ChurchTrac Online Church Membership Software
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Payroll

ChurchTrac Online's Payroll Feature extends the capabilities of the Accounting screen, allowing you to quickly generate paychecks for employees and clergy.

NOTE: CHURCHTRAC SOFTWARE, INC. DOES NOT SUBMIT TAX FORMS OR PAYMENTS ON YOUR BEHALF. IT IS YOUR RESPONSIBILITY TO ENSURE THAT ALL FORMS AND PAYMENTS ARE CORRECT AND SUBMITTED WHEN DUE. WE ASSUME NO LIABILITY FOR ANY INCORRECT, MISSING, OR UNREPORTED ITEMS. IF YOU HAVE QUESTIONS OR DO NOT FULLY UNDERSTAND YOUR OBLIGATIONS REGARDING TAX PREPARATION AND TAX PAYMENT SUBMISSION, YOU SHOULD CONSULT A PROFESSIONAL TAX ADVISOR.

The Payroll Screen will:

  • allow you to set up employee paychecks, either hourly or salary
  • distinguish between clergy wages and regular wages (see Clergy Tax Issues below)
  • track clergy housing allowances separately from clergy wages
  • track employee vacation
  • automatically calculate federal withholding, social security, and Medicare taxes, if applicable
  • generate federal tax forms, or provide you with the information that is necessary for completing state and federal tax forms

 

Payroll Feature limitations

  • The payroll feature does not automatically calculate state and local income taxes. If you live in a area with state or local income taxes, you'll need to determine these values and enter the amount manually when setting up an employee's paycheck, or you can set up a pay check item which withholds the correct percentage of gross wages for an employee.
  • The payroll feature is not able to generate any pre-populated forms for your state or locality. You'll be able to generate a report that contains the values you need, but you'll need to manually complete any required state or local forms and submit them to the proper government authority.
  • The payroll feature does not submit tax payments or tax forms on your behalf. You alone are responsible for making all your tax payments on time to the appropriate federal and state agencies. You should consult with a qualified tax professional to ensure you understand what payments you are required based on your situation and to make sure what forms you are required to submit.

 

Note: Neither the payroll application nor the information in this guide should be considered a substitute for the advice of a qualified tax or accounting professional.

 

AN OVERVIEW OF CLERGY TAX ISSUES

Most churches have one or more ordained ministers on their payroll. Unfortunately, many churches do not understand the basics of how ministers should be paid, or how clergy wages are taxed. The following points should summarize some of the unique features relating to clergy pay and taxes:

    • Ministers are generally considered to be employees of the church, even though they pay taxes as though they were self-employed.If a congregation employs and pays a minster a salary, that minister is generally considered an employee of the church. As such, income from the minister's exercise of ministry is wages for income tax purposes. However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are not wages; such amounts are self-employment income for both income tax purposes and social security tax purposes.

 

    • A minister's wages are not subject to income tax withholding. Churches should not withhold federal taxes from a minister's pay unless the minister has requested that the church voluntarily withhold funds for this purpose (this is specified as "Additional Withholding" on the minister's W-4). This amount is to be determined by the minister. Otherwise, the minister is required to submit quarterly tax payments to the IRS to cover his tax obligations.

 

    • Ministers are considered self-employed for Social Security tax purposes. Ministers pay Social Security tax under the Self-Employment Contributions Act (SECA). This means that churches should not withhold Social Security or Medicare taxes from clergy pay, nor should churches pay the employer's share of Social Security or Medicare for members of the clergy. (This means that Boxes 3 through 6 of the Minister's Form W-2, representing social security and Medicare wages and withholdings will be blank). Ministers should submit quarterly tax payments to cover their Social Security and Medicare liabilities, or specify an additional amount on Form W-4 to voluntarily withhold from each pay check to cover these obligations.

