March 1, 2012
Proper Payroll Withholdings Critical for Churches
Those who don't do it right face stiff penalties.
The recent payroll tax holiday extension keeps a 2-percent reduction for employee and clergy Social Security withholdings in place throughout 2012.
We've already covered what those rates should be on paychecks. But the reason why it is so important for churches to get all payroll withholdings--the payment of employee income and entitlement taxes--right is illustrated by the Feature Article in the upcoming March edition of Church Finance Today.
A federal court in North Carolina recently ruled that a minister met the definition of a “responsible person” under section 6672 of the tax code, and therefore the IRS could assess a penalty against the pastor in the amount of 100 percent of the payroll taxes that were not withheld or paid over to the government by the church.
The most significant federal reporting obligation of most churches is the withholding and reporting of employee income taxes and Social Security and Medicare taxes. Church officers and directors (and in some cases employees, such as administrators or bookkeepers) can be personally liable for the failure to withhold, account for, or pay over to the government any of these taxes. It does not matter that they serve without compensation, so long as they satisfy the definition of a “responsible person” and act willfully. A responsible person has: (1) power to direct the act of collecting withheld taxes; (2) accountability for and authority to pay employment taxes; and (3) authority to determine which creditors will or will not be paid.
Clearly, church leaders must be knowledgeable regarding a church’s payroll tax obligations and ensure that these obligations are being satisfied.
Richard Hammar further explains the proper handling of payroll withholdings and the definition of a responsible person in the March edition of Church Finance Today, a monthly newsletter reviewing critical accounting, financial, and tax developments affecting churches and clergy. And for a definitive word on all payroll reporting requirements, take a look at the 2012 Federal Reporting Requirements for Churches, a downloadable resource by Richard Hammar.