Federal Reporting Requirements for Churches 2012

Complying with Federal Payroll Tax Reporting Obligations

Step 1. Obtain an employer identification number (EIN) from the federal government if this has not been done.

This number must be recited on some of the returns listed below and is used to reconcile a church’s deposits of withheld taxes with the W-2 forms it issues to employees. The EIN is a nine-digit number that looks like this: 00-0246810. If your church does not have an EIN, you may apply for one online. Go to the IRS website at irs.gov for information.You may also apply for an EIN by calling 1-800-829-4933, or you can fax or mail Form SS-4 to the IRS.You should have only one EIN.

Key Point. An employer identification number is not a “tax exemption number” and has no relation to your nonprofit corporation status. It merely identifies you as an employer subject to tax withholding and reporting and ensures that your church receives proper credit for payments of withheld taxes.

Step 2. Determine whether each church worker is an employee or self-employed.

In some cases, it is difficult to determine whether a particular worker is an employee or is self-employed. If in doubt, churches should treat a worker as an employee, since substantial penalties can be assessed against a church for treating a worker as self-employed whom the IRS later reclassifies as an employee. In general, a self-employed worker is one who is not subject to the control of an employer with respect to how a job is to be done. Further, a self-employed person typically is engaged in a specific trade or business and offers his or her services to the general public.

The IRS and the courts have applied various tests to assist in classifying a worker as an employee or self-employed. Factors that tend to indicate employee status include the following:

The worker is required to follow an employer’s instructions regarding when, where, and how to work.
The worker receives “on-the-job” training from an experienced employee.
The worker is expected to perform the services personally, and not use a substitute.
The employer rather than the worker hires and pays any assistants.
The worker has a continuing working relationship with the employer.
The employer establishes set hours of work.l The worker is guaranteed a regular wage amount for an hourly, weekly, or other period of time.
The worker is expected to work full time.
The work is done on the employer’s premises.
The worker must submit regular oral or written reports to the employer.
The worker’s business expenses are reimbursed by the employer.
The employer furnishes the worker’s tools, supplies, and equipment.
The worker does not work for other employers.
The worker does not advertise his or her services to the general public.

Not all of these factors must be present for a worker to be an employee. But if most of them apply, the worker is an employee. Once again: If in doubt, treat the worker as an employee.

Key Point. For 2012, churches must withhold 28 percent of the compensation paid to a self- employed person who fails to provide his or her Social Security number to the church. This is referred to as “backup withholding” and is designed to promote the reporting of taxable income.

Key Point. Some fringe benefits are nontaxable only when received by employees. A common example is employer-paid medical insurance.

Step 3. Obtain the Social Security number for each worker.

After determining whether a worker is an employee or self-employed, you must obtain the worker’s Social Security number. A worker who does not have a Social Security number can obtain one by filing Form SS-5.This is a Social Security Administration form, not an IRS form. If a self-employed worker performs services for your church (and earns at least $600 for the year), but fails to provide you with his or her Social Security number, then the church is required by law to withhold a specified percentage of compensation as backup withholding. The backup withholding rate is 28 percent for 2012.

A self-employed person can stop backup withholding simply by providing the church with a correct Social Security number.

The church will need the correct number to complete the worker’s Form 1099-MISC (see page 11).

Churches can be penalized if the Social Security number they report on a Form 1099-MISC is incorrect, unless they have exercised “due diligence.” A church will be deemed to have exercised due diligence if it has self- employed persons provide their Social Security numbers using Form W-9. It is a good idea for churches to present self-employed workers (e.g., guest speakers, contract laborers) with a Form W-9, and to backup withhold unless the worker returns the form. The church should retain each Form W-9 to demonstrate its due diligence.

All taxes withheld through backup withholding must be reported to the IRS on Form 945.The Form 945 for 2011 must be filed with the IRS by January 31, 2012. However, if you made deposits on time in full payment of the taxes for the year, you may file the return by February 10, 2012.

Step 4. Have each employee complete a Form W-4.

These forms are used by employees to claim withholding allowances. A church will need to know how many withholding allowances each nonminister employee claims in order to withhold the correct amount of federal income tax. Ordained ministers need not file a Form W-4 unless they enter into a voluntary withholding arrangement with the church. A withholding allowance lowers the amount of tax that will be withheld from an employee’s wages.Allowances generally are available for the employee, the employee’s spouse, each of the employee’s dependents, and in some cases for itemized deductions.

