When it comes to taking care of payroll for your pastors, first you have to figure it if your organization qualifies for tax-exempt status. Read more about that here.
Your church is tax-exempt? Great! So what’s next?
What Most Pastors Don’t Realize Regarding Payroll
One thing common in churches around the country is that most churches do not reimburse their pastors for any of their ministry expenses. This is usually because of budgetary constraints.
Churches also do not realize what expenses can be deducted and the options that are available to them to deduct those expenses to maximize their deductions. The way they view their position and the expenses associated with ministry is often flawed, so they do not maximize their deductions and legally minimize their taxes.
The vast majority of American churches have fewer than 150 attendees with one or two pastors. They have no one to turn to for quality advice. The larger firms charge a lot and many churches cannot afford them. Also, many accountants are not clergy tax law experts, so they are confused about the housing allowance and the Deason Rule, ministry expenses, and the benefits of an accountable reimbursement plan. They are also confused about whether to exempt themselves from Social Security, health insurance, and Obamacare. The list goes on…
There are ways to avoid common mistakes. But even before setting up payroll, there are some steps to take.
Starting Steps Before Setting Up Payroll For Your Pastor
If you don’t have an EIN, or an Employer Identification Number, you’ll need to apply for a number by filling out IRS Form SS-4. Or you can get the number right away by calling via phone, or going online.
Your area may require you to get state and local identification numbers. Contact your state revenue department directly for information on applying to be a payroll provider in your state.
Determine if your pastor is an independent contractor or a full-time employee. Now determine how frequently you’re going to pay your pastor. You’re entitled to pay based on any schedule you want; however, most states require you to pay your employees on regular paydays.
Have your pastor fill out and sign an IRS Form W-4 and I-9. After that, establish payroll records. For federal tax purposes, you must keep information like the name, address, and Social Security Number of your pastor on file. You must also keep track of the total amount and date of each payment, the portion of each payment that constituted taxable wages, copies of each employee’s W-4, copies of returns you filed, and copies of any undeliverable W-2 forms.
Do calculate payroll taxes and withholding. For income tax purposes, the federal government provides tax tables (IRS’s Circular E) that calculate the amount you must withhold once you have established the appropriate amount of taxable wages.
Your Pastoral Payroll Software Solution
Gusto, our payroll partner, has done wonders for Aplos customers. They’ll make sure your payroll is done right and your taxes are done on time. They automatically calculate, pay, and file your federal, state, and local payroll taxes, as well as W-2s, 1099s, and new hire forms. Unlimited payrolls and direct deposit come standard too, for all 50 states. And these are just a few of the benefits that come with their service.
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