January 25, 2012
How to Prepare W-2s for Church Employees, Including Ministers
Last-minute help for completing these important forms.
Churches need to report each employee’s taxable income and withheld income taxes as well as Social Security and Medicare taxes on Form W-2, and furnish copies B, C, and two of the 2011 Form W-2 to each employee by January 31, 2012. Copy A should be submitted to the Social Security Administration by February 29, 2012, along with Form W-3, Transmittal of Wage and Tax Statements. If your employees give their consent, you may be able to furnish Forms W-2 to your employees electronically. Electronic forms are due April 2, 2012. See IRS Publication 15-A for additional information.
Although W-2s are not difficult to prepare, there are some tips you should know. First, be sure to add cents to all amounts. Make all dollar entries without a dollar sign and comma, but with a decimal point and cents. For example, $1,000 should read “1000.00.” Government scanning equipment assumes that the last two figures of any amount are cents. If you report $40,000 of income as “40000,” the scanning equipment would interpret this as 400.00 ($400)!
Second, here are some details on how to fill in specific boxes:
Box a. Report the employee’s Social Security number. Insert “applied for” if an employee does not have a Social Security number but has applied for one. If you do not provide the correct employee name and Social Security number on Form W-2, you may owe a penalty unless you have reasonable cause.
Box b. Insert your church’s federal employer identification number (EIN). This is a nine-digit number that is assigned by the IRS. If you don’t have one, you can obtain one by submitting a completed Form SS-4 to the IRS. Some churches have more than one EIN (for example, some churches that operate a private school have a number for both the church and the school). Be sure that the EIN listed on an employee’s Form W-2 is the one associated with the employee’s actual employer.
Box c. Enter your church’s name, address, and ZIP Code. This should be the same address reported on you Form 941.
Box d. You may use this box to identify individual W-2 forms. You are not required to use this box.
Box e. Enter the employee’s name.
Box f. Enter the employee’s address and ZIP Code.
Box 1. Report all wages paid to workers who are treated as employees for federal income tax reporting purposes.
For ministers who report their income taxes as employees, do not report the annual fair rental value of a parsonage and do not report any portion of a minister’s compensation that was designated (in advance) as a housing allowance by the church. Also, some contributions made to certain retirement plans out of an employee’s wages are not reported.
Caution: Taxable fringe benefits not reported as income in box 1 may constitute an automatic excess benefit transaction exposing the recipient and members of the church board to intermediate sanctions in the form of substantial excise taxes.
Box 2. List all federal income taxes that you withheld from the employee’s wages. The amounts reported in this box (for all employees) should correspond to the amount of withheld income taxes reported on your four 941 forms.
Box 3. Report an employee’s wages subject to the “Social Security” component (the 4.2 percent rate for 2011) of FICA taxes. Box 3 should not list more than the maximum wage base for the “Social Security” component of FICA taxes ($106,800 for 2011, and $110,100 for 2012). This box usually will be the same as Box 1, but not always. For example, certain retirement contributions are included in Box 3 that are not included in Box 1. To illustrate, contributions to a 403(b) plan by salary reduction agreement may be excludable from income and not reportable in Box 1, but they are subject to FICA taxes and accordingly they represent Social Security and Medicare wages for nonminister employees.
Remember: ministers (including those who report their income taxes as employees) are self-employed for Social Security with respect to their ministerial services, and so they pay self-employment taxes rather than the employee’s share of Social Security and Medicare taxes.
Churches that filed a timely Form 8274 exempting themselves from the employer’s share of FICA taxes do not report the wages of nonminister employees in this box since such employees are considered self-employed for Social Security purposes.
Box 4. Report the “Social Security” component (4.2 percent in 2011) of FICA taxes that you withheld from the employee’s wages. This tax is imposed on all wages up to a maximum of $106,800 for 2011 and $110,100 for 2012. Do not report the church’s portion (the “employer’s share”) of Social Security and Medicare taxes. Ministers who report their income taxes as employees are still treated as self-employed for Social Security purposes with respect to their ministerial services. For ministers, this box should be left blank.