 

    • Ministers often receive a tax benefit by allocating a portion of their wages as a housing allowance. If a housing allowance is paid to a minister, that amount should not be included in federal taxable wages on the minister's W-2. Therefore no federal tax is owed on a minister's designated housing allowance, which provides a considerable tax break for ordained clergy. However, ministers are required to pay self employment tax on a housing allowance, or on the fair rental value of a church-provided home or parsonage. Any amount designated as housing allowance for a minister is not reported in Box 1 of the minister's W-2 and therefore not considered or taxed as wages for federal tax purposes. Instead it is reported in Box 14 of the minister's W-2, and the minister is responsible for paying self employment taxes on this allowance.
      If your state has an individual income tax, you will need to check with them to determine if state income tax is owed on this amount.
      It is typically beneficial to the minister if the church designates an amount of the minister's salary as a housing allowance. The minister will pay self employment tax on the housing allowance, but not federal tax. Similarly, if a church provides a parsonage or other living arrangements for a minister, the minister is responsible for paying self employment tax on the fair rental value of the provided housing. For more information on clergy wages, see IRS Publication 517, or speak to a tax professional who specializes in clergy tax issues.

 

    • A minister's wages are typically reported on Form W-2 like other employees, not Form 1099. Even though the IRS considers ministers to be self-employed for Social Security and Medicare tax purposes, the church should provide the minister with a W-2 each January. Box 1 of the W-2 will report the minister's wages or salary, which does not include any amount that is designated as a housing allowance. Box 2 will be empty unless the minister has requested an Additional Withholding amount on Form W-4 in lieu of submitting quarterly tax payments. Boxes 3 through 6, which indicate Social Security and Medicare wages and taxes should be left blank.

 

    • Any other allowances or unaccountable reimbursements are taxed as regular clergy wages. Since ministers pay federal tax on their wages, plus self-employment tax on their wages and housing allowance, churches will often designate an additional allowance to offset the Social Security and Medicare taxes owed by the minister. Any allowance is classified as taxable income to the minister. Additionally, if you provide a specific allowance to a minister for phone, car, etc. that amount is also classified as income for tax purposes. You should instead research an accountable reimbursement strategy that will help to offset some of the minister's expenses without increasing his tax burden.

   

PAYROLL FIRST-TIME SETUP

When you open the payroll module for the first time, we'll prompt you to answer a few questions. Payroll   Here's a summary of the information that we'll need to know:

    • How often do you run payroll? This will be your default payroll schedule. Be careful to choose the correct option here, as you won't be able to change this setting in the future without contacting us for assistance.

 

    • When is your next pay day? Select the date that will be the first time you use the payroll module for running payroll.

 

    • What is the last day of work for that payday? Select the date that is the last day of work for the pay date you selected above. This represents the end of your pay period for the pay day your selected. Depending on how often you run payroll, you might be limited to certain options for this selection.

 

    • Add one or more Employees Enter the first and last name of employees (clergy and non-clergy) that you have paid this year. You also have the option to select whether this person is ordained clergy or not (note that clergy are treated differently than non-clergy for tax purposes).
    • Employee Type

      When creating a new employee you'll choose an Employee Type. The Employee Type is used to determine what kind of wages are paid to an employee. Once the employee has been created, you cannot change the Employee Type. If you need to pay someone multiple wage types (for example, both clergy and non-clergy wages), then you'll need to set up multiple employees in the software for that individual.There are three options you can select for Employee Type. The first option is for all non-clergy employees. Select this option for any non-pastoral wages, like secretaries, office staff, etc. With this option, the software will automatically calculate federal withholding, social security, and medicare taxes for each paycheck. The second option is for pastoral staff. According to the IRS, ordained ministers have a dual-status and are considered to be both an employee of the church and self-employed for tax purposes. Choose this option for any licensed or ordained minister who meets the IRS requirements for clergy (See IRS Publication 517). When you select this option, the software will not withhold any federal taxes, nor will it calculate social security or medicare taxes. It is the minister's responsibility to make quarterly tax payments directly the IRS or to arrange to have an "Additional Withholding Amount" (as specified on Form W-4) withheld from each paycheck by the church. Be sure to read our user guide for a detailed discussion of clergy tax issues. The third option for this field is for 1099-MISC workers. This option is typically used for independent contractors who are paid by you, but not employed by you. In most cases, you should not choose this option for clergy or pastoral staff. Be sure to consult the IRS publications or a qualified tax professional to ensure you are selecting the right option for each employee you create.

 

    • Have employees already been paid this year? You also must specify whether or not each employee was paid prior this year prior to the pay day that you specified above. If you select Yes, we'll prompt you to provide some additional information later regarding what you've paid this employee year-to-date (before your next pay day).

