Being a church treasurer is not a job for wimps. The church is working in the world of faith, but try cutting a check that is backed by faith instead of dollars. Try telling the IRS that the mistake on the tax forms is okay because of faith. Treasurers are the ones in middle trying to advance the work of faith without getting in trouble with the law.
Getting the pastor setup correctly in payroll is a big victory. Most payroll software wasn’t designed with pastors in mind. They were an afterthought so that’s why it’s sometimes tricky. Here’s the big things that often cause issues:
- What to do with the Housing Exclusion? The housing exclusion is the part of the pastor’s salary that is designated for housing to reduce taxable income. You usually need to break this out.
- Example: Salary of $45,000 with $5,000 housing exclusion: Enter $40,000 for salary and $5,000 Clergy Housing (Cash)
- What to do with Tax Withholding? Pastors are employees for IRS purposes but self-employed for Social Security purposes. That means you SHALL NOT withhold for Social Security and Medicare. It’s optional to withhold for income tax.
- There is usually a check box or button to make the pastor exempt from Social Security and Medicare. Find that and click it.
- Ask the pastor if they want income tax withheld and how much they want withheld per paycheck. They should fill out the W-4 to confirm this by writing “EXEMPT” in Step 1.c…even though that’s not an option. Then enter the amount to withhold per paycheck in Step 4.c.
- Pastor Payroll Worksheet: https://www.dakotasumc.org/media/files/CONFERENCE/5_Conf_Finance_Benefits/Finance/Pastor_Payroll_Worksheet.xlsx
- Housing Exclusion vs Housing Allowance Explained: https://jctaccounting.com/2019/12/20/housing-allowance-vs-housing-exclusion/
- Form W-4: https://www.irs.gov/pub/irs-pdf/fw4.pdf
I have a question on the pastor payroll worksheet. Our pastor receives a cash housing allowance for $16,000 and a designated housing exclusion of $24,000. The worksheet deducts both from the salary which seems like double-dipping. Is that correct? Thanks very much.
Hey Kelly, So I took your Cash Housing Allowance amount and Designated Housing Exclusion amount. I plugged in a $50,000 Base Salary. The worksheet shows $66,000 paid to the pastor (Base Salary + Cash Housing Allowance). On Box 1 of the W2, it shows $26,000 (Base Salary – Designated Housing Exclusion). The formula in worksheet looks odd like I’m double-dipping because I start at the Total Paid and subtract off both the Cash Housing Allowance and Designated Housing Allowance. I hope this help!