ChurchTrac Online's Payroll Feature extends the capabilities of the Accounting screen, allowing you to quickly generate paychecks for employees and clergy.
The Payroll Screen will:
Most churches have one or more ordained ministers on their payroll. Unfortunately, many churches do not understand the basics of how ministers should be paid, or how clergy wages are taxed. The following points should summarize some of the unique features relating to clergy pay and taxes:
When you open the payroll module for the first time, we'll prompt you to answer a few questions. Here's a summary of the information that we'll need to know:
ChurchTrac Online contains features which are designed to assist you with self-preparation of payroll and tax documents. To use the payroll feature, you'll also need to read and accept the statement regarding this. You should always double-check the values generated by ChurchTrac Online to ensure they are correct, or consult a professional tax advisor to ensure that you are meeting all requirements and obligations. Once you have successfully completed the payroll setup, we'll display the Payroll Settings screen, which is described below.
The Payroll Settings screen is where you'll enter all the important information about your organization, including your federal and state unemployment tax rates (if applicable). The Settings screen has four areas:
The Payroll Dashboard gives you all your payroll information at a quick glance. This is your "Home screen" for the payroll feature. The first (top) section of the dashboard lists your active employees. Click on an employee's name to view their information, or click the Add/Edit Employees button. This will take you to the Employees screen (which is discussed in detail below) where you can enter basic information about each employee, plus set up the items and amounts you want to use for their pay checks. Just below the Employee section of the Payroll Dashboard is the information about your next pay period.
When you're ready to generate payroll for this period, click the "Run Scheduled Payroll" button. This is where you'll enter the number of hours worked during the period (for hourly employees) and approve the payroll amount before generating checks. There's also a button here to "View Pay Periods". This will display a list of your pay periods and give you the option to void (or undo) you most recent pay period. You can also create an additional, unscheduled pay period if needed.
Below the Pay Period section of the dashboard you'll find the Tax Liabilities section. This will list your current unpaid taxes. Click the "View Tax" button to see more details, to mark taxes as "Paid", or to generate federal reports, such as Form 941.
The payroll dashboard will also display a list of important upcoming federal dates for employers. Some of the dates in this list may not apply to you. Also note that this list does not contain any State or Local due dates. Use this list as a reminder for when forms and taxes are due, but check with a qualified tax professional for your area to determine your actual due dates for federal, state and local forms and tax payments.
The Employees screen is where you enter information about your employees and set up their pay checks. It will be helpful to have a completed Form W-4 from each employee to complete this section for a new employee.
After you have created a new employee (or when you click on an employee's name in the list), you'll be able to enter information about that employee, including their payroll schedule, filing status, allowances claimed, and more. Some tax forms require that you also enter the employee's Social Security number.
We recommend that everyone you pay be on the same payroll schedule and that you use your default schedule for all of your employees and pastoral staff. However, if you need to pay someone on a different schedule, you can set the frequency that each employee is paid on the Employees screen.
Changing an employee's schedule does two things. First, if the employee is subject to federal withholding, the amount withheld will be determined by how often they are paid. We determine how much should be withheld from each pay check using the IRS published tax tables for the current year. The tax tables have different values based on how often an employee is paid. For this reason, it is important that you run payroll for each employee on a predictable schedule that matches the option you have selected here.
For simplicity, we recommend that all your employees be paid using your default schedule, but at least one employee must be paid using your default schedule. This has no impact on clergy as we do not calculate federal withholding for clergy. Ministers do, however, have the option of selecting an additional withholding amount for each pay check which can be applied to their expected tax liability in lieu of submitting quarterly tax payments to the IRS.
Secondly, changing an employee's payroll schedule also changes the calculation of wages and other items when the "yearly" period is used in the employee's paycheck setup. For example, if an employee's paycheck is set up for wages of $25,000.00 per year, then the application will calculate the amount of each pay check by dividing $25,000 by the number of expected pay periods during the year.
The bottom of the Employees screen is where you will configure the items and amounts that you want to appear on each employee's paycheck. Start by selecting a Payroll Item Type from the list. PLEASE NOTE that we have a detailed description of each item in this list below, including how taxes are calculated (or not calculated) for each item. Be sure to read the descriptions thoroughly before making your choices. Also, items may be taxed differently depending on whether or not the employee is ordained clergy.
