I can't believe this Payroll

[erchess]

Ok a really complicated payroll. The business is a church and its nonprofit status is in order now. It has one whole employee, the Pastor. The pastor chose not to have FIT or SIT withheld and it wouldn't have been appropriate to withhold Social Security or Medicare and the North Carolina Employment Security Commission tells me pastors are exempt from FUTA and SUTA so there's NOTHING TO WITHHOLD and therefore NOTHING TO SEND TO THE GOVERNMENT BUT PAPER? Am I overlooking something? I know the report is late but it was late when I got hired because well long story but the church thought he was a contractor and so did he.

Finally, since there is nothing to send in would the one annual report instead of quarterly reports suffice?

[Gretel]

Do you mean the 941/944 report? No, taxpayer has not a choice per se, IRS tells taxpayers which one to use. But if requirements are met T/P can ask IRS to switch him (to annually if he was quarterly). There is a deadline in spring either end in March or April to do this.

[erchess]

No Switching

as this is the first payroll report. But which form is appropriate for a payroll of just over 18K gross wages and no remittance due? Also am I overlooking something - is there a remittance due after all? The way I read TTB I can do 940 but I'd appreciate confirmation. My understanding is the form to use is based on annual remittance.

[JohnH]

I'd fill out a W-2 showing his total compensation in box 1. All other boxes on the W-2 are blank, although if he received a qualified Housing & Utilities allowance you can enter than info in Box 14 with the appropriate notation. (It isn't an required entry, but it is helpful to the tax preparer). If he had a H&U allowance, be sure it was properly documented in advance and that all those hoops have been jumped through.

I'd then fill out quartely reports for each of the 4 quarters, showing his compensation for each quarter on line 2 and the number of employees (1) on line 1. No other numeric entries need to be made on the 941. The total of line 2 for all 4 quarters should equal the amount in box 1 of the W-2.

Have the 941's signed and sent in. There won't be any penaties because there's no tax due, but chances are the IRS computers are sitting there waiting for those 941s to be filed and they'll eventually get grumpy if they're not fed.

Fill out a W-3 and send it to SSA with the Copy A of the W-2. It won't make any difference as far as SSA goes, but at least you'll have checked off all the things that need to be done.

[erchess]

TY John

I was afraid I might have to do quarterly but I wanted to do annual. Should they go in separate envelopes or together and is a cover letter necessary for the Quarterlies?

[Gretel]

Unless T/P received letter from IRS asking for 944, 941 is required we the option to switch to 944 to future years if requested by deadline.

[JohnH]

I was afraid I might have to do quarterly but I wanted to do annual. Should they go in separate envelopes or together and is a cover letter necessary for the Quarterlies?

I'd send them in separate envelopes, but no cover letter. IRS doesn't really care they are late when there's no tax due. They just want the check box marked in their computer that the returns have been filed. If they have questions, they know how to get in touch. I almost never provide information that isn't specifically required on any tax form of any kind.

This has nothing to do with your main question, but is this pastor getting a housing & utilities allowance, properly documented and paid separately? If not, then his church should immediately designate $8,000 or so of the $18,000 as H&U allowance (maybe much more, depending upon his actual expenses). It won't cost the church a penny more, but it could save the pastor some income taxes..

[Super Mom]

Maybe I'm crazy, but I was under the understanding that if no FIT, SS or Medicare is withheld, a church doesn't have to file 941 or 944. The Pastor gets a w-2 with his salary, housing allowance and utilities seperate. SS & Medicare are due on salary, housing allowance and utilities, salary is FIT, SS and Medicare. The church can help the pastor out by having the housing and utilities as high as possible and an accountable plan for expenses to come out of what you must report on the w-2 for salary. Salary in box 1 and housing and utilities listed in box 14. And of course the w-3.

[Burke]

. The church can help the pastor out by having the housing and utilities as high as possible and an accountable plan for expenses to come out of what you must report on the w-2 for salary. Salary in box 1 and housing and utilities listed in box 14. And of course the w-3.

