Navigating tax and payroll issues has always been complicated for churches and other religious organizations. Both the organizations themselves, and the clergy members who work for these organizations, have specialized payroll and tax needs. CPAs advising these clients need to have a comprehensive understanding of how things like religious exemptions, clergy classification and paid family leave affect payroll and tax obligations.
Considering many of these clients are already working with limited resources, IRS penalties for unpaid payroll taxes could be disastrous for churches. Here’s a brief look at what CPAs need to know to provide clients with the most accurate and valuable church payroll services this year.
Has anything changed around religious exemptions and church payroll in the last few years?
While political turmoil and changing regulations have affected many areas of payroll/income tax law over the last decade, there haven’t been major updates related to religious exemptions. One update during the Biden administration does involve religious exemptions, but only as they relate to anti-discrimination laws and federal contractors.
In late 2020, the Trump administration created a final rule that modified Executive Order 11246. One of the things EO 11246 does is prevent non-religious organizations from making employment decisions based on a person’s religion, in keeping with the equal opportunity clause (Title VII) of the Civil Rights Act of 1964.
The Trump administration’s rule essentially loosened the requirements to qualify for this religious exemption, opening the door for any entity that contracted with the federal government to claim an exemption and get around Title VII to make employment decisions based on religion.
The Biden administration proposed to repeal this rule in 2021; at that time, the Washington Post noted that no contractors had actually tried to use the exemption when it was available.
In other words: no, there haven’t been any sweeping changes to regulations affecting church payroll over the last several years. But CPAs may have church or religious organization clients whose payroll obligations have evolved recently because of staffing changes, new paid family leave programs and more.
How can CPAs provide value to church clients around payroll issues?
Church leaders and their employees tend to be more focused on their missions than tax paperwork. These clients might need to lean heavily on their CPAs for help maintaining compliance with payroll tax laws. The ways CPAs can provide significant value for these clients include:
Reviewing church payroll processes to make sure religious exemptions are being managed correctly. As CPAs know, an organization that meets the IRS definition of a church is generally exempt from income tax and enjoys other tax benefits, but must still withhold and remit income taxes and FICA taxes on behalf of anyone who’s classified as an employee.
Religious exemptions may allow a church or church-controlled organization to avoid paying its portion of employee FICA taxes only if the church claims an opposition to these taxes on religious grounds. Employees of a church that files Form 8274 to claim religious exemptions are then required to pay their own self-employment (SE) taxes or apply for their own exemption from paying SE taxes.
Only a small number of churches or church-controlled organizations meet the criteria for FICA exemptions. Whether or not there’s such an exemption in place, CPAs can provide oversight to make sure church clients are compliant with IRS requirements.
Verifying that church clients are correctly classifying workers. The lines can get blurry between employees and independent contractors, especially in churches where workers often wear a lot of hats and might not have traditional full-time roles. Musicians, worship leaders, custodians and other paid workers within the church must be correctly classified and taxed to avoid IRS penalties.
Correctly classifying and paying clergy can become especially complicated for a number of reasons. One of the complicating factors is that these individuals may earn income both as employees and independent contractors.
For example: a congregation might pay a salaried minister whose work is directed and controlled by the church to the extent that they meet the IRS definition of an employee, so the church must withhold income and FICA taxes on the minister’s salary. But if the minister also performs weddings and baptisms in the church on weekends, and is directly paid by congregation members for those services, those earnings must be treated and taxed as self-employment income.
Church clients have to lean on their CPAs to unravel thorny classification issues and ensure that everyone on the church payroll is being paid and taxed in compliance with IRS regulations.
Assessing any obligations that church/clergy might have under new state paid leave programs. The enactment of new paid family and medical leave programs has changed payroll tax processes in several states over the last few years. CPAs may need to help clients understand their choices and obligations under a paid leave program, especially because every state’s program has different rules.
For example, in Massachusetts, employees of churches and certain other religious organizations are exempt from the Commonwealth’s Paid Family and Medical Leave program. Churches don’t have to remit any PFML contributions on behalf of these employees. However, churches may opt into the program if they wish. Church workers who are classified as self-employed individuals may also elect to opt into PFML and pay the full contribution amount themselves.
Meanwhile, in Maryland, required contributions to the new Maryland Family and Medical Leave Insurance (FAMLI) fund are set to start in October 2023. CPAs with church clients in Maryland can start preparing these clients now for what to expect. Any client with at least one Maryland employee will be required to remit contributions on their behalf, and there’s no word about any religious exemptions that would allow covered employees from opting out of the program.
The good news for small churches is that employers with fewer than 15 employees won’t be required to make employer contributions. There’s still a lot that’s up in the air about the enactment of the Maryland paid leave program (including what the contribution rates will be) but CPAs can start talking to these clients about how church payroll processes will be affected come October.
Need help solving church payroll issues?
CPAs with churches and other religious organizations as clients are well positioned to help these clients navigate their unique payroll challenges—but the nuances of church payroll services might also be more complicated than busy CPAs have time to sort through themselves.
ConnectPay partners with CPAs to help them make payroll processing easy, accurate and as secure as possible for their clients. We’re here to take all the guesswork out of payroll for churches and their CPAs. When a client calls you with a question about religious exemptions or church payroll that you’re not sure how to answer, just call your Connected Services Representative. We’ll track down accurate answers, even if that means looping in our payroll tax team. Let’s connect.
By Drew Schildwachter
Drew Schildwachter is the Chief Operations Officer for ConnectPay. Drew joined the team in 2014 with years of experience as a contractor, video retail franchisee partner, operations director, and turnaround specialist for small businesses. Drew specializes in communicating with entrepreneurs about industry challenges that they encounter, and how aligning the best practices in payroll and business administration can alleviate pain points for small business owners.