Self-Employment Contributions tax & Fed & SSA

[nbccji]

Hello Experts,
I got a terrifying heart stopping letter from the Social Security Admin, it stated that my W3 and W2's from 2012 did not match amount submitted to IRS..(which means 2013 that i already sent out to everyone is incorrect too). I thought everything was set up correctly but after researching I am now more confused than ever... I discovered Pastor's have self employment tax on what I'm not sure, are only taxed Federally and for State on Salary Wages, and then Housing which I thought was not taxed at all is actually supposed to be taxed for Social Security and Medicare. I read somewhere in one of the 5 IRS publications that Pastors/Ministers are considered "Employees" by the IRS and "Self-Employed" by the SSA and Medicare .... If I have been doing this wrong all this time am I going to THE Big-House? Is the Pastor??!! Will the Pastor now owe thousands of dollars in back taxes? Our CPA hasn't mentioned anything but she only sees the Inc & Exp reports and balance sheets and payroll liability reports, not actual W2's & W3's... I need to update payroll and want to be sure I got it right before it gets any worse. So, is this correct: For the pastor's salary only Fed and State tax, for Housing select Social Security and Medicare, and what about Self-Employment tax... how do I help him calculate that? Can we create an account to pay monthly like the other taxes & deduct/pay them out of his pay? (I read a post B.J. Worth's Tax Guide for Minister's is good & will get it). When this is set up do I rerun and reprint a W2/W3 for the pastor and government and state? Thank you thank you, katie

[Matt]

Katie,

I know getting a letter like this is very distressing. However, please do not worry about you or your Pastor going to THE big house over this. The biggest challenge you face is working to get this situation corrected, as this will take a bit of time and effort to do.

First, let me explain what the tax laws are regarding wages and housing allowances for ordained ministers.

The majority of ordained ministers are considered employees for Federal income tax purposes, but Self-Employed for Social Security purposes. What this means is that the salary that an ordained minister receives is subject to Federal income taxes AND self-employment taxes. However, it is NOT subject to Social Security and Medicare taxes. In addition, the housing allowance that an ordained minister receives is ONLY subject to the self-employment tax. This also means that the majority of ordained ministers should receive a W-2, not a 1099.

Here's how the Payroll records need to be set up for an ordained minister in PowerChurch, assuming that they are considered an employee for Federal income tax purposes.

When setting up the income Pay Item for the Pastor's salary, under "Tax Options", you need to click the down arrow and select "More Options" (I am assuming you are using version 11). Under "More Options" where it says "This income is taxable by what type of taxes" ONLY select the Federal income tax and the State income tax (if your state has an income tax). Do NOT select the Social Security and Medicare taxes.

Then, when setting up the income Pay Item for the Pastor's Housing Allowance, under "Tax Options", you need to click the down arrow and select "Housing Allowance". PowerChurch is set up to automatically exclude the Housing Allowance from being picked up as wages in Box 2 on the W-2 and also put the Housing Allowance amount in Box 14 on the W-2 when this tax option is selected.

Once the Pastor's Pay Items have been set up correctly here's how you need to set up the Pastor's pay record in Maintain List of Employees.

The ONLY pay items you set up for the Pastor are the ones for the Pastor's Salary and the Pastor's Housing Allowance. You do NOT add pay items for the employee and employer share of the Social Security and Medicare taxes. You also do NOT add pay items for the Federal or State income tax withholding, unless the Pastor has specifically requested that these taxes be withheld and has given you a Form W-4. The reason is that ordained ministers are exempt from the Federal income tax withholding requirements.

Now that you know how the Payroll records need to be set up for the Pastor's Salary and Housing Allowance here is what you will need to do to clean all of this up.

You will need to recalculate how the Pastor's Salary and Housing Allowance should have been reported on the W-2 for each year. Then, you will need to file amended 941 returns (941-X) for each quarter where the wages and/or tax withholdings were reported incorrectly. Since you got a letter for 2012 and you already know that 2013 is incorrect then you will need to submit a total of 8 amended 941's (4 for each year). You will also need to submit amended W-2's (Form W-2c) for both 2012 and 2013 for the affected employees.

In preparing the amended 941's and W-2's for 2012 and 2013 you will also need to do a reconciliation to ensure that the totals on the 4 amended 941's for each year agree with the totals of all the W-2's (original and amended) for that year. The reason you got this letter is because this reconciliation was out of balance for 2012.

The Pastor (and each person receiving an amended W-2) will then need to file amended Federal and Sate income tax returns for 2012 (and 2013 if they have already filed for 2013).

Without actually seeing your records I do not know what the financial impacts of making these corrections will be on the Pastor and your church.

I would recommend that you enlist the help of your CPA in getting this situation resolved.

[nbccji]

Matt thank you so much, you're an night - owl angel! I will absolutely have our CPA's help. I'm hoping it will be a wash or benefit our Pastor since he paid ss & med (FICA) maybe he will be refunded.
And, at least it's only 2 years, he was part time prior & we just did extra withholdings.

So there is nothing I need to do regarding SECA? One last item, the Pastor asked a CPA that is a member of our congregation about the Housing allowance; she said he needed to file a Schedule SE (he said his tax person hasn't mentioned it & she does about 150 ministers).

These questions seem way out of the realm of simple bookkeeping (?) but if the Lord put me here I'm going to stand firm through Him & learn all I can. Might even watch a couple of webinars on the irs.gov site.

Can't thank you enough & appreciate all of the forum experts that have helped me with PowerChurch. Katie

[JohnDMeyers]

We have an on-going situation with the IRS which boils down to this: Our bookkeeper did not check the box on line 6 on the 941 form that we do not withhold FICA for our employees.

The letter from the IRS was overly nasty. It stated that we owed $29,000 in back taxes and penalties. (which we did not). The letter could have said, "we see you forgot to check the box on line 6, please do so and re-file your return. Thank you." But that's apparently not how they operate.

This was for 2010. We made the same error in 2011 and 2012. We are told that the IRS is just now processing 2011's returns.

The nasty letters continue to come. Each with a penalty of more than $20,000. Each one threatens to put a lien on our bank accounts. Again, that's apparently how they operate.

The 2010 issue was resolved by sending amended forms with the check box checked and not one penny was paid on the penalty. In fact, one IRS person said they put big amounts there just to make sure you call them.

My take-away is this.

Don't panic over those nasty IRS letters. Do the right thing, file your amended forms, and it will be ok.

[Matt]

Katie,

You are very welcome! To answer your question, there is nothing you need to do regarding the Self-Employment tax. The Self-Employment tax is computed on Schedule SE when the Pastor prepares his Federal income tax return.

The foremost authority I have found regarding tax law for Pastors and churches is the Church and Clergy Tax Guide by Richard Hammar. I would highly recommend that you obtain this book. It is updated annually to stay up to date with the tax law changes and it is the most comprehensive and thorough resource on the tax laws affecting Pastors and churches that I think you will find (over 700 pages!). You can find this book at http://store.churchlawtodaystore.com.

[nbccji]

Thank you both! I will say though that I have talked to the IRS several times in the past couple of years and have had very nice people that were patient and helpful, thank You God. This is the first letter I have gotten from the SSA and it was not threatening but just getting any letter from either the IRS or SSA is scary but thanks to you both I have been able to sleep and have a starting point on how to fix it.

Katie