Tax Talk: What Your Ministry Should Know

Tax Talk: What Your Ministry Should Know

“Our church doesn’t want to get involved in all of the paperwork of payroll reporting so we just issue a 1099-MISC form to the church secretary, the church custodian, and the Christian school teachers each year and let them handle their own taxes.” That statement is not as rare as it should be.  The law does not exempt churches from payroll tax withholding just because the paperwork is bothersome.

Section 6672 of the Internal Revenue Code codifies a 100% penalty for any person who is required to collect, account for, and pay over federal income and/or FICA taxes and who willfully fails to collect, account for, and pay over these taxes.  In other words, the penalty equals the amount of unpaid taxes.  If an audit determines that $50,000 in taxes should have been withheld and deposited with the IRS, the penalty will be $50,000. 

To be assessed the penalty you must be responsible and willful in failing to pay over payroll taxes.  Who is a “responsible person” in a church setting?  The treasurer, the senior pastor, and board members may all be potentially liable.  The primary test is whether the person has the ability to exercise independent judgment as to the conduct of the financial affairs of the organization.  A second test is whether the person has the authority to sign checks for the organization.

In determining who the responsible persons of the church are the IRS will ask who are the officers and board members; who has authority to hire or fire employees; who determines which creditors get paid; who signs the payroll tax returns; and who makes the federal tax deposits?  No one factor is determinative.  A bookkeeper who simply carries out the instructions of the pastor or treasurer will not be considered a responsible person.  A responsible person cannot avoid liability by delegating his authority to another.  Liability applies to all responsible persons, and not just the most responsible person.  That means that the IRS may assess the penalty against one responsible person or against more than one responsible person.

“Willful” under IRC 6672 does not require a bad or fraudulent intent.  It means that the reason for not paying the taxes was not accidental.  It was intentional, deliberate, knowing, or even reckless (indifferent to the requirements of the law). 

For example, if a board member knows that payroll taxes are not being paid (e.g. because employees are treated as self-employed) and does nothing, that is willfulness.  A board member who receives periodic financial statements that indicate that there is not enough cash flow to pay payroll taxes and does not inquire as to whether they are being paid is willful.  A pastor who directs that creditors be paid rather than tax deposits being made is willful.  A treasurer who prepares payroll tax returns but does not make the proper tax deposits because otherwise there is not enough money to pay the employees what they have earned is willful. An all too common situation is when a Christian school experiences a drop in enrollment and a subsequent loss of tuition. The school administrator tells the board and the board decides to pay the employees and creditors and not pay the payroll taxes.  The goal is to keep the school open long enough to recover from its “tailspin.”  Despite the noble motive of keeping the school open, the decision of the board is willful.

To avoid the 100% penalty IRC 6672 make sure that all of the church workers are properly classified, that all employees complete W-4 forms, and that all income and FICA tax deposits are made on a timely basis.




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