Next, select a Category for this item. When we create the employee's paycheck, we'll use the category you select for this item. The items in this list are the categories you have already created, (or they may be the default categories that we created automatically when your account was created). You can edit the categories that appear in this list (or create your own categories) by clicking Categories on the Accounting screen's toolbar. You'll also enter an Amount and select a Period/Option for this item. The Period/Option field defines the period that we'll use when calculating the actual amount on a paycheck. For example, if you select a Yearly period, then we'll automatically calculate the correct amount for each paycheck by dividing the Yearly amount by the number of pay periods you have during the year. So if you enter 52,000 Yearly and do payroll every other week (26 pay periods per year), we'll dive 52,000 by 26 to determine the actual pay amount for each period. In the same way, you can select Hourly for the Period/Option, and we'll calculate the correct amount based on the number of hours the employee worked during the pay period.
When generating payroll you'll have the option to enter the number of hours worked for each employee who is set up to have Hourly wages. If you select a Period/Option of "Each Paycheck", then we'll apply this fixed amount to each paycheck (without performing any additional calculations). We'll only determine if it should be added to or subtracted from the employee's other wages based on the Payroll Item Type you selected for this entry. You can also select an Period/Option of "Percent of Gross Pay". IMPORTANT: With this option you'll enter a percentage in the Amount field, not a dollar amount. For example, you might enter 6.00 in the Amount field, which means we'll multiple the employee's gross wages for the period by 0.06 (six percent) to determine the dollar amount for this item.
Optionally, you can specify a Annual Maximum for each item. Typically we recommend that you leave this field blank. When the item reaches this YTD amount, it will not longer be included on the employee's pay check. This could be useful for certain taxes or deductions that have a yearly maximum.
Note: You only need to add one payroll item for each employee, but you can add as many as necessary. Click "Add a Payroll Item" and configure each entry will the necessary values. Also, each entry can use a different value for the Period/Option field. For example, you can enter an amount that is Yearly, and have a second line/amount that is for Each Paycheck, and a third line/amount that is Percent of Gross Pay.
You will need to enter YTD payroll information for any new employee you add if you paid that employee prior to your next (or first) pay date. When you first begin using the payroll feature, you may have to enter YTD information for all your employees. This allows the program to track historical information and to produce reports that contain the correct numbers. When adding a new employee, we'll ask you if this employee has already been paid this year prior to your next pay date. Typically the answer to this question will be No, as you'll want to be sure to pay new employees using the payroll module beginning with their first paycheck.
If you have paid the employee already this year prior to your next scheduled pay date, (or if you're just starting to use the payroll module for the first time during the middle of a calendar year), then we'll display a section at the bottom of the Employee's profile where you can enter YTD payroll information. Double-check to make sure this information is entered correctly. Typically this information can be found on the employee's pay stubs or by running an Accounting report. Be sure to enter the total amount for each period requested, based on the date of each pay check. In some cases we'll want the total amount for a given month, in other cases we'll ask you to provide the total amount for an entire quarter.
This section is a summary of the items that appear in the Payroll Item Type selection box on the Employees screen. Be sure to consult with your tax advisor to ensure that you are using these items correctly. Employee Wages are wages paid to a non-minister. Use this item type to specify the wages for any non-clergy employee that you pay. These wages are taxable. We'll automatically calculate federal withholding (based on the employee's filing status and allowances) and FICA taxes.
Taxable Allowance is treated the same as Employee Wages, and is added to the employee's gross wages. Do not select this item for ordained clergy. Instead, select Clergy Wages or Clergy Allowance. A Taxable Benefit (Non-Cash) is any non-monetary benefit that is used in determining the employee's gross wages for tax purposes. While the value of this item is not paid to the employee or included in the employee's cash wages, the amount is included in gross wages and is used for determining federal withholding as well as FICA taxes. Clergy Wages are wages paid to an ordained or licensed minister.
