When it comes to preparing taxes, there are a few important things to note when filing tax forms for clergy and church employees. We’ve compiled a list of answers to common W-2 questions typically received around this time of year. We hope you find this information helpful in the midst of tax-filing season!
Clergy compensation and benefits are reportable on IRS Form W-2, not on the IRS Form 1099. Churches that report clergy as independent contractors may not provide qualified tax-free health coverage and other retirement benefits without inclusion as additional taxable compensation. Clergy income is reported in Box 1 of the W-2 with any voluntary federal tax withholding reported in Box 2. Because clergy are not subject to Social Security and Medicare taxes, Boxes 3 through 8 should be left blank. The housing allowance should not be included in the amount reported in Box 1 but should be reported in Box 14 (Other) and designated as Housing.
Social Security and Medicare taxes should be withheld and remitted for church employees who do not qualify as clergy. These tax amounts should be reported in Boxes 3 through 6 of the W-2, and along with any amounts reported in Box 2, reconcile with the total of the quarterly amounts reported on IRS Form 941. Churches do not have the option of treating clergy as regular employees for reporting Social Security and Medicare taxes.
403(b) contributions made by clergy and other church employees are reported in Box 12 with Code E for pre-tax contributions and Code BB for after-tax Roth contributions. The matching church contribution is not included in the amount reported in Box 12.
Health premiums paid by the church are reported in Box 12 with Code DD. For churches participating in the Alliance Benefits Health Plan, a portion of the health premium is reported separately as a Health Savings Account (HSA) contribution in Box 12 with Code W. Employee-only coverage through Alliance Benefits includes a $1,008 HSA annual contribution, and other coverages include a $2,004 HSA annual contribution.
The combined total of the employer contributions to an HSA and employee contributions made through a payroll cafeteria plan should be reported in Box 12 with Code W. For 2019, the HSA contribution limits are $3,500 for employees with single coverage and $7,000 for employees with family coverage. For those who are age 55 or older, these limits are increased by $1,000.
The Evangelical Council for Financial Accountability (ECFA) is hosting two upcoming webinars titled Church Reporting Made Easy and Ministers’ Taxes Made Easy. For more information and to register, click here.
Church Reporting Made Easy – January 23, 2020
Description: Having a thorough understanding of the various filings that churches are required to make early in 2020 for the 2019 year is so important for church financial administrators. This webinar, led by two of the authors of the popular annual Zondervan Church and Nonprofit Tax & Financial Guide, will help church leaders understand each of their key filing responsibilities. Church Reporting Made Easy can save you time and avoid penalties and interest caused by misfiling of forms with the IRS.
Ministers’ Taxes Made Easy – February 13, 2020
Description: We invite you to join this special webinar led by coauthors of the popular annual Zondervan Minister’s Tax & Financial Guide. Dan Busby and Michael Martin from ECFA will help you understand new issues for 2019 tax returns, along with important assistance in tax planning for 2020. This information can save costly errors and help you file correct returns for 2019.
Eddie Swanson serves as the Assistant Treasurer/Controller of The C&MA as well as the Treasurer of Harvest Downtown Church located in Colorado Springs, CO. He has worked at the National Office since August 15, 2001, and is a key resource for Alliance churches and Alliance Benefits relating to general and complex tax inquiries.