  ChurchTrac Online contains features which are designed to assist you with self-preparation of payroll and tax documents. To use the payroll feature, you'll also need to read and accept the statement regarding this. You should always double-check the values generated by ChurchTrac Online to ensure they are correct, or consult a professional tax advisor to ensure that you are meeting all requirements and obligations. Once you have successfully completed the payroll setup, we'll display the Payroll Settings screen, which is described below.  

PAYROLL SETTINGS

The Payroll Settings screen is where you'll enter all the important information about your organization, including your federal and state unemployment tax rates (if applicable). The Settings screen has four areas:

    • General Info. Enter your organization's name and other basic information. You'll also need to select which (checking) account you want us to use when generating pay checks.

 

    • Federal Tax. Here you will enter your EIN and other basic information relating your federal tax payments. Typically, churches are exempt from Federal Unemployment (FUTA) Tax, but you should check with your local tax advisor to determine your liability. If your organization is exempt, enter 0 in the Federal Unemployment rate box. You'll also need to select whether you file Form 941 each quarter, or Form 944 annually. Most churches file Form 941 quarterly and make monthly tax deposits through EFPTS. If your tax liability is very small, you may be able to pay your taxes quarterly with your 941 or annually with your 944. If you do not know which option to select, you should contact your professional tax advisor or the IRS.

 

    • State Tax. You may be in a state where unemployment tax is required for churches. If so, enter your rate, otherwise, enter 0 in the State Unemployment Tax Rate box. Typically your state will notify you each year if you are required to pay unemployment tax (it may be called something different in your state), but you should verify with your state what your responsibilities are and whether or not you are exempt.

 

    • Default Categories. Choose the category that you want to use for each item on this page. We'll use the category you select whenever we create an entry on your church register. For example, when we create a paycheck, we'll use the category you select for Federal Withholding when we subtract the withholding amount. You can click on Categories on the Accounting screen toolbar to create and edit your categories. We'll also use the Default Fund that you select on the Categories screen for each item.

 

Hint: If you already have categories that you use for creating paychecks, you'll probably want to use those here instead of creating new default categories automatically. In addition, other categories can be selected for items on an employee's paycheck when you set those up. See the Employee's Screen section below.

 

PAYROLL DASHBOARD

The Payroll Dashboard gives you all your payroll information at a quick glance. This is your "Home screen" for the payroll feature. The first (top) section of the dashboard lists your active employees. Click on an employee's name to view their information, or click the Add/Edit Employees button. This will take you to the Employees screen (which is discussed in detail below) where you can enter basic information about each employee, plus set up the items and amounts you want to use for their pay checks. Just below the Employee section of the Payroll Dashboard is the information about your next pay period.

When you're ready to generate payroll for this period, click the "Run Scheduled Payroll" button. This is where you'll enter the number of hours worked during the period (for hourly employees) and approve the payroll amount before generating checks. There's also a button here to "View Pay Periods". This will display a list of your pay periods and give you the option to void (or undo) you most recent pay period. You can also create an additional, unscheduled pay period if needed.

Note: When you generate payroll, we'll automatically create paychecks on your checking account register that you can print for your employees. Please note that these checks are "locked" and cannot be edited. If you make a mistake, you can void and then re-run your most recent completed payroll. Also, while the data on your Accounting screen's check register and your Payroll module should match, they are not linked. For example, if you change the amount you pay an employee in the payroll module, no changes will be made to prior payrolls or to paychecks in your register that have already been generated.

Below the Pay Period section of the dashboard you'll find the Tax Liabilities section. This will list your current unpaid taxes. Click the "View Tax" button to see more details, to mark taxes as "Paid", or to generate federal reports, such as Form 941.

Note: The application will be able to generate a report that contains the information you'll need to complete any state forms you must file. Each state has different requirements and different forms. It is your responsibility to prepare and submit all state forms and payments in a timely fashion. Please contact your professional tax advisor to ensure you are in compliance with all state and local requirements

The payroll dashboard will also display a list of important upcoming federal dates for employers. Some of the dates in this list may not apply to you. Also note that this list does not contain any State or Local due dates. Use this list as a reminder for when forms and taxes are due, but check with a qualified tax professional for your area to determine your actual due dates for federal, state and local forms and tax payments.  

EMPLOYEES SCREEN

The Employees screen is where you enter information about your employees and set up their pay checks. It will be helpful to have a completed Form W-4 from each employee to complete this section for a new employee.

When adding a new employee you'll need to select an Employee Type. See the discussion above about the different Employee Types.

