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Court Ruling Could Change Payroll Tax Requirements for Religious Institutions

As religious congregations attend worship services, the unique payroll tax and HR requirements for clergy and staff may be the furthest thing from their minds. However, away from the pulpit, church leaders wrestle with issues such as whether clergy are self-employed or part of the payroll, how to accurately calculate estimated quarterly taxes and even if the definition of “clergy” is met as it relates to tax reporting.

Religious leaders across the country are looking for solutions to help navigate through these payroll tax issues so they can avoid penalties, save time and money, and focus attention on the spiritual well-being of their members.

Recent Ruling Targets Clergy

A major issue facing religious institutions today arose from a lawsuit that called into question the way payroll taxes are reported for clergy. A November 2013 ruling by U.S. District Court Judge Barbara Crabb stated that the practice of offering clergy a tax-free housing allowance was unconstitutional. More than 44,000 ministers, rabbis, priests, imams and others nationwide could be affected by future rulings. Additionally, religious leaders are concerned that if such cases become more prevalent, turnover will increase, as clergy would experience a reduction in take-home pay.

Eliminating the housing allowance also would lead to changes in the way clergy are required to file under a dual tax status. Rev. Richard Nugent, church staff finances director of the Unitarian Universalist Association, predicts religious leaders could call on Congress to change laws that require clergy to file with the IRS as an employee, in lieu of filing Social Security and Medicare as self-employed. Filing as self-employed means a person must pay the entire 15.3 percent FICA tax on his or her own. Changing this law would help offset the cost of eliminating no-cost or tax-shelter allowances for housing to clergy.

The federal government officially appealed Crabb’s decision in January; the ruling has remained during the appeals process.

Finding Solutions

Paycom helps religious institutions meet their unique needs by staying current on payroll tax laws, sorting out the details of properly filing taxes and providing solutions for saving both time and money.

Our system helps users benefit from cost savings by combining payroll and HR functions into one application, eliminating the need to purchase and maintain multiple systems and licenses. This online, real-time system is also highly efficient, allowing staff members to make changes, run reports and process payroll from wherever they are, whenever they want.

In short, Paycom can help religious institutions get back to what matters most: their congregations.