In 2020, church payroll and compensation issues have skyrocketed to the forefront of attention for many ministry leaders nationwide. Implications stemming from the coronavirus pandemic, Paycheck Protection Program, and other new employment regulations have introduced complexity that can make your head swim! We have sifted through all of the noise and provided a short list of the key things that ministry leaders need to pay attention to as we close out 2020.
When planning your budget, don’t forget to designate the minister’s housing allowance in your council minutes prior to the start of the year. Housing allowances may be changed throughout the year, but never retroactively. If housing is not documented in the council minutes, the IRS may disallow the housing allowance and recategorize the housing as salary. Housing is not subject to income tax, which can decrease the minister’s taxable income and place the minister in a lower tax bracket. Learn more about the tax benefits of claiming a housing allowance.
Foursquare highly recommends Foursquare churches use a payroll service that specializes in clergy compensation. Why, you ask? A quick way to see if you are correctly handling payroll with regard to FICA is to look at the minister’s W-2. If boxes 3, 4, 5 or 6 are blank, their payroll is correct. Consider hiring a payroll company to handle the complexity of clergy compensation. The cost of a payroll service is like an insurance policy against the thousands of dollars that could be owed if compensation is reported incorrectly.
Foursquare recommends the following payroll providers:
Do you have more questions about payroll? View these articles about clergy compensation:
- Do clergy pay payroll taxes?
- Tax implications of moving from non-ministerial to a minister.
- ICFG guidelines for opting out of Social Security.
Christmas Gifts and Bonuses
Don’t forget: Gifts that were collected through the church—such as pastor appreciation gifts or bonuses given to your pastors and employees anytime during the year—are taxable and should be included as compensation on their W-2s at the end of the year. Benevolence given to employees (or their family members) should be included on their W-2s as well. Learn more about how to handle gifts and bonuses.
We have sifted through all of the noise and provided a short list of the key things that ministry leaders need to pay attention to as we close out 2020.
Payments to non-employees: Form 1099-NEC will replace Form 1099-Misc
IRS Form 1099-Misc for reporting payment to non-employees will be replaced by Form 1099-NEC. Compensation for services performed by a non-employee totaling $600 or more (including parts and materials) will be reported in box 1 on Form 1099-NEC.
Form 1099-NEC should be sent to any company or individual that provides a service to the church with the exception of C or S corporations (indicated on their W-9s). This includes payment for services such as landscaping, cleaning, snowplowing, honorariums to visiting speakers, etc. (Attorney fees paid to a C or S corporation must be reported on Form 1099-NEC.) All payers must submit Form 1099-NEC to the recipient and Forms 1099-NEC and 1096 to the IRS by February 1, 2021.
Form 1099-NEC is not part of the combined Federal/State Filing Program which enabled the IRS to report 1099-Misc information automatically to the state. Churches will need to file Form 1099-NEC with their states or find a provider that offers a state filing option. (AK, FL, IL, NV, NH, NY, SD, TN, TX, WA, WY do not require state filing.)
Failing to file will result in a penalty as high as $280 per return or $560 for intentional disregard for filing.
Are your employees paid correctly?
The Fair Labor Standards Act defines employees into two categories, exempt and non-exempt. An exempt worker must be paid an annual salary of at least $35,568 and have job duties that classify them as an exempt worker. If the employee does not meet these qualifications or one of the exemptions provided by the FLSA, then the employee must be paid an hourly wage and overtime when they exceed 40 hours in a week. (Some state rules may be more strict.) If you are paying employees a stipend or a straight salary, you may be violating FLSA rules.