After you have created a new employee (or when you click on an employee's name in the list), you'll be able to enter information about that employee, including their payroll schedule, filing status, allowances claimed, and more. Some tax forms require that you also enter the employee's Social Security number.

Why do we need your employee's Social Security numbers? We ask for employee's Social Security number to assist you with printing Form W-2s. If you'd prefer, you can keep this information offline and enter it manually on any printed forms or reports each year.
IMPORTANT: For each non-clergy employee you must select a Filing Status and Allowances claimed. These items are not needed for clergy employees or 1099 workers since we do not withhold federal taxes from those employee types.

 

PAYROLL SCHEDULES

We recommend that everyone you pay be on the same payroll schedule and that you use your default schedule for all of your employees and pastoral staff. However, if you need to pay someone on a different schedule, you can set the frequency that each employee is paid on the Employees screen.

IMPORTANT: When you change an employee to one of the unscheduled options, the employee will be removed from the regular payroll schedule, and you'll need to manually run an unscheduled payroll for that employee.
NOTE: When you have an employee who is paid an hourly wage, and that employee is set to one of the unscheduled options, you'll need to manually calculate and enter the wages for each pay period. For this reason, we strongly recommend leaving hourly employees on your default payroll schedule.

Changing an employee's schedule does two things. First, if the employee is subject to federal withholding, the amount withheld will be determined by how often they are paid. We determine how much should be withheld from each pay check using the IRS published tax tables for the current year. The tax tables have different values based on how often an employee is paid. For this reason, it is important that you run payroll for each employee on a predictable schedule that matches the option you have selected here.

For simplicity, we recommend that all your employees be paid using your default schedule, but at least one employee must be paid using your default schedule. This has no impact on clergy as we do not calculate federal withholding for clergy. Ministers do, however, have the option of selecting an additional withholding amount for each pay check which can be applied to their expected tax liability in lieu of submitting quarterly tax payments to the IRS.

Secondly, changing an employee's payroll schedule also changes the calculation of wages and other items when the "yearly" period is used in the employee's paycheck setup. For example, if an employee's paycheck is set up for wages of $25,000.00 per year, then the application will calculate the amount of each pay check by dividing $25,000 by the number of expected pay periods during the year.  

PAYCHECK SETUP

The bottom of the Employees screen is where you will configure the items and amounts that you want to appear on each employee's paycheck. Start by selecting a Payroll Item Type from the list. PLEASE NOTE that we have a detailed description of each item in this list below, including how taxes are calculated (or not calculated) for each item. Be sure to read the descriptions thoroughly before making your choices. Also, items may be taxed differently depending on whether or not the employee is ordained clergy.

Next, select a Category for this item. When we create the employee's paycheck, we'll use the category you select for this item. The items in this list are the categories you have already created, (or they may be the default categories that we created automatically when your account was created). You can edit the categories that appear in this list (or create your own categories) by clicking Categories on the Accounting screen's toolbar. You'll also enter an Amount and select a Period/Option for this item. The Period/Option field defines the period that we'll use when calculating the actual amount on a paycheck. For example, if you select a Yearly period, then we'll automatically calculate the correct amount for each paycheck by dividing the Yearly amount by the number of pay periods you have during the year. So if you enter 52,000 Yearly and do payroll every other week (26 pay periods per year), we'll dive 52,000 by 26 to determine the actual pay amount for each period. In the same way, you can select Hourly for the Period/Option, and we'll calculate the correct amount based on the number of hours the employee worked during the pay period.

When generating payroll you'll have the option to enter the number of hours worked for each employee who is set up to have Hourly wages. If you select a Period/Option of "Each Paycheck", then we'll apply this fixed amount to each paycheck (without performing any additional calculations). We'll only determine if it should be added to or subtracted from the employee's other wages based on the Payroll Item Type you selected for this entry. You can also select an Period/Option of "Percent of Gross Pay". IMPORTANT: With this option you'll enter a percentage in the Amount field, not a dollar amount. For example, you might enter 6.00 in the Amount field, which means we'll multiple the employee's gross wages for the period by 0.06 (six percent) to determine the dollar amount for this item.

NOTE: Gross wages would be any amount in Employee Wages, Taxable Allowance, Taxable Benefit (Non-Cash), Other Earnings, Clergy Wages, and Clergy Other Allowance.