Ask all new employees to give you a signed Form W-4 when they start work. If an employee does not complete such a form, then the church must treat the employee as a single person without any withholding allowances or exemptions. As an employer, you must put into effect any FormW-4 that replaces an existing certificate no later than the start of the first payroll period ending on or after the 30th day after the day on which you received the replacement Form W-4. Of course, you can put a Form W-4 into effect sooner, if you wish. Employers are not responsible for verifying the withholding allowances that employees claim.

TIP. The “withholding calculator” found on the IRS website (irs.gov) can help employees determine the proper amount of federal income tax withholding.Another useful resource, Publication 919 (How Do I Adjust My Tax Withholding?), is available on the IRS website.

Step 5. Compute each employee’s taxable wages.

The amount of taxes that a church should withhold from an employee’s wages depends on the amount of the employee’s wages and the information contained on his or her Form W-4. A church must determine the wages of each employee that are subject to withholding. Wages subject to federal withholding include pay given to an employee for service performed.The pay may be in cash or in other forms. Measure pay that is not in money (such as property) by its fair market value.Wages often include a number of items in addition to salary. (There is a comprehensive list of examples in Step 10.)

Step 6. Determine the amount of income tax to withhold from each employee’s wages.

The amount of federal income tax the employer should withhold from an employee’s wages may be computed in a number of ways. The most common methods are the wage bracket method and the percentage method.

Wage bracket method. Under the wage bracket method, the employer simply locates an employee’s taxable wages for the applicable payroll period (that is, weekly, biweekly, monthly) on the wage bracket withholding tables in IRS Publication 15 (“Circular E”), and determines the tax to be withheld by using the column headed by the number of withholding allowances claimed by the employee.You can obtain a copy of IRS Publication 15 at any IRS office by calling the IRS forms number (800-829-3676), or by downloading a copy from the IRS website (irs.gov).

Percentage method. Under the percentage method, the employer multiplies the value of one withholding allowance (derived from a table contained in Publication 15) by the number of allowances an employee claims on Form W-4, subtracts the total from the employee’s wages, and determines the amount to be withheld by using another table.

Recommendation. Be sure to obtain a new IRS Publication 15 (Circular E) in January of 2012. It will contain updated tables for computing the amount of income taxes to withhold from employees’ 2012 wages and other helpful information. Both of these methods are explained in detail in Publication 15. Each year, a church should obtain a copy of Publication 15 to ensure that the correct amount of taxes is being withheld.

Wages paid to a minister as compensation for ministerial services are exempt from income tax withholding. However, ministers who report their income taxes as employees can enter into a voluntary withholding arrangement with their church. Under such an arrangement, the church withholds federal income taxes from the minister’s wages in an amount specified by the minister. Some ministers find voluntary withholding attractive, since it avoids the additional work and discipline associated with the estimated tax procedure.

A minister who elects to enter into a voluntary withholding arrangement with his or her church need only file a completed IRS Form W-4 (Employee’s Withholding Allowance Certificate) with the church.The filing of this form is deemed to be a request for voluntary withholding.

Voluntary withholding arrangements may be terminated at any time by either the church or minister, or by mutual consent.

Ministers are always deemed to be self-employed for Social Security purposes with respect to services performed in the exercise of ministry. Therefore, a church whose minister elects voluntary withholding is only obligated to withhold the minister’s federal income taxes.The minister is still required to use the estimated tax procedure to report and prepay the self-employment tax (the Social Security tax on self-employed persons). However, ministers electing voluntary withholding can indicate on line 6 of Form W-4 that they want an additional amount of income taxes to be withheld from each pay period that will be sufficient to pay the estimated self-employment tax liability by the end of the year. This additional withholding of income taxes becomes a credit that can be applied against a minister’s self-employment taxes on his or her Form 1040. It is reported by the church as additional income taxes withheld on its quarterly Form 941.

Since any tax paid by voluntary withholding is deemed to be timely paid, a minister who pays self-employment taxes using this procedure will not be liable for any underpayment penalty (assuming that a sufficient amount of taxes are withheld).

