Consider the following scenarios:
Pastors at Suburban USA Church are compensated with both a salary and a housing allowance. Each payroll they have FICA calculated and withheld. The employee and employer portions of FICA are sent to the IRS along with form 941 each quarter.
Smalltown USA Church is a rather small church. They are unable to put anyone on payroll right now, but they have a small house on the church grounds. They allow the Pastor to live in the house rent free to “compensate” for the ministry done.
InnerCity USA Church is just getting set up. They are paying their Pastor but the whole amount of compensation is being claimed as a cash housing allowance. The church is still calculating taxes for the cash housing allowance and the cash housing allowance is shown in boxes 1, 3 and 5 of the Pastor’s W2.
Do any of these scenario’s sound like your church? If so, then your church payroll is done incorrectly. Most church payrolls, including those whose payrolls are run with major payroll companies, are done incorrectly due to the complexity of clergy compensation.
A few quick rules that most payroll companies are unaware of:
1. Clergy are considered dual-status employees. This means that for income tax purposes they are employees of the church but for Social Security and Medicare they are Self-Employed. This means that although clergy should be paid as an employee and via a payroll system, they should not have FICA calculated and the church should not pay in FICA for them. Instead, clergy must pay Self-Employment Tax (SECA) on their tax returns.
2. Contrary to popular belief, Housing Allowances (Cash and Parsonage) are not tax free. Housing Allowances are excludable from gross income for income tax purposes but are still taxable for SECA unless an exemption has been made on your tax return within your first two years in ministry (see this blog post on Form 4361 we recently posted). Housing allowance should either show up in Box 14 on a Clergy W2 or the Clergy should receive a letter listing the amount/value of their housing allowance.
If that all seems overly complex, Wisdom Over Wealth can help! Wisdom is a quality conscious payroll service provider that advocates and partners with our church clients. With Wisdom Payroll, you have the benefit of working with a church payroll team member who has the experience and passion to do your payroll correctly.
Interested in learning more? Wisdom now provides a complementary review of your church’s payroll. Simply send a pdf copy of your most recent payroll register, cash requirement journal and quarterly reports to payroll@wisdomoverwealth.com. Once we receive those reports our team will look over your reports and schedule a call to let you know what we find.