Optionally, you can specify a Annual Maximum for each item. Typically we recommend that you leave this field blank. When the item reaches this YTD amount, it will not longer be included on the employee's pay check. This could be useful for certain taxes or deductions that have a yearly maximum.

NOTE: The program will calculate the sum of all entries during the current year that use the same Payroll Item Type when determining if the annual maximum has been met. For this reason you could get unexpected results if you setup an employee's paycheck using the same Payroll Item Type multiple times. You should not enter an annual maximum for any line that uses the same Payroll Item Type as another line for the same employee.

Note: You only need to add one payroll item for each employee, but you can add as many as necessary. Click "Add a Payroll Item" and configure each entry will the necessary values. Also, each entry can use a different value for the Period/Option field. For example, you can enter an amount that is Yearly, and have a second line/amount that is for Each Paycheck, and a third line/amount that is Percent of Gross Pay.

ENTER PRIOR PAYROLL DATA

You will need to enter YTD payroll information for any new employee you add if you paid that employee prior to your next (or first) pay date. When you first begin using the payroll feature, you may have to enter YTD information for all your employees. This allows the program to track historical information and to produce reports that contain the correct numbers. When adding a new employee, we'll ask you if this employee has already been paid this year prior to your next pay date. Typically the answer to this question will be No, as you'll want to be sure to pay new employees using the payroll module beginning with their first paycheck.

If you have paid the employee already this year prior to your next scheduled pay date, (or if you're just starting to use the payroll module for the first time during the middle of a calendar year), then we'll display a section at the bottom of the Employee's profile where you can enter YTD payroll information. Double-check to make sure this information is entered correctly. Typically this information can be found on the employee's pay stubs or by running an Accounting report. Be sure to enter the total amount for each period requested, based on the date of each pay check. In some cases we'll want the total amount for a given month, in other cases we'll ask you to provide the total amount for an entire quarter.  

PAYROLL ITEM TYPES

This section is a summary of the items that appear in the Payroll Item Type selection box on the Employees screen. Be sure to consult with your tax advisor to ensure that you are using these items correctly. Employee Wages are wages paid to a non-minister. Use this item type to specify the wages for any non-clergy employee that you pay. These wages are taxable. We'll automatically calculate federal withholding (based on the employee's filing status and allowances) and FICA taxes.

Note: We use the Percentage Method Tables in IRS Publication 15 (Circular E) when calculating the amount to withhold for federal income tax.

Taxable Allowance is treated the same as Employee Wages, and is added to the employee's gross wages. Do not select this item for ordained clergy. Instead, select Clergy Wages or Clergy Allowance. A Taxable Benefit (Non-Cash) is any non-monetary benefit that is used in determining the employee's gross wages for tax purposes. While the value of this item is not paid to the employee or included in the employee's cash wages, the amount is included in gross wages and is used for determining federal withholding as well as FICA taxes. Clergy Wages are wages paid to an ordained or licensed minister.

Clergy wages are treated differently than employee (non-clergy) wages. Ministers are considered self-employed for Social Security and Medicare tax purposes. As such, the church should not withhold taxes from a minister's wages, nor should the church pay the employer's share of Social Security and Medicare taxes on clergy wages. Ministers will be responsible for paying both federal tax and SECA tax on this amount. See the discussion above regarding minister's wages and taxes. Clergy Housing (Cash) is a special income designation for ordained ministers which carries special tax rules. Like clergy wages, the church (employer) should not withhold taxes on this amount, nor should it pay the employer share of Social Security and Medicare tax. Ministers are required to pay self employment tax (SECA) on the portion of their wages designated as as housing allowance, however this amount is not subject to federal tax or withholding. A housing allowance is not included gross wages, and is not reported as wages in Box 1 of the minister's W-2 (we'll report housing allowances in Box 14). Clergy Housing (Non-Cash) is similar to a cash housing allowance (above) in how it is taxed.

