05.1 - Federal Tax Reporting

by Scott Selman

“Give therefore to the emperor the things that are the emperor’s, and to God the things that are God’s.”
Matthew 22:21 (NRSV)

Over the years, Congress has enacted various tax laws that affect local churches and their employees, including pastors. Although churches are generally exempt from income taxes, and may receive other forms of favorable tax treatment, every church should have a basic understanding of certain provisions of the Internal Revenue Code.

Charitable Giving

The requirement that most often applies to local churches concerns charitable giving from donors that make single contributions of $250 or more. A donor is required to obtain a written acknowledgement, such as a year-end statement, from the recipient local church for any single contribution of $250 or more in order to claim a charitable contribution deduction on his or her Federal income tax return.  

Although a church does not incur a penalty for failure to provide an acknowledgement, the donor cannot claim the deduction without an acknowledgement. Accordingly, all churches are encouraged to provide year-end statements to their contributors. Statements should include a notation that goods or services provided by the church in return for contributions consist entirely of intangible religious benefits.

There is a lesser-known requirement that churches should provide a written disclosure to donors who receive goods or services in exchange for a single payment in excess of $75. The disclosure must provide the donor with a good-faith estimate of the fair market value of the goods or services. Internal Revenue Service (IRS) Publication 1771, entitled Charitable Contributions, provides useful information.

Employee Compensation

There are five Federal tax forms that apply to most churches. These forms include:  Form 941, Form W-2, Form W-3, Form 1099-MISC, and Form 1096. Here are a couple of ground rules that are unique to clergy income:

  • Rule Number One – Clergy are always considered self-employed for Social Security taxes. Social Security should never be withheld for clergy and local churches should not remit an employer share of Social Security for clergy.
  • Rule Number Two – There are no mandatory Federal income tax withholding requirements for clergy. However, Federal income taxes may be withheld at the request of the clergyperson.

Form 941, Employer’s Quarterly Federal Tax Return

Form 941 is a quarterly report that should be filed for each quarter in the calendar year. The filing dates are April 30, July 31, October 31, and January 31 for the first, second, third, and fourth quarters. Form 941 reports the number of employees, the amount of Social Security and Medicare wages and taxes ($0 for clergy), as well as the income taxes withheld in each quarterly period.

The totals from the four quarterly Forms 941 should be in balance with your Forms W-2. Please note that if the pastor is the local church’s only employee, the church is not required to file Form 941, unless the pastor has elected voluntary Federal income tax withholding.

Form W-2, Wage and Tax Statement

Form W-2 provides wage and tax information to employees, the Social Security Administration, the IRS, and state and local governments. Forms W-2 should be given to all employees, including clergy, by January 31 and Copy A of Forms W-2 must be filed with Form W-3 by February 28. Local churches may file up to 20 Forms W-2 and Form W-3 online using the Social Security Administration website at www.ssa.gov/employer .  The website allows an employer to print copies of forms for filing with state and local governments, for distribution to employees, and for the employer’s records.

Form W-3, Transmittal of Wage and Tax Statements

The information included in Forms 941 and Forms W-2 are the basis for completing Form W-3. Form W-3 should be reconciled with the total amounts from Forms W-2 and the four quarterly Forms 941. Form W-3 should be filed by February 28 and may be filed online if you have 20 or fewer Forms W-2 to transmit.

Form 1099-MISC, Miscellaneous Income

Forms 1099-MISC are given to individuals who are independent contractors and receive compensation in excess of $600 for services rendered to a local church. Copy B of Forms 1099-MISC should be given to individuals by January 31. Copy A of Forms 1099 should be filed with Form 1096 by February 28.

Since serious tax and financial consequences may result if a person is misclassified between employee and independent contractor, it is important to review each situation carefully. Examples of independent contractors may include visiting worship leaders at special events, an organist that plays for your church and several other churches, and a painter that renders services to the church on a one-time basis for a fixed fee.  

IRS Publication 15-A, Employer’s Supplemental Tax Guide, discusses the criteria for determining whether a person is an employee or independent contractor.

Form 1096, Annual Summary and Transmittal of U.S. Information Returns

Form 1096 is used to transmit paper Forms 1099-MISC, and should be filed by February 28.

The preceding information is intended to provide a general overview of the year-end Federal tax reporting requirements that affect most local churches. Additional information is provided in the Tax Packet developed by the General Council on Finance and Administration. Other IRS publications that may be helpful include: Tax Guide for Churches and Religious Organizations (Publication 1828) and Social Security and Other Information for Members of the Clergy and Religious Workers (Publication 517).

 

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