Step 7. Withhold Social Security and Medicare taxes from nonminister employees’ wages.

Employees and employers each pay Social Security and Medicare taxes (together, these two kinds of taxes are called “FICA”, for Federal Insurance Contributions Act) equal to 7.65 percent of an employee’s wages.The 7.65 percent tax rate is comprised of two components: (1) a Medicare hospital insurance tax of 1.45 percent, and (2) an “old age, survivor and disability” (Social Security) tax of 6.2 percent. There is no maximum amount of wages subject to the Medicare tax. For 2012, the maximum wages subject to Social Security taxes (the 6.2 percent amount) is $110,100.

The Tax Relief Act of 2010 provided a temporary payroll tax and self-employment tax “holiday” during 2011 of two percentage points off the employee share of Social Security tax and the Social Security component of self- employment taxes.This meant that the employee’s share of Social Security taxes dropped from 6.2 to 4.2 percent of wages, and the Social Security component of self- employment taxes dropped from 12.4 to 10.4 percent of self-employment earnings for 2011.This reduction in taxes was enacted to stimulate the economy by increasing the take-home pay of millions of workers.

Late in 2011, Congress voted to extend for two months the reduced payroll tax rate that applied in 2011. The Temporary Payroll Tax Cut Continuation Act of 2011 extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through February 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.The reduced self-employment tax rate is also extended through February 29, 2012.

The IRS is advising employers to implement the new payroll tax rate as soon as possible in 2012 but not later than January 31, 2012. For any Social Security tax overwithheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

The Social Security tax rates for 2011 and 2012 are as follows:

Year	Tax on Employee	Tax on Employer	Combined Tax
2011	5.65%	7.65%	13.3%
2012	5.65%*	7.65%	13.3%

*Updates to this tax will be on the MMBB website

Key Point. Federal law allowed churches that had nonminister employees as of July 1984 to exempt themselves from the employer’s share of Social Security and Medicare taxes by filing a Form 8274 with the IRS by October 30, 1984. Many churches did so.The exemption was available only to those churches that were opposed for religious reasons to the payment of Social Security taxes.The effect of such an exemption is to treat all nonminister church employees as self-employed for Social Security purposes. Such employees must pay the self-employment tax (SECA) if they are paid $108.28 or more for the year. Churches hiring their first nonminister employee after 1984 have until the day before the due date for their first quarterly Form 941 to file the exemption application. Churches can revoke their exemption by filing a Form 941 accompanied by full payment of Social Security and Medicare taxes for that quarter. Many churches have done so, often inadvertently.

Step 8. The church must deposit the taxes it withholds.

Churches accumulate three kinds of federal payroll taxes:

income taxes withheld from employees’ wages,
the employees’ share of Social Security and Medicare taxes (withheld from employees’ wages), and
the employer’s share of Social Security and Medicare taxes.

Most employers must deposit payroll taxes on a monthly or semiweekly basis. An employer’s deposit status is determined by the total taxes reported in a four-quarter “lookback” period. For 2012, the lookback period will be July 1, 2010 through June 30, 2011.

Monthly depositor rule. Churches that reported payroll taxes of $50,000 or less in the lookback period will deposit their withheld taxes for 2012 on a monthly basis. Payroll taxes withheld during each calendar month, along with the employer’s share of FICA taxes, must be deposited by the 15th day of the following month.

Semiweekly depositor rule. Churches that reported payroll taxes of more than $50,000 in the lookback period must deposit their withheld taxes on a semiweekly basis. This means that for paydays falling on Wednesday, Thursday, or Friday, the payroll taxes must be deposited on or by the following Wednesday. For all other paydays, the payroll taxes must be deposited on the Friday following the payday.

Payment with return rule. If you accumulate less than a $2,500 tax liability during the quarter, you may make a payment with Form 941 instead of depositing monthly. See IRS Publication 15, Circular E, for more information.

Key Point. Beginning in 2011 all deposits must be made using the Electronic Federal Tax Payment System (EFTPS).There are penalties for depositing late, or for mailing payments directly to the IRS that are required to be deposited, unless you have reasonable cause for doing so.To enroll in EFTPS, call 800-555-4477, or to enroll online, visit eftps.gov. For general information about EFTPS, call 800-829-4933.

