Church Payroll ComplianceNexus Financial

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Employment Tax ReturnsEvery employer, including an organization exempt from federal income tax, who pays wages to employees is responsible for withholding, depositing, paying and reporting federal income tax, social security and Medicare (FICA) taxes, and federal unemployment tax (FUTA), unless specifically excepted by law

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Employment Tax• Employment tax consists of

• Income tax withheld and paid on behalf of an employee

• FICA taxes withheld and paid on behalf of an employee

• Generally, churches are required to withhold, report and pay income and FICA taxes only

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Social Security and Medicare Tax• Wages paid to church employees subject to FICA unless • Wages paid for services performed by a duly ordained, commissioned or licensed minister of a church in the exercise of his/her ministry OR

• Employee is paid wages of less than $108.28 in a calendar year OR

• A church that is opposed to the payment of Social Security and Medicare taxes for religious reasons•File Form 8274

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Federal Unemployment Tax Act (FUTA)•Churches and religious organizations are exempt from federal unemployment (FUTA) tax withholding

Family Employees•Child employed by parents

• Any age – subject to income tax withholding• Under age 18 – not subject to social security and Medicare taxes• Under age 21 – not subject to FUTA tax

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Reporting Requirements• Withheld employee income tax and FICA taxes are reported on Form 941, Employer’s Quarterly Federal Tax Return• Some small employers are eligible to file an annual Form 944 instead of quarterly returns – must have received authorization from the IRS• Employers who made all federal tax deposits for the quarter on time are granted an automatic 10-day extension to file Form 941 or 944

Trust Fund Recovery Penalty (TFRP)•Money withheld from an employee’s wages by an employer and held in trust until paid to the Treasury• If trust fund taxes are not paid in a timely manner, the IRS may assess the TFRP•Amount of penalty is equal to the tax evaded, not collected or not accounted for and paid over

Trust Fund Recovery Penalty (cont’d)•The TFRP may be assessed against any person who• Is responsible for collecting or paying withheld income and employment taxes, and• Willfully fails to collect or pay them

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Form 944•Employer’s annual liability for social security, Medicare and withheld federal income taxes is $1,000 or less•New employers are eligible to file Form 944 if they will meet the eligibility requirements• When filing Form SS-4, Application for Employer Identification Number, check box on line 14 to indicate whether you expect to have $1,000 or less and would like to file Form 944

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Employee Business Expenses•Church treated same as any other employer•Rules differ if expenses paid under an accountable or non-accountable plan• Plan determines whether payment for expenses is included in employee’s income

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Accountable Reimbursement Plan•Three requirements

• Involves a business connection• Requires the employee to substantiate expenses incurred•Within a reasonable period of time

• Requires the employee to return any excess amounts•Within a reasonable amount of time

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Accountable Plan (cont’d)•Employee business expenses reimbursed under an accountable plan are • Excluded from an employee’s gross income• Not required to be reported on the employee’s W-2• Exempt from the withholding and payment of wages subject to FICA and income tax withholding

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Non-accountable Reimbursement Plan• If church reimburses or advances an employee funds for business expenses, but does not require or receive substantiation of expenses• Amounts paid considered wages to employee and subject to income and FICA tax withholdings and reportable on W-2

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Example• If a church pays its secretary $200 per month allowance to reimburse monthly business expenses the secretary incurs while conducting church business, and the secretary is not required to substantiate the expenses or return any excess, then the entire $200 must be reported on Form W-2 as wages subject to FICA and income tax withholding.

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Automobile Mileage• If a church pays a mileage allowance at a rate less than or equal to the federal standard rate, the amount of the expense is deemed substantiated• Not included as wages• Employees must substantiate the time, place and business purpose of the mileage being reimbursed

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Automobile Mileage (cont’d)•Mileage reimbursement considered wages, and included in income, if• mileage rate exceeds the standard mileage rate• Time, place and business purpose not documented

•No income attributed to employees who use a vehicle owned by the church to perform church-related work

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Automobile Mileage (cont’d)• For 2013, the IRS standard mileage rates for use of a car, van, pickup or panel truck, are:• 56.5¢ per mile for business miles driven,• 24¢ per mile driven for medical or moving purposes, and• 14¢ per mile driven in service of charitable organizations.

Source: IRS Notice 2012-72

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Recordkeeping Requirements•Tax-exempt organizations required to maintain books and records necessary to accurately file federal tax and information returns

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Record RetentionRecords of revenue and expenses, including payroll records• Retain at least four years after filing the return(s) to which they relate

Records relating to acquisition and disposition of property (real, personal and investment)• Retain at least four years after the filing of the return for the year in which disposition occurs

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Filing Requirements

Form How Form Used

When to File

W-2, Wage and Tax Statement

- Give to each employee by Jan. 31st - File with the SSA by the last day of February

W-3, Transmittal of Wage and Tax Statement

- File with the SSA by the last day of February

941, Employer’s Quarterly Federal Tax Return OR944, Employer’s Annual Federal Tax Return*

To report Social Security and Medicare taxes and income taxes withheld and paid by employer

- Quarterly reports due Apr. 30, Jul. 31, Oct. 30, and Jan. 31- Annual report due January 31

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Filing Requirements (cont’d)

Form How Form Used

When to File

1096, Annual Summary and Transmittal of U.S. Information Returns

To transmit Forms 1099-MISC, W-2G and certain other forms to the IRS

- File by last day of February in the year following the calendar year in which the payments were made

1099-MISC, Miscellaneous Income

Use if church pays an unincorporated individual or entity $600 or more in any calendar year

-Give recipient a copy of 1099 by Jan. 31st

-File Copy A of 1099 with IRS by last day of February

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SourcesIRS Publication 557 – Tax-Exempt Status for Your OrganizationIRS Publication 15 (Circular E) – Employer’s Tax GuideIRS Publication 517 – Social Security and Other Information for Members of the Clergy and Religious WorkersIRS, Tax Guide for Churches and Religious Organizations

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Church and Nonprofit Payroll CompliancePresented by Nexus Financial as part of the

Small Business Profitability Series