Church Tax Tips Related to Payroll or Compensation
WatersEdge is dedicated to supporting local churches by providing expert guidance on tax-related issues and helping navigate with ease the financial complexities churches face. We currently serve more than 290 churches through our accounting, bookkeeping, payroll, and contribution tracking services.
This article is another in a series where we will share some of those frequently asked questions, followed by clear and practical answers to help answer questions your church might have.
A common question churches often ask relates to payroll/compensation.
Q. I have a question about state payroll taxes for our pastor and janitor. Our church’s previous treasurer informed me that the church was not required to pay Arkansas state payroll taxes. I would like to know if that information is accurate but also what further steps, if any, does our church need to take?
A. Churches are not required to withhold state income tax from minister’s wages. A pastor can request voluntary withholding by completing an Arkansas Form AR4EC (state W-4) or make quarterly estimated tax payments directly to the state. For non-ministerial positions, such as a janitor, the church is considered the employer and is responsible for withholding Arkansas state income tax from wages and remitting those taxes to the Arkansas Department of Finance and Administration (DFA). To do this, the church must register for a Withholding Wage Tax Account through the Arkansas Taxpayer Access Point (ATAP) at atap.arkansas.gov. The employee must complete Arkansas’s withholding certificate (Form AR4EC) in order to set their state tax withholding elections.
Q: I have an employee who is now on Medicare, and I need to reimburse him for his premiums. Our past business administrator would reimburse him by adding it to his paycheck, but the employee is being taxed for that. Is there a way to reimburse the employee without it being taxed?
A. If the church has fewer than 20 employees and already offers a group health plan with minimum value, they may reimburse active employees enrolled in Medicare Part A and Part B or Part D for those premiums. The arrangement must be integrated with the employer’s group plan and limited to Medicare Part B/D and Medigap premiums. The employer may not incentivize Medicare enrollment or discourage group coverage – doing so would violate Medicare Secondary Payer rules. If the church does not already offer a group health plan, you will need to implement either a Qualified Small Employer HRA or an Individual Coverage HRA to be able to reimburse the premiums as a tax-free benefit.
Q. There is a young student attending a Christian university in our state who is also a member of our church. Our pastor and youth minister would like to provide her with a paid internship during the summer. My initial thought was that any payment would have to be handled through our payroll. One of the suggestions from our youth minister was to give $500 for her to the matching scholarship available through the university. Can you provide some guidance on how this scenario should be handled?
A. Internship roles in the church can absolutely be unpaid, volunteer positions. However, if you make it a paid internship, they should be treated as employees. Even if it’s an unpaid position, it’s not recommended to tie it to the university’s scholarship. Do you have a policy that clearly defines scholarship qualifications? If so, and this intern meets those qualifications, you can issue the scholarship following the summer. If you do have a policy and the intern doesn’t meet the requirements (membership, etc.), then you would need to revise the policy in order to grant the scholarship. If you don’t have a policy, you can award the scholarship, but best practice is to define qualifications in a policy.
WatersEdge monitors and responds to emails with questions just like these. If you have a lingering question your church needs help navigating, please contact us at [email protected].