New Tax Bill Affects Pastors and Churches

From his column God, Government and Me—Money in the Church

Congress passed a major tax bill on December 16. It was signed into law by the President the following day. Here is analysis of the provisions that will impact many pastors, other church staff and churches—including a significant change in payroll processing effective January 1, 2011.

Non-ministerial Social Security Taxes

For one year (2011), the FICA Social Security tax on employees is reduced from 6.2 percent to 4.2 percent on wages earned—up to $106,800. The Medicare rate remains 1.45 percent for 2011.

What does this mean for churches? The change in the law does not save any money for the church, but it does save dollars for employees. This rate change only applies to non-ministerial employees (read on for the impact on ministers). The change does not apply to the employer (church) FICA tax rate of 6.2 percent. So for 2011 only, a church will withhold 4.2 percent Social Security tax and 1.45 percent Medicare tax (total of 5.65 percent) from non-ministerial employees (up to $106,800 of compensation) and the church will pay 6.2 percent Social Security tax and 2.9 percent Medicare tax (there is no maximum threshold on the Medicare tax).

More good news: this Social Security rate reduction does not have to be repaid when church employees file their tax returns—this is a one-year savings with no repayment.

Example 1: Employee A receives $50,000 of FICA wages in 2011. A's FICA tax for 2011 is $2,825. This is $1,000 less than it would have been without the payroll tax reduction ($50,000 x .02).

Ministerial Social Security Taxes

The Self-Employment Contributions Act (SECA) imposes two taxes on self-employed individuals: a Social Security tax and a Medicare tax. These SECA taxes apply to net earnings from self-employment above a $400 minimum for the tax year. There is an annually adjusted ceiling limitation on the amount subject to Social Security ($106,800 for 2011), but no limit on the Medicare tax.

For 2011 only, the self-employed Social Security tax rate is reduced from 12.4 percent to 10.4 percent. This parallels the two-percentage-point reduction in the Social Security portion of the employee's FICA tax, from 6.2 percent to 4.2 percent.

So the SECA tax rate for 2011 on net earnings from self-employment up to $106,800 is 13.3 percent (10.4 Social Security tax and 2.9 percent Medicare tax).

Example 2: Taxpayer B has $50,000 of net earnings from self-employment in 2011. A's SECA tax for 2011 is $6,650 ($5,200 Social Security tax and $1,450 Medicare tax). This is $1,000 less than it would have been without the payroll tax reduction $50,000 x .02).

Another interesting point—the SECA tax deduction allowed on Line 27 of Form 1040 is not impacted by the reduction in the Social Security rate. For 2011, the one-half of self-employment deduction on Line 27 remains at 7.65 percent employment tax.

What to Do

Churches should make the following preparations:

  • Payroll processing for non-ministerial staff. Churches will need to change their payroll processing for non-ministerial employees effective January 1, 2011, to reflect the new combined Social Security and Medicare withholding rate of 5.65 percent (the old rate was 7.65 percent).
  • Voluntary withholding of income taxes for ministerial staff. Your church may have a voluntary arrangement with ministerial staff for federal income tax withholding. Many ministers have enough federal income tax withheld to cover their Social Security tax obligation. If so, ministerial staff may wish to decrease their federal income tax withholding as of January 1, 2011 since they will owe 2 percent less SECA tax for 2011 up to $106,800.

Dan Busby is a certified public accountant, president of the Evangelical Council for Financial Accountability (ECFA), and the author of the Zondervan Clergy Tax & Financial Guide.

Created on Monday, 10 January 2011