The Tax Relief and Jobs Creation Act of 2010 provided a payroll tax holiday for 2011 in the form of a two percentage point reduction in Social Security taxes. This meant that the employee's share of Social Security taxes dropped from 6.2 percent to 4.2 percent of wages (the employer's share was not affected), and self-employed workers' Social Security tax dropped from 12.4 percent to 10.4 percent of self-employment earnings. Congress has extended this holiday to at least February 29, 2012.
Box 5. Report a nonminister employee’s current and deferred (if any) wages subject to the Medicare component (1.45 percent) of FICA taxes. This will be an employee’s entire wages regardless of amount. There is no ceiling. For most workers (earning less than $106,800 in 2011 or $110,100 in 2012) the maximum amount of wages subject to the “Social Security” tax (Boxes 3 and 5) should show the same amount. If you paid more than $106,800 to a nonminister employee in 2011, Box 3 should show $106,800 and Box 5 should show the full amount of wages paid. This amount increases to $110,000 for 2012.
Box 6. Report the Medicare component (1.45 percent) of FICA taxes that you withheld from the nonminister employee’s wages. This tax is imposed on all wages, current and deferred (if any), regardless of amount.
Box 10. Show the total dependent care benefits under a dependent care assistance program (section 129) paid or incurred by you for your employee. Include the fair market value of employer-provided daycare facilities and amounts paid or incurred in a section 125 cafeteria plan. Report all amounts paid or incurred including those in excess of the $5,000 exclusion. Include any amounts over $5,000 in Boxes 1, 3, and 5. For more information, see IRS Publication 15-B.
Box 11. Report the total amount you distributed to an employee under a nonqualified deferred compensation (NQDC) plan, including some rabbi trusts. Also report these distributions in Box 1. Unlike qualified plans, NQDC plans do not meet the qualification requirements for tax-favored status. NQDC plans include those arrangements traditionally viewed as deferring the receipt of current compensation, and include termination pay and rabbi trusts.
If you did not make distributions this year, show deferrals (plus earnings) under a NQDC plan that became taxable for Social Security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture. Also report these amounts in Boxes 3 (up to the Social Security wage base) and 5. Do not report in Box 11 deferrals included in Boxes 3 or 5 and deferrals for current year services (such as those with no risk of forfeiture). Boxes 3 and 5 are used to report nonminister employees' wages subject to Social Security and Medicare taxes, and are generally blank for ministers with respect to compensation received for ministerial services.
The purpose of Box 11 is for the Social Security Administration (SSA) to determine if any part of the amount reported in Box 1 or Boxes 3 or 5 was earned in a prior year. The SSA uses this information to verify that it has properly applied the social security earnings test and paid the correct amount of benefits.
If your church made distributions and is reporting any deferrals in Boxes 3 and 5, do not complete Box 11. For additional information, see IRS Publication 15.
Box 12. Insert the appropriate code and dollar amount in this box. Insert the code letter followed by a space and then insert the dollar amount on the same line within the box. Do not enter more than three codes in this box. If more are needed, use another Form W-2. Use capital letters for the codes, and remember not to use dollar signs or commas. For example, to report a $3,000 contribution to a section 403(b) tax-sheltered annuity, you would report “E 3000.00” in this box.
The codes are as follows:
A – This will not apply to church employees.
B – This will not apply to church employees.
C – You (the church) provided your employee with more than $50,000 of group term life insurance. Report the cost of coverage in excess of $50,000. It should also be included in Box 1 (and in Boxes 3 and 5 for nonminister employees). See page 12 for additional information.
D – Generally not applicable to churches.
E – The church made contributions to a 403(b) plan pursuant to a “salary reduction agreement” on behalf of the employee. Report the amount of the contributions. While this amount ordinarily is not reported in Box 1, it is included in Boxes 3 and 5 for nonminister employees since it is subject to Social Security and Medicare taxes with respect to such workers.
