The Federal Insurance Contributions Act (FICA) dictates that both an employer and employee are responsible for the FICA taxes. Unlike the rest of the taxpaying population, when a minister does his tax return he will be responsible to pay federal income tax and self-employment taxes.
This self-employment tax is 15.3% of the minister’s gross income. This is because when it comes to Social Security taxes, the minister is considered self-employed, and he is responsible to withhold and pay 100% of those taxes. Now this is where understanding ministerial compensation can get kind of tricky. Mistake #2: Churches treat the minister as an employee for Social Security purposes. In actuality, the minister should be treated as an employee for federal income tax purposes and he should receive a Form W-2 showing the wages paid to him by the church. You see, when a minister receives a Form 1099-MISC from the church, he will usually report his income on Schedule C and deduct unreimbursed expenses. However, the truth of the matter is that issuing your pastor a Form 1099-MISC is not correct and doing so can significantly raise the chances of his tax return being flagged for audit. Whenever I talk with churches that operate in this manner I am usually told, “Well, that is the way we have always done things.” Or, I may hear, “That is how we were told to do it by another church that has been around for many years.” Many churches treat the pastor as a self-employed person and assume that they can issue him a Form 1099-MISC. Mistake #1: Churches treat the minister as self-employed for tax purposes. But before I do so, I want to give you the three most common mistakes churches make when paying their ministers a salary. Later in this post I will share with you what happened with the church in San Diego. Whether or not you are receiving compensation from your church as a pastor, this is a post that every pastor and church leader needs to read. One of the most common mistakes churches make when it comes to payroll is the misclassification of a minister. Their question to me was, “How could the CPA get it wrong?” And I responded that “it had to do with the fact that a minister has a dual tax status, which can cause much confusion.” My response after a brief understanding of their payroll confirmed what they had both feared, which led to astonishment (and frankly, disbelief to a degree) at the situation, because they had hired a local CPA to set up and handle their church’s payroll. Upon learning that their church’s payroll might not have been done correctly, they approached me and asked if I would be willing to take a closer look at their church’s payroll. He was attending the conference along with his church administrator. This realization actually reminds me of a pastor I met in San Diego, California a few years back at one of our conferences. However, before we breathe too deeply, we need to discuss a realization that became quite clear to me this year through our minister’s tax service: there is a shared misunderstanding amongst churches and pastors all across the country with regards to how ministers should be paid and treated for income tax purposes. Since we are through the brunt of tax season, we can take a moment to breathe a sigh of relief we all made it through and in one piece. 3 Common Mistakes Churches Make When Paying Pastors By Raul Rivera
0 kommentar(er)