Whenever the church provides a home or parsonage, the value is not included in gross wages, but the minister is required to pay self employment (SECA) tax on the fair rental value of that home. Like a cash housing allowance, this amount will be reported on the minister's W-2 in Box 14. Clergy Other Allowance. Some churches will provide an allowance to offset a portion of the Social Security and Medicare taxes that the minister must pay at the self-employment rate. Other allowances may also be included here as well. These allowances will be included as gross wages and treated the same as the Clergy Wages category. Ministers will be responsible for paying both federal tax and SECA tax on this amount. 1099-Misc Wages are used for paying non-employees. Typically a minister will not be considered a 1099 employee, nor should you provide your ministerial staff with a 1099 to report their wages. You will only use this for reporting payments to independent contractors who are self employed. See your tax advisor to determine when it is appropriate to use 1099 Wages and when a person is considered an employee vs. an independent contractor. The program will not withhold any taxes from items categorized as 1099 Wages. The Other Earnings payroll item is treated the same as Employee Wages, but may be used to designate amounts that are separate from regular wages. For example, a retroactive pay increase or severance pay may be classified as Other Earnings.

Accountable Reimbursement is non-taxable payment made to an employee to repay an out-of-pocket business-related expense. The amount of the reimbursement is not included in gross wages, nor is is used when determining withholding or FICA taxes. Because an accountable reimbursement is not considered to be wages, it won't be included in tax reports or on government forms. As an employer you should require a receipt or some form of documentation to substantiate the expense reimbursement. Do not use Accountable Reimbursement to provide an expense allowance or reimbursement paid under a non-accountable plan. See IRS Publication 15 for details on setting up an accountable reimbursement plan.

Note regarding Deduction Types (below): An employee can have one or more taxable or pre-tax deductions for retirement plans, insurance, HSAs, or other benefits. The type of the deduction determines whether the amount is included in the employee's taxable wages, or if the amount is partially or fully excluded when determining the employee's taxable wages. There are four classifications for deductions that are available (see descriptions below).

Deduction Before All Taxes is a deduction in wages that occurs before any taxes have been calculated, thus reducing the amount of taxable income for both federal withholding and Social Security/Medicare tax purposes. Cafeteria plan benefits that reduce wages under section 125 are typically excluded from taxable income, as well as certain fringe benefits. See IRS Publication 15-B for details.

Note: Not all benefits should be considered "pre-tax" and the IRS has as many rules as they have exceptions to the rules. Please check with your tax advisor to be sure you have selected the correct deduction option for each situation.

Deduction Before Fed Tax reduces the employee's wages for determining federal withholding, but not for Social Security and Medicare. Federal withholding will be calculated on the employee's wages after the deduction has been subtracted. Deduction Before SS/Med is a deduction in wages that reduces the employee's wages for Social Security and Medicare tax purposes, but not for federal withholding. Federal withholding will be calculated on the employee's gross wages, but FICA tax will be calculated based on the employee's gross wages minus the deduction amount. Deduction After Taxes is a deduction in wages that occurs after all taxes have been calculated. This type of deduction does not reduce the employee's taxable wages. Deductions in wages that are used for retirement and pension plans can typically be classified in one of these categories. However, you should check with a tax advisor or the plan administrator to make sure you understand how these deductions are taxed. Accident and health insurance premiums paid by a deduction in the employee's wages are generally deducted before taxes, but you should check with your tax advisor. Employee contributions to their HSAs or MSAs through a payroll deduction plan must be included in wages and are subject to social security, Medicare, and FUTA taxes and income tax withholding. However, HSA contributions made under a salary reduction arrangement in a section 125 cafeteria plan are not wages and are not subject to employment taxes or withholding. For more information, see the Instructions for Form 8889, Health Savings Accounts (HSAs).

Hint: Be sure to set up and choose your Categories in such a way that your deduction types can easily be distinguished from one another.

Premiums paid by an employer for an individual health plan are considered taxable income and are subject to federal withholding and FICA taxes. Contributions to an individual health plan are considered to be a deduction after taxes as they do not reduce the employee's taxable income. Additional Withholding is an amount specified by the employee in Box 6 of their Form W-4. if specified, you should withhold this amount from each scheduled paycheck until the employee requests the amount be changed, or until a new W-4 is provided by the employee. For a non-minister employee (non-clergy), the amount is added to the federal withholding amount which is automatically calculated by the application. Although churches should not withhold taxes from a minister's pay, a minister may elect to have an "Additional Withholding" amount taken from each pay check to cover their anticipated taxes. This withholding amount can be used to supplement or replace the minister's quarterly payments to the IRS. Any amount specified as Additional Withholding will be reported in Box 2 of the employee's Form W-2 (Federal income tax withheld).