Clergy wages are treated differently than employee (non-clergy) wages. Ministers are considered self-employed for Social Security and Medicare tax purposes. As such, the church should not withhold taxes from a minister's wages, nor should the church pay the employer's share of Social Security and Medicare taxes on clergy wages. Ministers will be responsible for paying both federal tax and SECA tax on this amount. See the discussion above regarding minister's wages and taxes. Clergy Housing (Cash) is a special income designation for ordained ministers which carries special tax rules. Like clergy wages, the church (employer) should not withhold taxes on this amount, nor should it pay the employer share of Social Security and Medicare tax. Ministers are required to pay self employment tax (SECA) on the portion of their wages designated as as housing allowance, however this amount is not subject to federal tax or withholding. A housing allowance is not included gross wages, and is not reported as wages in Box 1 of the minister's W-2 (we'll report housing allowances in Box 14). Clergy Housing (Non-Cash) is similar to a cash housing allowance (above) in how it is taxed.
Whenever the church provides a home or parsonage, the value is not included in gross wages, but the minister is required to pay self employment (SECA) tax on the fair rental value of that home. Like a cash housing allowance, this amount will be reported on the minister's W-2 in Box 14. Clergy Other Allowance. Some churches will provide an allowance to offset a portion of the Social Security and Medicare taxes that the minister must pay at the self-employment rate. Other allowances may also be included here as well. These allowances will be included as gross wages and treated the same as the Clergy Wages category. Ministers will be responsible for paying both federal tax and SECA tax on this amount. 1099-Misc Wages are used for paying non-employees. Typically a minister will not be considered a 1099 employee, nor should you provide your ministerial staff with a 1099 to report their wages. You will only use this for reporting payments to independent contractors who are self employed. See your tax advisor to determine when it is appropriate to use 1099 Wages and when a person is considered an employee vs. an independent contractor. The program will not withhold any taxes from items categorized as 1099 Wages. The Other Earnings payroll item is treated the same as Employee Wages, but may be used to designate amounts that are separate from regular wages. For example, a retroactive pay increase or severance pay may be classified as Other Earnings.
Accountable Reimbursement is non-taxable payment made to an employee to repay an out-of-pocket business-related expense. The amount of the reimbursement is not included in gross wages, nor is is used when determining withholding or FICA taxes. Because an accountable reimbursement is not considered to be wages, it won't be included in tax reports or on government forms. As an employer you should require a receipt or some form of documentation to substantiate the expense reimbursement. Do not use Accountable Reimbursement to provide an expense allowance or reimbursement paid under a non-accountable plan. See IRS Publication 15 for details on setting up an accountable reimbursement plan.
Deduction Before All Taxes is a deduction in wages that occurs before any taxes have been calculated, thus reducing the amount of taxable income for both federal withholding and Social Security/Medicare tax purposes. Cafeteria plan benefits that reduce wages under section 125 are typically excluded from taxable income, as well as certain fringe benefits. See IRS Publication 15-B for details.
Deduction Before Fed Tax reduces the employee's wages for determining federal withholding, but not for Social Security and Medicare. Federal withholding will be calculated on the employee's wages after the deduction has been subtracted. Deduction Before SS/Med is a deduction in wages that reduces the employee's wages for Social Security and Medicare tax purposes, but not for federal withholding. Federal withholding will be calculated on the employee's gross wages, but FICA tax will be calculated based on the employee's gross wages minus the deduction amount. Deduction After Taxes is a deduction in wages that occurs after all taxes have been calculated. This type of deduction does not reduce the employee's taxable wages. Deductions in wages that are used for retirement and pension plans can typically be classified in one of these categories. However, you should check with a tax advisor or the plan administrator to make sure you understand how these deductions are taxed. Accident and health insurance premiums paid by a deduction in the employee's wages are generally deducted before taxes, but you should check with your tax advisor. Employee contributions to their HSAs or MSAs through a payroll deduction plan must be included in wages and are subject to social security, Medicare, and FUTA taxes and income tax withholding. However, HSA contributions made under a salary reduction arrangement in a section 125 cafeteria plan are not wages and are not subject to employment taxes or withholding. For more information, see the Instructions for Form 8889, Health Savings Accounts (HSAs).
