cannot choose their "classifications".

The church determines each workers classification according to the IRS guidelines. See more on how to classify workers here: Misclassification of Workers

However...most of the time "Pastors" are considered employees of the church =)

BUT...if the church has designated 100% of their compensation... then there is no "taxable" income to withhold any voluntary taxes.

Note: a church can designate all of a minister's compensation as housing allowance, but I strongly recommend that in order for a church to do that... their qualifying minister should be bi-vocational and/or have other sources of income such as spousal income to pay other expenses. See more onDesignating All Compensation as Housing Allowance

Also note that unless the minister has filed and been approved to opt out of social security, they will owe a SE tax on the housing amount, so they should make estimated tax payments quarterly ...unless they know they will not owe any taxes because tax credits or maybe because their spouse is withholding extra to cover their SE taxes=)

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