Step 9. All employers subject to income tax withholding, Social Security and Medicare taxes, or both, must file Form 941 quarterly.

Form 941 reports the number of employees, and the amount of Social Security and Medicare taxes and withheld income taxes that are payable. Form 941 is due on the last day of the month following the end of each calendar quarter.

Quarter	Ending	Due date of Form 941
1st (Jan. – Mar.)	March 31	April 30
2nd (April – June)	June 30	July 31
3rd (July – Sept.)	September 30	October 31
4th (Oct. – Dec.)	December 31	January 31

If any due date for filing shown in the table falls on a Saturday, Sunday, or legal holiday, you may file your return on the next business day.

Form 941 may be filed electronically. For more information, visit the IRS website at irs.gov/efile or call 1-866-255-0654.

Key Point. Form 944 replaces Form 941 for eligible small employers.The purpose of the new Form 944 is to reduce the burden on the smallest employers by allowing them to file their employment tax returns annually, and in most cases pay the taxes at the same time that they file.

Generally, you are eligible to file this form only if your payroll taxes for the year are less than $1,000. Do not file Form 944 unless the IRS has sent you a notice telling you to file it.

Step 10. Prepare a Form W-2 for every employee, including ministers employed by the church

For 2011. Starting in 2011, the healthcare reform legislation (Affordable Care Act) required employers to report the cost of coverage under an employer-sponsored group health plan on employees’W-2 forms.To allow employers more time to update their payroll systems, the IRS announced in late 2011 that it was making this reporting requirement optional for all employers in 2011. IRS Notice 2011-28, issued in 2011, provided further relief by making this requirement optional for smaller employers in calendar year 2012 (for W-2 forms filed in January of 2013). Small employers are defined for this purpose as those issuing fewer than 250 W-2 forms for the previous year.The IRS has further announced that this reporting requirement will not apply to small employers after 2012 until it publishes guidance “giving at least six months of advance notice of any change to the transition relief.”

The IRS has stressed that “there is nothing about the reporting requirement that causes or will cause excludable employer-provided health coverage to become taxable. The purpose of the reporting requirement is to provide employees useful and comparable consumer information on the cost of their health care coverage.”

Key Point. If your employees give their consent, you may be able to furnish Forms W-2 to your employees electronically. See IRS Publication 15-A for additional information. If you file your 2011 Forms W-2 with the Social Security Administration electronically, the due date is extended to April 2, 2012.For information on how to file electronically, call the SSA at 1-800-772-6270. You may file a limited number of Forms W-2 and W-3 online using the SSA website at ssa.gov/employer.The site also allows you to print out copies of the forms for filing with state or local governments, distribution to your employees, and for your records.

A church reports each employee’s taxable income and withheld income taxes as well as Social Security and Medicare taxes on Form W-2. A church should furnish copies B,C,and 2 of the 2011 FormW-2 to each employee by January 31, 2012. File Copy A with the Social Security Administration by February 29, 2012. Send all Copies A with Form W-3, Transmittal of Wage and Tax Statements. If you file electronically the due date is April 2, 2012.

Key Point. Be sure to add cents to all amounts. Make all dollar entries without a dollar sign and comma, but with a decimal point and cents. For example, $1,000 should read “1000.00.” Government scanning equipment assumes that the last two figures of any amount are cents. If you report $40,000 of income as “40000,” the scanning equipment will interpret this as 400.00 ($400)!

You may need some assistance with some of the boxes on the Form W-2. Consider the following:

Box a. Report the employee’s Social Security number. Insert “applied for” if an employee does not have a Social Security number but has applied for one. If you do not provide the correct employee name and Social Security number on Form W-2, you may owe a penalty unless you have reasonable cause.

Box b. Insert your church’s federal employer identification number (EIN).This is a nine-digit number that is assigned by the IRS. If you do not have one, you can obtain one by submitting a completed Form SS-4 to the IRS. Some churches have more than one EIN (for example, some churches that operate a private school have a number for both the church and the school). Be sure that the EIN listed on an employee’s Form W-2 is the one associated with the employee’s actual employer.

