Church Leaders May Be Liable
for Unpaid Payroll Taxes
- Joshua M. Cantwell, CPA, MBA, CFM,
CMA
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INTRODUCTION
Churches are often referred to as tax-exempt organizations;
however, it is a misnomer to say a church does not pay taxes.
Churches typically are required to pay many types of taxes,
including but not limited to a variety of payroll taxes, sales
taxes, property taxes on non-worship facilities, and even Unrelated
Business Income Taxes (UBIT) paid on activities that are similar to
those carried on by commercial, taxable entities. The only taxes
that churches are generally exempt from paying are federal and state
income taxes on their profits, some employer-paid payroll taxes such
as Unemployment and the Employment Training Tax (ETT), and property
taxes on worship facilities. This article focuses on a church’s
obligation to pay federal payroll taxes and the personal liability
that church leaders may face if their church fails to properly
withhold and pay federal payroll taxes.
WITHOLDING BASICS
All employers, including churches, must pay federal payroll taxes.
California withholding rules are similar to federal rules. Internal
Revenue Code Section 6672 mandates an employer to withhold federal
income taxes and social security taxes from employees’ wages. An
employer is considered to be a “trust agent” for the employee,
meaning that the money withheld by the employer is held in trust for
the employee until the funds are paid to the IRS. Employees are
given a credit against their tax liability for taxes withheld
whether the employer remits the funds to the government or not. The
IRS cannot collect this tax from the employee even if the employer
does not pay the tax to the government. This means that the IRS may
look to other responsible person to pay the employer’s payroll taxes
if the employer fails to do so.
CHURCH LEADERS WHO WILLFULLY FAIL TO PAY PAYROLL TAXES MAY BE
PENALIZED
When an employer fails to pay payroll taxes due the IRS, Section
6672 of the Internal Revenue Code subjects all “responsible persons”
to liability for an amount equal to the amount of the taxes due.
Section 6672 imposes the penalty on anyone who is required to
collect, administer and pay over the tax and who willfully fails to
do so. In the case of a church, responsible persons could include
the pastor, board members, treasurer, controller, etc. If a person
has sufficient responsibility it does not matter whether he actually
made the decision not to pay the taxes. The test is whether the
person had the power to pay the taxes.
To be liable under Section 6672, the person must meet two
requirements: (1) He must be a “responsible person” and (2) He must
“willfully” fail to pay over the taxes due. The IRS has defined
“willfulness” to be a voluntary, conscious, and intentional refusal
to withhold taxes. In order to assess a penalty, the IRS is not
compelled to prove that the individual refusing to withhold
appropriate taxes did so with a bad motive or evil intent.
Church pastor, board member, treasurer, and controller; this message
is for you. Whether you are a paid employee or simply volunteering
your services: IF PAYROLL IS WITHIN THE SCOPE OF YOUR
RESPONSIBILITIES, YOU MAY BE PERSONALLY LIABLE FOR THE CHURCH’S
FAILURE TO WITHHOLD AND REMIT PAYROLL TAXES. It is extremely
important, not only for the church itself, but for you personally,
that all withholdings and remittances are done properly.
PRACTICAL CONSIDERATIONS
- Consider hiring an outside
payroll service provider to share the responsibility for
complying with withholding rules. Remember, though, that even
if a church outsources its payroll function, the ultimate
responsibility for withholding taxes still resides with the
church and its responsible persons. Most outside payroll
service providers disclaim any liability for withholding and
paying the correct taxes; instead, they only claim
responsibility for properly following the churches’
instructions regarding what to withhold and making sure that
all payroll tax returns are processed in a timely manner.
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- Have a CPA with church
experience review your payroll function annually from top to
bottom. The IRS takes an aggressive stance against those whom
it deems responsible for failing to pay taxes. While the IRS
must establish that a person was both under a duty to collect
and willfully failed to pay withholding taxes in order to
establish personal liability, individuals who consider
themselves innocent bystanders are often found liable.
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- Finally, and most importantly,
even if you are a pastor or church leader whose role and
duties are primarily spiritual or pastoral, with financial
reports and church administration delegated to others, you owe
it to your church, staff, and even yourself as a potentially
“responsible person” to communicate to your board and
responsible staff how critical it is that the payroll taxes
are handled properly.
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Click here to
review the text of IRC §6672
Should you have any questions, please don’t hesitate to call the
Sozo Consulting hotline at 650.906.7272 or send an
email.
We are here to serve and protect you.
*CA State Income Tax withholding is also
required. But for purposes of this article, only Federal
withholdings will be addressed directly. In most cases, CA
withholding rules are very similar to those detailed within this
article.
| Protect the Church is sponsored
by Christian attorneys and CPA's to provide periodic updates of the laws and
legal and accounting issues of general interest to religious organizations.
This article is not to be construed as specific legal advice or as a
substitute for legal counsel regarding your case. Any ideas or opinions
expressed herein should not be implemented without consulting an attorney or
CPA familiar with your situation. To learn more about legal and accounting
resources for ministries log onto our website at
www.protectthechurch.org. If you have a specific legal issue
or problem, you may contact Sharonrose Cannistraci, Esq. at 408.297.5400
ext. 206 or via e-mail. If you have a tax
or financial question, you may contact Joshua at his consulting firm
Sozo Consulting at
650.906.7272. |
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