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As charitable organizations, churches don’t have to worry about things like profits and revenue streams. However, they do have to keep certain church accounting considerations in mind.
Church administrative teams should track how they collect donations and report income and expenses. They should also make sure to follow all of the rules when it comes to hiring, firing, and paying their staff.
That last item is important. Church payroll is a uniquely tax-compliant, regulation-heavy element in the faith-based world. It’s an area where church leaders must pay close attention.
This resource will dive into the often overwhelming world of payroll for churches. We’ll explore the salary options for clergy, key tax forms, steps to set up church payroll, and the question of when it makes sense to outsource the whole kit and caboodle.
Payroll is a sub-section of the accounting and bookkeeping space. It consists of the process of paying an organization’s employees, something that involves a few different activities:
In a church setting, the goal of payroll is the same as anywhere else — at least on the surface. The objective is to make sure you pay all of your employees correctly, you pay them on time, and you maintain a record of that activity.
There are many benefits to having a formal approach to your church’s payroll. Let’s take a look at a few of the biggest advantages a healthy payroll system offers a church.
Payroll is an organized and official approach to paying your employees. This means it naturally has to follow the rules and regulations that come with employment.
Payroll may take some time to set up. Once you have a system in place, though, everything becomes easier. This improved efficiency leads to less time spent on a task that, in the end, is an ancillary element to your larger ministry.
As a church, your team will likely pour a lot of their mental, physical, emotional, and spiritual energy into your activities. You want everyone to feel well-compensated for their efforts. Payroll ensures that no one is reminding you about their compensation. It simply arrives in their mailboxes or bank accounts on schedule.
When you have payroll in place, you have a clear picture of your church’s monthly labor costs. Your employees also have a predictable amount and cadence that they can expect for their wages.
The IRS explains that there are special tax rules that apply to faith-based organizations (including churches). One of these is the aforementioned fact that churches operate under tax-exempt status if they meet the requirements of a 501(c)(3) organization and a few basic criteria (such as not generating net earnings for shareholders or attempting to influence legislation).
While this means a church doesn’t have to pay traditional taxes as an organization (in most cases), the exception to the rule is employment tax. Often referred to as payroll tax, the IRS explains:
“Generally, churches and religious organizations are required to withhold, report and pay income and Federal Insurance Contributions Act (FICA) taxes for their employees. Employment tax includes income tax and FICA taxes withheld and paid for an employee.”
The IRS adds that “substantial penalties” can follow if a church doesn’t handle this properly. The bureau also explains that employment tax is only for official employees. In other words, if you are working with individuals who are either contractors or unpaid volunteers, you don’t have to worry about payroll rules. You’ll need to file a 1099 for church employees (or, more accurately, church freelancers and contractors), and you should be all set.
It’s only when you hire an employee as a formal worker for your church that you should set up and follow payroll rules.
We’ll cover other employee payroll considerations in a minute (and, to be honest, they’re all fairly similar to their for-profit equivalents). However, clergy payroll is a unique and interesting exception to the rule and one that you want your church leadership to understand.
The biggest question to answer right out of the gate is whether pastors are employees or not — and the answer is a little confusing.
Technically speaking, a pastor holds dual tax status (meaning they are taxed two separate ways). When it comes to Social Security tax and Medicare taxes (SECA taxes), the government considers pastors self-employed. However, they are common-law employees as far as federal income tax goes.
Another wrinkle is that Pastors don’t have to pay federal income tax on their housing allowance. However, they do have to pay their self-employed taxes on that income. Again, the IRS provides further stipulations, including the fact that a housing allowance must go toward living expenses and cannot be larger than a pastor’s reported gross income.
As far as reporting goes, you need to ask: is a pastor a 1099 employee or a full-timer? Churches should report using either a W-2 or 1099 form, depending on whether they consider their pastor an official employee or contractor, respectively.
When it comes to most church workers, the first step is to make sure they’re considered employees (i.e., not contractors). If they’re an employee, with church employee tax laws, most standard employment and payroll considerations apply.
You should follow things like the FLSA (Fair Labor Standards Act), minimum wage, overtime regulations and other labor laws for church employees. If you’re wondering, do churches pay unemployment taxes? That is one area where you can catch a break. In most cases, churches don’t have to pay FUTA (Federal Unemployment Tax Act) taxes.
Okay, we’ve spent enough time analyzing payroll considerations. What does it look like to actually implement these in a growing ministry? If you’re ready to hire some employees at your church but aren’t sure where to start, here is a quick rundown of what you can expect as you set things up.
When you’re working with volunteers, it’s easy for everyone to wear a lot of hats. You can have unpaid workers shift from one job or responsibility to the next without thinking it through too much.
When it comes to formal employees, though, you want to put a little more thought into what, exactly, your church is hiring them to do. This doesn’t mean they can’t help in other areas. However, the formalities of payroll make clear, defined job descriptions important.
As you flesh out this information, make sure to clarify what the compensation is for each position. Make it clear that an individual working in said position is an employee and not a contractor. Are they non-exempt, or are they working on an hourly basis? Will you pay the position on a weekly, biweekly, or monthly schedule?