Box c. Enter your church’s name, address, and ZIP Code. This should be the same address reported on you Form 941.

Box d. You may use this box to identify individual W-2 forms.You are not required to use this box.

Box e. Enter the employee’s name.

Box f . Enter the employee’s address and ZIP Code.

Box 1. Report all wages paid to workers who are treated as employees for federal income tax reporting purposes.This includes:

Salary, bonuses, prizes, and awards.
Taxable fringe benefits (including cost of employer-provided group term life insurance coverage that exceeds $50,000).
The value of the personal use of an employer- provided car.
Most Christmas, birthday, anniversary, and other special occasion gifts paid by the church.
Business expense reimbursements paid under a nonaccountable plan (one that does not require substantiation of business expenses within a reasonable time, or does not require excess reimbursements to be returned to the church, or reimburses expenses by means of salary reductions). Also note that such reimbursements are subject to income tax and Social Security withholding if paid to nonminister employees.
If you reimburse employee travel expenses under an accountable plan using a per diem rate, include in Box 1 the amount by which your per diem rate reimbursements for the year exceed the IRS- approved per diem rates.Also note that such excess reimbursements are subject to income tax and Social Security withholding if paid to nonminister employees or ministers who have elected voluntary tax withholding. Use code L in Box 12 to report the amount equal to the IRS-approved rates.
If you reimburse employee travel expenses under an accountable plan using a standard mileage rate in excess of the IRS-approved rate (51 cents per mile for business miles driven during the first six months of 2011 and 55.5 cents per mile for business miles driven during the last six months of 2011) include in Box 1 the amount by which your mileage rate reimbursements for the year exceed the IRS-approved rates.Also note that such excess reimbursements are subject to income tax and Social Security withholding if paid to nonminister employees or ministers who have elected voluntary tax withholding. Use code L in Box 12 to report the amount equal to the IRS-approved rates.
Employer reimbursements of an employee’s nonqualified (nondeductible) moving expenses.
Any portion of a minister’s self-employment taxes paid by the church.
Amounts includable in income under a nonqualified deferred compensation plan because of Section 409A of the tax code.
Designated Roth contributions made under a Section 403(b) salary reduction agreement.
Church reimbursements of a spouse’s travel expenses incurred while accompanying a minister on a business trip represent income to the minister unless the spouse’s presence serves a legitimate business purpose and the spouse’s expenses are reimbursed under an accountable arrangement.
Churches that make a “below-market loan” to a minister of at least $10,000 create taxable income to the minister (some exceptions apply). A below market loan is a loan on which no interest is charged, or on which interest is charged at a rate below the applicable federal rate.
Churches that forgive a minister’s debt to the church create taxable income to the minister.
Severance pay.
Payment of a minister’s personal expenses by the church.
Employee contributions to a health savings account (HSA).
Employer contributions to an HSA if includable in the income of the employee.

For ministers who report their income taxes as employees, do not report the annual fair rental value of a parsonage and do not report any portion of a minister’s compensation that was designated (in advance) as a housing allowance by the church. Also, some contributions made to certain retirement plans out of an employee’s wages are not reported.

CAUTION. Taxable fringe benefits not reported as income in box 1 may constitute an automatic excess benefit transaction exposing the recipient and members of the church board to intermediate sanctions in the form of substantial excise taxes.

Key Point. Churches should not include in box 1 the annual fair rental value of a parsonage or a housing allowance provided to a minister as compensation for ministerial services.

Box 2. List all federal income taxes that you withheld from the employee’s wages. For all employees, the amounts reported in this box should correspond to the amount of withheld income taxes reported on your four 941 forms.

Box 3. Report an employee’s wages subject to the “Social Security” component (the 4.2 percent rate for 2011) of FICA taxes. Box 3 should not list more than the maximum wage base for the “Social Security” component of FICA taxes ($106,800 for 2011, and $110,100 for 2012). This box usually will be the same as Box 1, but not always. For example, certain retirement contributions are included in Box 3 that are not included in Box 1. To illustrate, contributions to a 403(b) plan by salary reduction agreement may be excludable from income and not reportable in Box 1, but they are subject to FICA taxes and accordingly they represent Social Security and Medicare wages for nonminister employees.

