By Julie Nance
The end of the year is extremely stressful for the church treasurer. They have giving statements to prepare as well as income reporting documents. The most confusing document to complete is the Form W-2.
In the church setting, there are employees of two different statuses: ministerial and non-ministerial. The non-ministerial employees have FICA taxes (Social Security and Medicare) withheld, while ministerial employees do not. This is the most common error on ministerial Form W-2.
To help in the completion of both Forms W-2, follow the steps below:
*Pre-tax deductions: The most common pre-tax deductions that church employees will encounter include, but are not limited to:
• Code E—Elective deferrals under a section 403(b) salary reduction agreement. This is the amount the employee wishes to have withheld and deposited in a 403(b) pension plan. This amount is not included in Box 1.
• Code W—Employer contributions to a health savings account. This amount can reflect both the church’s and the employee’s portion.
• Code DD—Cost of employer-sponsored health coverage. Use this code to report the cost of employer-sponsored health coverage. The amount reported with Code DD is not taxable. Even though churches will normally have fewer employees than is required to use this code, the IRS recommends that all employers report any portion they are paying towards an employee’s health coverage. This is an information gathering tool for the IRS.
** Total wages may be different from the salary listed in Box 1. If the employee is having wages withheld for a 403(b) pension plan or for health savings account purposes, these would not be included in Box 1; however, they must be added back into the salary to properly calculate Social Security and Medicare withholdings.
In 2012, the employee’s portion of Social Security and Medicare was 4.2%. In 2013, the withholding percentage reverted back to 6.2%. It is essential that this change be reflected on the employee’s 2013 Form W-2.
If a minister elects not to have federal income taxes or state and local taxes withheld from their income, the minister should still receive a Form W-2 with wages minus housing allowance being reported in Box 1 and the housing allowance being listed in Box 14. It is optional as to whether or not housing allowance is reported in Box 14. However, it greatly benefits the minister to have it appear on the Form W-2, because not all tax preparers are aware that they need to include the housing allowance when calculating the self-employment tax on the minister’s tax return.
If you need assistance completing your pastor(s)’s Form W-2, please contact Dr. Julie A. Nance at firstname.lastname@example.org or 502-432-7004.
Dr. Julie A. Nance serves as executive editor for ABC’s of Church Management and owner of Nance Tax Services. She has been providing the church with expert council on issues relating to church administration for over sixteen years. Julie can be reached at email@example.com or 502-432-7004.