Establishing these details upfront is helpful in ensuring that everyone is on the same page as each new employee settles in and begins contributing to your church.
Once you select someone to fill a role, such as a church administrator or worship director, get the information you need from them, too. Remember, you’re going to be reporting on their income and withholding payroll taxes over time. You want everything to be clear and in writing.
Use payroll documentation where necessary. For example, a W9 Form helps you capture basic information from an individual, such as their name, address, and tax ID. If you’re going to withhold federal income tax, you also need the W4 Form. You also want to collect information for payroll activities you might provide, such as bank information for direct deposit.
Consider what you need from each employee to manage their compensation over time. Then, get that information early in the onboarding process.
There are a few different ways you can go about tending to payroll duties as an organization. For instance, you can:
Manual payroll is generally a bad idea at this point. At the least, look for digital church payroll services that can help you stay accurate, up-to-date, and on track as you process each paycheck.
Once you’ve established your infrastructure, you’re ready to hire more employees. Just make sure to follow your church’s established payroll practices and keep track of everything as you go along.
Once you’ve created a clear job description, found an ideal candidate, and collected the necessary information during their onboarding, you can get your payroll into a normal cycle. Even then, though, there’s more you can do.
When discussing church payroll, it’s easy to get caught up in the government and reporting side of the equation. There’s so much pressure to handle payroll taxes, fill out the right forms, and tend to other tax-related elements correctly that it’s easy to miss out on other important things that factor into your church’s payroll.
With that in mind, let’s take a few minutes to look at some additional considerations that come with running a church’s payroll.
One thing worth investigating is tax breaks. While a church may not have to pay taxes as an entity, there are certain tax breaks that they can further tap into, especially when it comes to payroll.
Not all beneficial tax policies look the same, either. For instance, the ongoing push for a non-itemized charitable deduction is a development that churches can take advantage of if it passes.
Of course, that has less to do with payroll and more to do with tithes and offerings, but you get the point. Keep your finger on the pulse of tax compliance and deductions over time.
Tackling the complexities of properly hiring someone can make it easy to miss out on a critical question: how many employees should you have in the first place?
Just because you have the infrastructure to hire someone and handle their paperwork and compensation doesn’t mean you should sign someone on every time there’s an opportunity. Remember, you’re running a church. It may be a non-profit that isn’t focused on things like revenue growth and profitability, but it still has limited resources.
So, how many employees can (and should) you hire? Tradition dictates that most congregations hire employees at a 75:1 ratio against attendees. However, this is an arbitrary method that tends to be inflated in many cases. Regardless, it can be difficult to apply on a case-by-case basis. Church Salary even goes so far as to call it out as the single church hiring metric that it considers “the least normative for church staffing.”
The real answer when it comes to church staff size is that it depends on your situation. You can’t just look at a single thing, like growth rates or number of regular attendees and then justify each paid position you want to create. Instead, you need to look at your church’s employment needs and capabilities holistically. Factors to consider include:
If you want a formula, the full-time equivalent (FTE) is a better indicator of your hiring needs. This consists of adding up all of the work hours of your paid staff (including part-time employees) and then dividing the total by 40.
Take some time to calculate your current FTE. This gives you an indicator of how many people you currently have on staff. As your congregation grows or you have turnover in your staff, try to maintain your FTE.
By this point, it should be pretty clear that running payroll isn’t a cakewalk. Even in a church setting (you might even say, especially in a church setting), paying employees is a complicated and tricky activity.
If you’re a big enough church to hire an accountant as a full-time member of your staff, that can be a solution. Even so, often managing the payroll and accounting needs, even for a larger church, doesn’t require someone to give it their full-time attention, which means a full-timer can be a waste of resources.
Payroll software is enough support to solve the problem in some scenarios. It can create an infrastructure that is easier to manage, and forward-thinking software solutions can make certain tasks simpler.
If your church’s payroll and accounting needs are simply too difficult to handle in-house, you may want to outsource them. There are both national and local payroll services that can help manage your church’s accounting needs for a fraction of the cost of a full-time employee.
If you do outsource this part of your administrative duties, look for Church payroll companies. Having a faith focus is important when it comes to bookkeeping and providing financial advice.
At Chaney & Associates, we consider ourselves the accounting firm for the Church. Our team focuses on providing church-specific payroll and accounting services and software. We keep track of tax developments, fill out forms, oversee activity, and provide financial counsel — all of which is dedicated to and focused on churches.
If you’re going to outsource your church’s payroll or even your accounting in general, contact us. Together, we can explore the various options available depending on your church’s size, staff capabilities, and other needs.
Churches may not have the same tax concerns as other organizations. But they do have to manage payroll correctly. From paying your pastor to following payroll tax guidelines for the rest of your staff, make sure you’re taking your payroll responsibilities seriously.
A healthy payroll structure can positively serve your ministry. It empowers you, your staff, and your congregation to thrive as your church grows over time.
