Correctly Implement Payroll, Withholding and Forms
It is critical to have the correct understanding and the appropriate software to accurately set up and track all the details and nuances related to employee and employer contributions, withholdings and tax deposits. For example, pastors are self-employed for Social Security purposes, while being considered employees for federal income tax. Also, pastors are exempt from having federal tax withheld but may elect to pay their federal tax through conventional withholding anyway. It is important for congregations and pastors to know these laws and to agree about who is doing what.
For withheld income tax and contributions to Social Security and Medicare, there are rules about when congregations need to deposit these taxes and summarize this activity (quarterly, using Form 941). Failure to make timely deposits at the federal and state levels can lead to significant fines and penalties. Rules are also in place for reporting wages and withholding to individuals on W-2 and 1099 forms at the end of the year.
With all these requirements, either outsourcing the job to a payroll services company or automating the process through payroll software is the way to go. These services also provide access to payroll experts that are more knowledgeable about the legal intricacies. Payroll software and services also allow for direct deposit.