F – Generally not applicable to churches.
G – Generally not applicable to churches.
H – Generally not applicable to churches.
J – You (the church) are reporting sick pay. Show the amount of any sick pay that is not includable in the employee’s income because he or she contributed to the sick pay plan.
K – Generally not applicable to churches.
L – You (the church) reimbursed the employee for employee business expenses using the standard mileage rate or the per diem rates, and the amount you reimbursed exceeds the amounts allowed under these methods. Enter code “L” in Box 12, followed by the amount of the reimbursements that equal the allowable standard mileage or per diem rates. Any excess should be included in Box 1. For nonminister employees, report the excess in Boxes 3 (up to the Social Security wage base) and 5 as well. Do not include any per diem or mileage allowance reimbursements for employee business expenses in Box 12 if the total reimbursements are less than or equal to the amount deemed substantiated under the IRS-approved standard mileage rate or per diem rates.
M, N – Generally not applicable to churches.
P – You (the church) paid qualified moving expenses reimbursements directly to an employee. Report the amount of these reimbursements but only if they were made under a nonaccountable arrangement. Do not report reimbursements of qualified moving expenses that you paid directly to a third party on behalf of the employee (for example, to a moving company), or the employee under an accountable arrangement.
R – Report employer contributions to a medical savings account on behalf of the employee. Any portion that is not excluded from the employee’s income also should be included in Box 1.
S – Report employee salary reduction contributions to a Simple retirement account. However, if the Simple account is part of a 401(k) plan, use code D.
T – Report amounts paid (or expenses incurred) by an employer for qualified adoption expenses furnished to an employee under an adoption assistance program.
W – Report employer contributions to a health savings account (HSA). Include amounts the employee elected to contribute using a cafeteria plan.
Y– It is no longer necessary to report deferrals under a section 409A nonqualified deferred compensation plan in Box 12 using code Y.
Z – Report all amounts deferred (including earnings on deferrals) under a nonqualified deferred compensation plan that are included in income under section 409A of the tax code because the NQDC fails to satisfy the requirements of section 409A. Do not include amounts properly reported on Forms 1099-MISC or W-2 for a prior year. Also, do not include amounts considered to be subject to a substantial risk of forfeiture for purposes of section 409A. The amount reported in box 12 using code Z is also reported in box 1.
BB – Report designated Roth contributions under a section 403(b) salary reduction agreement. Do not use this code to report elective deferrals under code E.
DD – Starting in tax year 2011, the Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan. To give employers more time to update their payroll systems, IRS Notice 2010-69 made this requirement optional for all employers in 2011. IRS Notice 2011-28 provided further relief for smaller employers filing fewer than 250 W-2 forms by making the reporting requirement optional for them for 2012 as well and continuing this optional treatment for smaller employers until further guidance is issued. The reporting under this provision is for information only; the amounts reported are not included in taxable wages and are not subject to new taxes.
Box 13. Check the appropriate box.
• statutory employee. Churches rarely if ever have statutory employees. These include certain drivers, insurance agents, and salespersons.
• retirement plan. Mark this checkbox if the employee was an active participant (for any part of the year) in any of the following: (1) a qualified pension, profit-sharing, or stock bonus plan described in section 401(a) (including a 401(k) plan); (2) an annuity contract or custodial account described in section 403(b); (3) a simplified employee pension (SEP) plan; or (4) a SIMPLE retirement account.
• third party sick pay. Churches generally will not check this box.
Box 14. This box is optional. Use it to provide information to the church employee. Some churches report a church-designated housing allowance in this box. The IRS uses Box 14 for this purpose in a comprehensive minister tax example in the current edition of its Publication 517, but this is not a requirement.
For a complete guide to preparing W-2s and more helpful tips on all of the forms your church is required to file, download the new 2012 Federal Reporting Requirements and Step-by-Step Clergy Tax Returns.