Your church may be tax-exempt. But does that mean the church employees are tax-exempt?

Here's a quick guide to help you better understand how taxes work for church employees. We'll also answer some common questions we get asked and provide links to resources to help.

Read on to learn what you, as a church employee, need to know about income tax.

Understanding Your Tax Obligations

As a church employee, it's important to recognize that you are subject to many of the same tax obligations as employees in other industries.

Here's a breakdown of the taxes you may encounter:

1. Federal Income Tax: Like anyone else, church employees must pay federal income tax on their earnings. This tax is based on the amount of income you earn during the year and is calculated using the IRS tax brackets
2. Social Security Tax (FICA): The Social Security tax funds the Social Security program, providing retirement, disability, and survivor benefits. Church employees are subject to this tax, which is currently set at 6.2% of your wages, up to a certain income limit determined annually by the IRS
3. Medicare Tax (FICA): Similar to Social Security tax, church employees must also pay Medicare tax, which funds the Medicare program providing health insurance for eligible individuals. The current Medicare tax rate is 1.45% of your wages, with no income limit
4. Additional Medicare Tax (for higher-income earners): High-income church employees may be subject to an additional Medicare tax of 0.9% on wages, compensation, and self-employment income that exceeds certain threshold amounts established by the IRS
5. State Income Tax: Depending on the state where you live and work, you may also be subject to state income tax. State income tax rates and requirements vary widely, so it's essential to understand the specific regulations in your state
6. Local Taxes: Some local jurisdictions impose income taxes on residents and employees. If you work in an area with local income taxes, you may need to pay these taxes in addition to federal and state taxes

Churches Pay Payroll Taxes

The church is expected to act like any other employer. They must withhold federal income tax, Social Security tax, and Medicare tax from employees' paychecks. This guarantees that employees meet their tax obligations and avoids surprises during tax season.

Form W-4 for Churches

When you start working for a church, you need to fill out a Form W-4, Employee's Withholding Certificate.

This form allows you to specify how much federal income tax should be withheld from your paycheck based on your filing status, dependents, and other factors. Be sure to review and update your Form W-4 to reflect any changes in your personal or financial situation.

Your employer will also withhold Social Security and Medicare taxes from your wages based on the current rates set by the IRS. These taxes are typically withheld automatically and remitted to the appropriate government agencies on your behalf.

What About the Pastor?

The pastor is obligated to pay income taxes as an employee, but the church is not required to withhold those taxes from their paycheck.

If the church does not withhold income taxes on the pastor's behalf, they must submit quarterly estimated self-employment tax payments (SECA). However, it might make sense for your church to withhold those taxes as a service or benefit to the pastor.

Also, the pastor may have to pay taxes on services they provide in the course of their job. For instance, if they receive funeral or wedding fees, that income is taxable. They should claim that income as self-employment income under Schedule C of their Form 1040.

Church Employees, Social Security, and Medicare

Do church employees have to pay social security and medicare taxes? Yes. And the church is expected to withhold those taxes from the employee's income.

However, clergy are given a dual tax status. They are treated as self-employed regarding FICA and a church employee regarding income tax. So a minister will carry their FICA tax obligation on their own. Boxes 3, 4, 5, and 6 of their Form W-2 must be left blank.

IRS Tax Compliance for Church Employees

If you are on the church payroll (or if you are a minister wanting to answer your employee's questions), it's essential to stay informed about tax obligations and ensure compliance with federal, state, and local tax laws. Here are a few tips to help you navigate this topic:

• Keep accurate records: Maintain detailed records of your income, tax withholding, and any deductible expenses throughout the year. These records will be invaluable when it comes time to file your tax return
• Understand your deductions: Take advantage of any tax deductions or credits available to you as a church employee. This may include deductions for unreimbursed work-related expenses, contributions to retirement accounts, or charitable donations
• Seek professional guidance: If you have questions, don't hesitate to talk to a tax professional. They can provide personalized advice based on your circumstances and help you make informed decisions

Church Payroll FAQS

Do churches have to pay payroll taxes?

Churches must withhold federal income tax, Social Security tax, and Medicare tax from employees' paychecks.

However, clergy hold a dual status that requires them to file as self-employed regarding FICA, yet also pay income taxes as an employee of the church. Churches can decide if they want to withhold these fees on the pastor's behalf.

Should churches withhold income tax?

For church employees, yes.

For clergy, churches are not required to withhold taxes. However, many churches do this as a service to the minister.

What taxes are church employees responsible for?

Church employees must pay:

• Federal Income tax
• Social Security
• Medicare
• State Income tax
• Local taxes

Church employees pay taxes like employees of any other institution. Churches are obligated to withhold these taxes on the employee's behalf.

Church Employees Pay Taxes

Church employees must pay state and federal taxes, just like an employee in any other industry. The pastor is responsible for FICA and SECA tax obligations, but the church can withhold those fees as a benefit.

Taxes are a fact of life for all working individuals, but with the right knowledge and preparation, you can navigate them without worry.

Disclaimer: Tax laws are complex and subject to change, which can have varying impacts on different organizations. ChurchTrac provides the above information for general guidance only and is not a substitute for professional advice. We highly recommend consulting with a tax professional or legal counsel to address your specific needs. ChurchTrac assumes no liability for actions taken in reliance upon the information contained herein.

Matt Church Engagement