State Income Tax or Local Income Tax. Use these Payroll Item Types for entering the amount to be withheld from each employee's paycheck to cover state and/or local withholding. PLEASE NOTE that we do not automatically calculate state/local withholding or state/local tax liabilities. It is your responsibility to withhold the correct amount based on the state and/or locality's laws and the tax obligation of each employee. If you are in an area where there is a State or Local income tax, select one of these Payroll Item Types from the list. In most cases the State Income Tax is a percentage of gross wages. If that is the case for your State, enter the tax percentage for this employee in the Amount field. Enter the value as a whole number, not a fraction. For example, six percent would be entered as 6.00 (without any symbols). Next, select "Percent of Above Wages" from the Frequency selection list. When you generate payroll, we'll calculate the amount for this line item by adding the wages that appear above it in the list and multiplying that amount by the percentage you have entered. As an example, a paycheck may have $1000.00 in employee wages on the first row and 6 percent of above wages selected on the second row for state tax. When we generate the paycheck, the first row will be $1000.00, and the second row will be $60.00. Alternatively, you can manually calculate the amount to withhold from each paycheck and enter that amount with the "Each Paycheck" frequency.

IMPORTANT NOTE: We'll also help you track the amount of state and local taxes that you've withheld from employees. You'll be able to see a running amount of this total on the Tax Liabilities screen. However, as with federal forms and payments, it is your responsibility to make sure any state/local forms and payments are made on time and are correct.

TAX LIABILITIES SCREEN

On the Payroll Dashboard, click the button labeled "View Tax and Payment Information" to open the Tax Liabilities screen. This screen shows the various types of taxes you owe (based on your selections in Payroll Settings), as well as how much you owe. Each tax type will be displayed in its own section, allowing you to keep track of what is currently owed for each tax type.

Be sure to make sure your Payroll Setting selections are correct, as it impacts how items on the Tax Liabilities screen are grouped, and what tax due dates we display.

As taxes become due, you should mark the taxes as 'Paid'. In some cases we'll prompt you to generate a check on your register for making this payment. The Payroll tax section will also display links for generating Form 941 or 944 at the appropriate times, depending on your selections in Payroll Settings.  

TAX QUESTIONS AND ANSWERS

REMINDER: The content of this article is not to be considered a substitute for the advice of a qualified tax professional.

Is the church required to withhold federal payroll taxes from its employee's paychecks? Yes. Just like other employers, if you have any non-minister employees, you must withhold and match Social Security and Medicare tax, also known as FICA. You are also required to withhold federal income taxes if applicable. Additionally, ordained minister employees may also request that you withhold a portion of their pay for tax purposes.

We think of our minister as an employee and would prefer to withhold federal tax, as well as Social Security and Medicare tax from his pay. Is this okay? No. This isn't an optional guideline or suggestion. Ordained clergy are regarded as self-employed for tax purposes, and you cannot withhold Social security or Medicare taxes from their pay, nor should you pay the employer's share of their taxes as you would with a regular employee. Ministers are required to pay quarterly tax payments to the IRS, just like other self-employed individuals. However, the minister can request that an "Additional Withholding Amount" be withheld from each paycheck in lieu of submitting quarterly tax payments directly to the IRS. The minister determines the amount he wishes to have withheld from each pay check.

We've heard that pastors are self-employed. Should we set him up as a 1099-MISC "employee"? No. While ordained ministers are considered self-employed for tax purposes, they are also considered employees of the church. For this reason, their wages are reported on Form W-2 as described in Clergy Tax Issues above.

Someone paid the pastor $300 for a wedding that he performed. Should the church report that amount in his taxable wages? No. Unless the church paid the pastor directly for performing the wedding, that amount won't be reported as income from the church.

The pastor wants a portion of his income designated for housing. Why? Ministers can receive a housing allowance, which is a special designation for income that is legally excluded from a minister's income for federal income tax purposes. By designating a portion of the minister's salary as a housing allowance, the church is providing a legal way for the minister to reduce his tax obligation, without any additional cost or inconvenience to the church.

Our church has filed Form 8274 and is exempt from paying the employer share of payroll taxes. Can we use ChurchTrac Online for running payroll? No. And even though you have exempted your church from paying these taxes, the employees themselves are now obligated and required to pay the full amount of their Social Security and Medicare taxes, including the amount that would normally be paid by you, the employer/church.