Premiums paid by an employer for an individual health plan are considered taxable income and are subject to federal withholding and FICA taxes. Contributions to an individual health plan are considered to be a deduction after taxes as they do not reduce the employee's taxable income. Additional Withholding is an amount specified by the employee in Box 6 of their Form W-4. if specified, you should withhold this amount from each scheduled paycheck until the employee requests the amount be changed, or until a new W-4 is provided by the employee. For a non-minister employee (non-clergy), the amount is added to the federal withholding amount which is automatically calculated by the application. Although churches should not withhold taxes from a minister's pay, a minister may elect to have an "Additional Withholding" amount taken from each pay check to cover their anticipated taxes. This withholding amount can be used to supplement or replace the minister's quarterly payments to the IRS. Any amount specified as Additional Withholding will be reported in Box 2 of the employee's Form W-2 (Federal income tax withheld).
State Income Tax or Local Income Tax. Use these Payroll Item Types for entering the amount to be withheld from each employee's paycheck to cover state and/or local withholding. PLEASE NOTE that we do not automatically calculate state/local withholding or state/local tax liabilities. It is your responsibility to withhold the correct amount based on the state and/or locality's laws and the tax obligation of each employee. If you are in an area where there is a State or Local income tax, select one of these Payroll Item Types from the list. In most cases the State Income Tax is a percentage of gross wages. If that is the case for your State, enter the tax percentage for this employee in the Amount field. Enter the value as a whole number, not a fraction. For example, six percent would be entered as 6.00 (without any symbols). Next, select "Percent of Above Wages" from the Frequency selection list. When you generate payroll, we'll calculate the amount for this line item by adding the wages that appear above it in the list and multiplying that amount by the percentage you have entered. As an example, a paycheck may have $1000.00 in employee wages on the first row and 6 percent of above wages selected on the second row for state tax. When we generate the paycheck, the first row will be $1000.00, and the second row will be $60.00. Alternatively, you can manually calculate the amount to withhold from each paycheck and enter that amount with the "Each Paycheck" frequency.
On the Payroll Dashboard, click the button labeled "View Tax and Payment Information" to open the Tax Liabilities screen. This screen shows the various types of taxes you owe (based on your selections in Payroll Settings), as well as how much you owe. Each tax type will be displayed in its own section, allowing you to keep track of what is currently owed for each tax type.
As taxes become due, you should mark the taxes as 'Paid'. In some cases we'll prompt you to generate a check on your register for making this payment. The Payroll tax section will also display links for generating Form 941 or 944 at the appropriate times, depending on your selections in Payroll Settings.
Is the church required to withhold federal payroll taxes from its employee's paychecks? Yes. Just like other employers, if you have any non-minister employees, you must withhold and match Social Security and Medicare tax, also known as FICA. You are also required to withhold federal income taxes if applicable. Additionally, ordained minister employees may also request that you withhold a portion of their pay for tax purposes.
We think of our minister as an employee and would prefer to withhold federal tax, as well as Social Security and Medicare tax from his pay. Is this okay? No. This isn't an optional guideline or suggestion. Ordained clergy are regarded as self-employed for tax purposes, and you cannot withhold Social security or Medicare taxes from their pay, nor should you pay the employer's share of their taxes as you would with a regular employee. Ministers are required to pay quarterly tax payments to the IRS, just like other self-employed individuals. However, the minister can request that an "Additional Withholding Amount" be withheld from each paycheck in lieu of submitting quarterly tax payments directly to the IRS. The minister determines the amount he wishes to have withheld from each pay check.
We've heard that pastors are self-employed. Should we set him up as a 1099-MISC "employee"? No. While ordained ministers are considered self-employed for tax purposes, they are also considered employees of the church. For this reason, their wages are reported on Form W-2 as described in Clergy Tax Issues above.
Someone paid the pastor $300 for a wedding that he performed. Should the church report that amount in his taxable wages? No. Unless the church paid the pastor directly for performing the wedding, that amount won't be reported as income from the church.
The pastor wants a portion of his income designated for housing. Why? Ministers can receive a housing allowance, which is a special designation for income that is legally excluded from a minister's income for federal income tax purposes. By designating a portion of the minister's salary as a housing allowance, the church is providing a legal way for the minister to reduce his tax obligation, without any additional cost or inconvenience to the church.
Our church has filed Form 8274 and is exempt from paying the employer share of payroll taxes. Can we use ChurchTrac Online for running payroll? No. And even though you have exempted your church from paying these taxes, the employees themselves are now obligated and required to pay the full amount of their Social Security and Medicare taxes, including the amount that would normally be paid by you, the employer/church.