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Exploring the Truth: Do Churches Pay Payroll Taxes

by | Mar 29, 2024 | Nonprofits

The Labyrinth of Church Payroll Taxes

On the surface, federal tax exemption for churches is deceptively simple. 

Churches are generally considered tax-exempt for federal income tax purposes. Additionally, they are not required to file the annual tax return that most other 501(c)(3) entities must file.

Yet one step deeper, and the complexities of tax exemption for the church become a labyrinthine process with twists and turns that wind across federal, local, and state levels. 

Church leaders should tread carefully through this maze of church taxes, taking advantage of all available exemptions while complying with applicable tax requirements, including income, sales, and employment (payroll) taxes.  

Depending on your jurisdiction and legal structure, the exemptions available to your church may vary. But in all cases, churches must be aware of applicable federal and state-level tax regulations when employing staff. 

This article traces the intricacies of these church payroll taxes and explains the obligations of churches and their employees by answering the following questions: 

  • Do churches pay payroll taxes?
  • Does the IRS require churches to file employment tax returns?
  • Are ministers taxed differently than other church employees? 
  • Which workers qualify as church employees, and which are considered self-employed for payroll tax purposes?

Do Churches Pay Payroll Taxes?

Although most churches enjoy federal exempt status on income tax, when it comes to the question: Do churches pay payroll taxes? Income tax exemption does not apply to payroll taxes, and the IRS generally requires churches to file certain employment tax returns with the IRS. 

While churches themselves are exempt from federal income tax, as an employer, a church is typically subject to the same tax obligations (other than for ministerial employees, discussed below) as other employers. This includes:

Social Security and Medicare taxes: Both employees and employers, including churches, are usually required to contribute to Social Security and Medicare. This is done through the Federal Insurance Contributions Act (FICA). The church must withhold the employee’s share and contribute the employer’s share.

Unemployment taxes: In the United States, churches are generally exempt from paying federal unemployment taxes under the Federal Unemployment Tax Act (FUTA). In some states, churches are automatically exempt from state unemployment taxes, while in others, they may have to apply for an exemption.

Income tax withholding: Income tax withholding is more complex for churches than for businesses and other organizations. Generally, churches must withhold federal income taxes from their employees’ wages. However, the IRS does not require churches to withhold income taxes from licensed ministers/pastors (i.e., someone who is duly ordained, commissioned, or licensed to perform ministerial duties by a religious organization).

do churches pay payroll taxes

Payroll Taxes for Ministers

There are some unique considerations when it comes to payroll taxes for ordained, licensed, or commissioned ministers: 

Income tax withholding: As indicated above, churches are not required to withhold income taxes from ministerial employees.  However, a church and minister can voluntarily agree that the church will withhold income tax for the minister by the minister filing a completed Form W-4 with their employer.

Housing allowance: Another unique aspect for ministers is that compensation designated as ministerial housing allowance may be exempt from income tax. To qualify, ministers must meet certain criteria, the housing allowance must be officially designated by the employing church, and the allowance must be used for the minister’s housing expneses. The housing allowance can cover housing-related expenses such as rent, mortgage payments, utilities, repairs,and furnishings.

Social Security and Medicare taxes: Ministers are considered self-employed for Social Security and Medicare tax purposes. They are responsible for paying the self-employment tax, which covers both the employee and employer portions of Social Security and Medicare. This tax is calculated on their ministerial earnings, and they may be required to make quarterly estimated tax payments.

Don’t Risk a Tax Audit

It’s important for both ministers and churches to be aware of these intricacies and to ensure compliance with tax regulations. Seeking advice from a church lawyer familiar with clergy tax issues will help you navigate these complexities.