Employer FICA is Illegal for Ordained Ministers

Last week a colleague at another church and I had an email exchange that might be of value to you. The question was whether ordained ministers should have the employer's portion FICA paid by their church (NO!). The underlying issue is bigger than that - too many times church leaders tell their staff to do things which are illegal because those leaders are not familiar with tax laws. When the staff attempts to inform the pastor of the laws, the pastor instructs the administrator to do it his (the pastor's) way regardless of the law. This puts the administrator between a rock (his boss and paycheck) and a hard place (the IRS and the law). 

Pastors, please listen to your administrators. That's why you hired them; that's what you pay them for. Ask them for information rather than telling them what they should do. You may not like their answer - remember, they are just the messenger. Take your frustration to Congress, please, not on your staff.

I do not know what my colleague will do but this person is in a very difficult position. Unfortunately, I hear about situations like this at least once a month.

Lead On!

Steve

Question:

It’s been a long time since I consulted you! I have a problem and need your expertise. One of our ordained staff was approved to designate part of her salary as her housing allowance yet wants to continue to be treated as an employee. Does that mean we pay our share of her FICA (Social Security and Medicare)? Any other things we need to know regarding this? How do I prepare the W-4 toward the end of the year when in the first eight months, her whole salary was treated as taxable income but beginning September, we exclude that housing allowance? I need help and guidance from you. Thanks!

Response:

Great question and I got an answer for you – I heard it this past summer at the church administrators’ annual meeting.

If a person is ordained, then that person cannot be treated like an employee for Social Security Administration purposes. That person is self-employed. Thus, the non-profit can never pay any employer FICA and Medicare for that person. The ordained minister bears the burden of both the employee and employer portions of FICA and Medicare.

Housing allowance can still be taken out of the salary. However, the housing allowance portion is only prospective from the time it was approved by the governing body. That means that if the minister was on staff on 1/1/2011 but that the housing allowance was approved by the board on August 1, 2011, the housing allowance is only effective from August 1 through December 12 – it is not retro-active to January 1.

One last thing this attorney said, if you are made to do something that you disagree with, then do not sign the W-3 – get someone higher up to sign it because if the IRS or SSA come to your office, you can direct them to the person who signed it, not you.

Thanks for contacting me and I hope I answered your questions. If not, I’ll try again. Let me know.

Question

Thanks once again for your prompt reply. My concern is that it’s my boss I’m dealing with. He wants me to treat one of our staff with a housing allowance but to continue to withhold and pay the necessary taxes and SS & Med tax for the employee. I’m confused as to what I should do.

Response

You’re in a very difficult place – you need an “outside expert” to explain the legal side to your boss. There are several ways to go about this.

1       * Gather data from reputable sources such as Richard Hammar’s Church & Clergy Tax Guide. It’s published annually and costs $40 – the whole book is over 700 pages long. It is the “Bible” for church administrators on legal and tax matters. If you don’t have it, please get it ASAP.

2       * Get a person to write up an opinion to give to your DOM. This person can be someone like me, a nationally-known expert (see http://nonprofit-tax.com/), or the best scenario is the firm that does your audit.

3       * Get someone to visit with your boss to explain the situation and the consequences – fines, penalties, loss of 501(c)(3) status, and, if it is bad enough, jail time.

What he is asking you to do is clearly illegal. He needs to be educated about this. The laws have been the same since 1984. I don’t know how old your boss is, but he may be thinking of pre-1984 laws or he may have heard of pre-1984 laws from some colleagues.

Let me know if I can help you in this situation.

Response

Thanks for the advice and I will pray which action to take. I’ll study the things you listed.





Lead On!
Steve

Budget Percentages

Below is a recent email exchange with a friend of mine (names omitted).

Email Question:

I have a church that wants help examining their budget allocations by categories: missions, personnel, programs, etc. They want to look at similar size churches with similar size budgets. They want to know whether their allocations are in line for their type of church. Basically, they want to benchmark their distributions. They suspect that their personnel budget at 67% is high, but the church doesn't know any different. And they want to know why they do not have any money to do actual programs.

Do you have access to any sort of database like that from any of your connections?

My response:

1. No, I don’t know of any authoritative written source of ratios. Sorry.
2. My experience tells me the following makes commons sense

a.      Personnel

                                                              i.      Range of 40-60% of undesignated receipts

                                                            ii.      Ideally about 50%

                                                          iii.      This includes the ministers and administrative assistants – people key to accomplishing the goals, mission and vision of the church

b.      Facilities

                                                              i.      Range of 15-25% of undesignated receipts

                                                            ii.      Ideally about 20%

                                                          iii.      This includes facilities staff costs

                                                          iv.      The percentage will be higher if a church has debt; lower if there is no or low debt.

                                                            v.      A church should spend annually about 2% of the cost of replacing the building on maintenance. If you have a building worth $1 million, then spend about $20,000 on maintenance. The rest of the percentage will be spent on salaries, utilities, cleaning supplies, commercial property insurance, capital reserve funds, etc.

c.      Programming

                                                              i.      Range of 20-35% of undesignated receipts

                                                            ii.      Ideally about 30%

                                                          iii.      This includes education, worship, missions, funds budgeted for allocation to outside organizations (Cooperative Program/Missions), etc.

That being said, these percentages go wild in various types of churches. New, emerging, highly growing churches have very high salary percentages and loads of debt. Older, established churches have paid off their debt so their programming is high and salaries have stabilized in the 50-60% range. While there is no “one size fits all” there are well-grounded rules that will help a church stay out of fiscal trouble. Hope this helps.

Lead On!
Steve