Employee Retention Credit for Churches

Disclaimer: This is general tax advice so don’t sue me. It seems like every other month there’s a government handout for churches. I don’t know about you, but the abbreviations and the paperwork can become overwhelming. Well…here’s another one. The Employee Retention Credit (ERC) is actually an older program that was overshadowed by the PPP Loans. If you never heard it or have forgotten about it, join the club. This is a credit you can receive to help retain employees even though your ministry is being impacted by COVID.

Here’s the gist of it:

  • Payroll Tax Credit: This is like the FFCRA in that it is a refundable credit to your payroll taxes. That means you applye for it through the Form 941.
  • $7,000/Employee: For the first half of 2021, you can receive up to $7,000 per employee per quarter. Doesn’t apply to clergy employees though.
  • Negatively Impacted: You need to have 1)had a 20% decrease in Gross Receipts in a quarter when compared to 2020, or 2)had operations fully or partially suspended due to government orders.
  • No Overlapping: If you receive a second PPP Loan, the wages covered by that loan aren’t eligible for ERC.

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FFCRA Tax Credit: What about the vaccine?

Disclaimer: This is general tax advice so don’t sue me. I personally have been slow about getting the vaccine. I can justify it that I’m relatively young and healthy. I already have had COVID and still have antibodies (verified every two months when I donate blood). But the real reason is I’m not looking forward to getting sick from the vaccine. The listed side effects are: fatigue, headache, muscle pain, joint pain, chills, nausea, vomiting, and fever. A couple of my friends had a harder time with the vaccine than they did with COVID.

But now there is some economic incentive to getting vaccinated! I recently found out that the time you take off to get vaccinated as well as the time you need to recover falls under the FFCRA tax credit. Here’s what you need to know:

  • Employees: Track any time you had to take off to get vaccinated or to recover. Report it to whoever does your payroll.
  • Self-Employed & Clergy: Track any time you had to take off to get vaccinated or to recover. Report this to your tax preparer…next January.

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Understanding a Pastor’s Pay Stub

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.”


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How do pay your pastor in QuickBooks

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.

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Families First Tax Credit for Clergy

Disclaimer: This is general tax advice so don’t sue me. The question I was left with last week was: Can the church claim a payroll tax credit if their pastor is out because of COVID? After doing much research and calls, I came to the conclusion that the church cannot claim the tax credit.

The primary reason for this is the pastors confusing tax status. The IRS considers them to be employees, but the Social Security Administration considers them to be self-employed. This credit is tied to payroll taxes which are under the Social Security Administration.

This does open it up that the pastor might be able to claim this tax credit on their personal tax return. This could be a nice bonus for pastors…as long as they keep documentation of their time out. My preliminary estimate is that pastors could get around a $2,000 credit on their taxes. Here’s how I calculated it:

  • $50,000 in Self-Employment Income (Base Salary of $42k + Fair Rental Value of Parsonage of $12k – Salary Withholdings of $4k)
  • รท 260 Work Days (The IRS assumes self-employed folks work just 5 days per week 52 weeks a year. Isn’t that cute.)
  • x 10 Days (if you were out two weeks, you would get 5 days/week.)
  • = $1,923 Tax Credit

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Families First Tax Credit for Lay Employees

Disclaimer: This is general tax advice so don’t sue me. I had almost forgotten about the Families First Coronavirus Response Act (FFCRA) until I got a call from Bismarck McCabe UMC. They were on top of things and knew more than I did. The only question we still have is if clergy are covered.

Long story short, FFCRA gave employees an extra 80 hours of sick leave (or proportional if part-time) if they or a member of their family was directly affected by COVID. This is different than being affected by the shutdowns. You can see more about this in the links below. To help pay for this sick leave, you can claim a payroll tax credit! This is good news for churches that already file a quarterly Form 941.

Here’s what makes this credit so good:

  • Dollar for Dollar: You get reimbursed 100% for this sick leave in most cases. This includes health insurance costs.
  • Includes Health Insurance Costs: While few lay employees receive health benefits from the church, that portion can also be applied to the credit.
  • Refundable: This credit is refundable. A lot of our churches don’t pay in much for payroll taxes so it’s nice to know that, when the credit is larger than the taxes, you’ll get a check back.

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CARES Act: Church paying Pastor’s Student Loans

During the first three months of the COVID crisis, the big concern was if churches were going to have enough money to keep operating…to pay their pastor, utilities, and mortgages. As time goes on, many churches are finding out that their finances are doing great all things considered. Now that they are able to catch their breath, they may want to thank their pastor with more than words or a card, or even a hot dish.

The CARES Act allows you to make payments toward your employees’ student loans (including your pastor’s) with tax-free money! I love the phrase “tax free.” This is only available during 2020. You still have to jump through some hoops, but it’s not too bad. The video will explain it.


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