It doesn't help the pastor to have the HSA allowance any higher than FRV of the home including utilities, since he will just have to add it back to wages on Line 7 as excess. It should approximate as nearly as possible the actual figure, so it is maximized, but it cannot be arbitrary.

[Super Mom]

Exactly, that's what I meant to say.

[JohnH]

Personally, I like the term "set the H&U allowance as high as possible". It is true that the H&U allowance can't exceed the FRV of the home, funished and with all utilities paid. But as a practical matter, I see it set too low much more often than seeing it set too high. That results in lost deductions for the pastor.

I think there are several reasons for this. Many pastors don't even understand exactly how it works, and they are sometimes timid about pushing to have it set "high", either out of concern for an audit or out of fear that somebody will complain. Church treasurers and committee members are sometimes afraid it will cause the IRS to look more closely at their books.

Also, it's a sad fact that there are many chuch members who are jealous that the pastor gets a tax break that they aren't entitled to. So they quibble about the H&U allowance when in fact they should demonstrate some grace in a situation where it costs the church absolutely nothing to do so. I've had this very conversation with various church members and finance committee members from time-to-time. I occasionally hear some people (even church treasurers) tossing around such things as "it can't exceed 50% of income" and other arbitrary limits, none of which are relevant.

So I'm in favor of saying to set it as high as possible and having a separate discussion about exactly what that means if anybody in the process cares to know the facts.

[erchess]

But do I have to file the payroll?

I will be ok setting the Housing Allowance and Accountable Plan for other expenses of ministry but do I or do I not have to file the payroll? The way I see it, it can't hurt.

[JohnH]

Supermom makes a good point, and I'm not sure if the 941 is actually required when the pastor is the only employee. This is a little unusual since even most small churches have someone on payroll (custodian, secretary, etc) as a part-time person.

However, I'm assuming there's an existing filing requirement for 941's for last year, and that can only be statisfied by actually sending in the quarterly reports. I wouldn't send them in with all zeros. May as well put the pastor's compensation on there, if for no other reason than to know that the sum of the 941's equals the figure entered on the W-3.

[erchess]

No existing requirement

At least for the 20 plus years the pastor has been there no payroll reports have been sent in nor has there been any request for any. The pastor knew nothing of a housing allowance or non profits or payrolls. He started out with a tax guy who retired and he followed what the tax guy did because the person he sold the business to said she did not know how to do a pastor's taxes. If she attempted to convey the message that they had been done wrong, he did not get that message. He reported the entire collections of the church on SCH C as his income and he reported the expenses (a larger sum) which included both the actual expenses of the church such as mortgage utilities religious education materials and so on as well as his expenditures such as his business cards and his mileage visiting members but not counting his trips to the church on Sundays because he knew that was commuting. He then deducted this loss from the income from his other job and went right on with no idea he was not doing things correctly until he got a letter about his 09 return. He was able to work out a deal where he paid what they were asking for and they agreed not to hassle him about prior years if they are satisfied with 10. For that he hired me.

I am convinced that this man is as honest as the day is long. He is not educated in matters of finance or accounting but he has always earned his way in the world as legally as he knew how and he lives by his faith which I respect deeply even though in some ways it differs from mine. He's got to be among the kindest and most transparent people I know.

So what says the body? I hesitate to file a non required report but obviously the last thing I need is a letter wanting to know where it is.

[Super Mom]

I've done alot of research on this over the years. My tax software has a 'clergy statement' which will parse out all of the expense where they go, and of course the SE for the SS and Medicare taxes. Definitely get "an accountable plan" set up for expenses approved by and in the minutes of the church, all of the details on expectation for this can easily be found at IRS.gov and there's probably other sources online. I typed up a paper that covered all the bases and had the secretary read it in a business meeting once a year and then voted on by the church. The expenses can then come directly out of the salary reported by the church on the w-2. I had a church and no 941 or 944 was required, but the pastor got a w-2 every year and a w-3 was filed, of course no withholdings or anyone else on payroll. 941's and 944's were never filed for many years. The clergy income statement in my software will also let you know if the parsonage/utilities is set right because you can put in actual. Check the rules on everything, I always do that before I finalize any returns for anything since the laws change so much! Good luck!