Planting Space

Churches must be very careful in setting up payroll for their employees. There are four primary types of church employees (ministers exempt from social security, ministers who are not exempt, non-ministerial staff, and independent contractors). Each type of employee is requires different pay calculations and different tax reporting. Church planters, as well as all churches, must be careful when setting up payroll. You have several options for setting up a payroll system.

• Outsource everything. The advantage is the service provider takes care of all administrative requirements including writing checks, filing taxes, reporting new employees, etc. Minimal effort is required by the church planter. Automated payroll is however expensive, especially if there are only a few employees. Before choosing a provider, check references with another church or two to ensure they are doing ministerial payroll correctly.
• In house processing with outsourced administration. There are some services (e.g. Quicken, Costco Member Services, etc), that offer semi-automated payroll processing. The church still processes the payroll locally but most of the administration of filing required taxes, etc is automated.
• In house using a manual process. Payroll is managed on the church’s computer, and they administer pay locally. Under this option, the Church Planter must write monthly checks, make monthly federal payroll tax deposits at a local bank, send monthly state payroll taxes, file quarterly 941 forms, issue year end W2 and W3 forms, and file year end state tax forms. Although payroll is straightforward once it is understood, it can be a intimidating to learn (especially with housing allowance, social security exemptions, etc.). This option saves money but puts all the responsibility on the church.
• Provided by Sponsoring or Supporting Organization - One of your sponsoring or supporting organizations may be willing to process your payroll in their system. Check to find out.

I recommend new churches to pay an accountant or payroll company who is familiar with ministerial taxes to handle payroll processing whenever financially possible.

Free tip: Whether you do your own payroll or not, the Church & Clergy Tax Guide is an invaluable guide for churches and has a great explanation on this topic.

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