Most pastors make a practice of living by faith. So much so that they even take it by faith that they’re getting paid correctly. But pastors should know that payroll is a tricky part of being a church treasurer, and the pastor’s paycheck is the trickiest of the tricky. So how do you know if you are being paid correctly? In the last year, I came across two churches that incorrectly paid their pastors only to find out 12+ months later. Not fun. Even worse, the IRS added to the “not fun.”
I included a quick worksheet that was mainly aimed at helping church treasurers but would be helpful for pastors to verify and understand their paycheck. As President Reagan used to say, “Trust, but verify.”
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.
For those of us that are a little older, we remember when the pastor was on the denomination’s health insurance, and the only other health benefit was if the church decided to reimburse an employee for premiums. And then Obamacare happened. Obamacare changed a lot of things. One of the negative changes is that these very informal reimbursement agreements became taxable. Soon after the election of President Trump, a loophole opened up that allows reimbursements in a very regulated way. This loophole is QSEHRA (I pronounce it Q-Sara).
Here’s the gist of it.
Almost all churches can use this.
Need to offer the same amount to all eligible employees (except can discriminated based on age and family status).
Need to adopt a Plan Document (template below in the links).
A lot of churches reimburse mileage for their pastor. Pastors can put on quite a few miles…especially if they serve multiple churches. Mileage can actually be a major part of the budget. One of the issues is knowing the difference between commuting miles and business miles because commuting is not reimbursable.
I took my info from New Clergy Training on Accountable Reimbursements to help teach on this one issue. Why is this important? 1)It protects the church from paying for mileage they shouldn’t. 2)It protects the pastor from adverse tax consequences as reimbursing commuting miles is taxable. 3)It prevents hard feelings from misunderstandings.
If you’re a new church treasurer, and, after three months, you finally are feeling comfortable cutting paychecks for your pastor and lay employees. Then the IRS comes in demanding information on the Form 941. Does a church really have to fill out this form? That depends.
The short answer is, if you just have a pastor and are not withholding Federal Income Tax, you do not have to do the Form 941. If you do have to file the Form 941, it’s not horrible. I walk you through it. I’m mainly focusing on small and medium-sized churches that don’t have to monthly remit payroll withholdings. For larger churches, chances are you have payroll software that fills this out for you.
Like I said in a previous post, payroll is the most intimidating part of being a church treasurer. What makes it worse is that most churches just a handful of employees…maybe a part-time custodian and secretary. It just doesn’t make financial sense to shell out much for payroll software when your payroll is minimal. Without payroll software, how do you run payroll manually…especially when you have a lay employee or two.
Don’t worry though. While payroll for lay folks is painful, it’s not impossible. I show you how to calculate the withholdings and share with you a spreadsheet like the one I’ve used in the past for this purpose.
When I became a church treasurer, the scariest part of the job was payroll. I was a CPA. I worked as an auditor for the State of North Dakotas. I knew about taxes and payroll liabilities and all that fun stuff, but I’d never actually cut a payroll check before. To make matters worse, no university trains people on clergy taxes. I was completely unprepared for cutting my pastors paycheck.
I’m not alone. I’ve helped train in numerous church treasurers and this is almost always the biggest concern. What I’ve found out is that cutting a paycheck for your pastor is less complex than cutting a paycheck for a lay employee. You need to understand the Housing Exclusion and how your payroll software (if you use any) handles that. Once you get that, it’s smooth sailing…no FICA…usually no Federal Income Tax Withholding.