Key Point. Remember that ministers (including those who report their income taxes as employees) are self-employed for Social Security with respect to their ministerial services, and so they pay self- employment taxes rather than the employee’s share of Social Security and Medicare taxes.

Churches that filed a timely Form 8274 exempting themselves from the employer’s share of FICA taxes do not report the wages of nonminister employees in this box since such employees are considered self-employed for Social Security purposes.

Box 4. Report the “Social Security” component (4.2 percent in 2011) of FICA taxes that you withheld from the employee’s wages. As stated above, this tax is imposed on all wages up to a maximum of $106,800 for 2011 and $110,100 for 2012. Do not report the church’s portion (the “employer’s share”) of Social Security and Medicare taxes. Ministers who report their income taxes as employees are still treated as self-employed for Social Security purposes with respect to their ministerial services. For ministers, this box should be left blank.

For 2011. The Tax Relief and Jobs Creation Act of 2010 provided a payroll tax holiday for 2011 in the form of a two percentage point reduction in Social Security taxes. This meant that the employee’s share of Social Security taxes dropped from 6.2 percent to 4.2 percent of wages (the employer’s share was not affected), and self-employed workers’ Social Security tax dropped from 12.4 percent to 10.4 percent of self-employment earnings. Late in 2011 Congress voted to extend for two months the reduced payroll tax rate that applied in 2011.

Box 5. Report a nonminister employee’s current and deferred (if any) wages subject to the Medicare component (1.45 percent) of FICA taxes. This will be an employee’s entire wages regardless of amount. There is no ceiling. For most workers (those earning less than $106,800 in 2011 or $110,100 in 2012), Box 3 (for wages subject to the Social Security tax) and Box 5 (for wages subject to the Medicare tax) should show the same amount. However, if you paid more than $106,800 to a nonminister employee in 2011, Box 3 should show $106,800 and Box 5 should show the full amount of wages paid. This amount increases to $110,000 for 2012.

Box 6. Report the Medicare component (1.45 percent) of FICA taxes that you withheld from the nonminister employee’s wages.This tax is imposed on all wages, current and deferred (if any), regardless of amount.

Box 10. Show the total dependent care benefits under a dependent care assistance program (section 129) paid or incurred by you for your employee. Include the fair market value of employer-provided daycare facilities and amounts paid or incurred in a section 125 cafeteria plan. Report all amounts paid or incurred, including those in excess of the $5,000 exclusion. Include any amounts over $5,000 in Boxes 1, 3, and 5. For more information, see IRS Publication 15-B.

Box 11. Report the total amount you distributed to an employee under a nonqualified deferred compensation (NQDC) plan, including some rabbi trusts. As mentioned above, you should also have reported these distributions in Box 1. Unlike qualified plans, NQDC plans do not meet the qualification requirements for tax-favored status. NQDC plans include those arrangements traditionally viewed as deferring the receipt of current compensation, and include termination pay and some rabbi trusts.

If you did not make distributions this year, show deferrals (plus earnings) under a NQDC plan that became taxable for Social Security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture.Also report these amounts in Boxes 3 (up to the Social Security wage base) and 5. Do not report in Box 11 deferrals included in Boxes 3 or 5 and deferrals for current year services (such as those with no risk of forfeiture). Boxes 3 and 5 are used to report nonminister employees’ wages subject to Social Security and Medicare taxes, and are generally blank for ministers with respect to compensation received for ministerial services.

The purpose of Box 11 is for the Social Security Administration (SSA) to determine if any part of the amount reported in Box 1 or Boxes 3 or 5 was earned in a prior year.The SSA uses this information to verify that it has properly applied the social security earnings test and paid the correct amount of benefits.

If your church made distributions and is reporting any deferrals in Boxes 3 and 5, do not complete Box 11.

For additional information, see IRS Publication 15.

Box 12. Insert the appropriate code and dollar amount in this box. Insert the code letter followed by a space and then insert the dollar amount on the same line within the box. Do not enter more than three codes in this box. If more are needed, use another Form W-2. Use capital letters for the codes, and remember not to use dollar signs or commas. For example, to report a $3,000 contribution to a section 403(b) tax-sheltered annuity, you would report “E 3000.00” in this box. The codes are as follows:

A – This will not apply to church employees.
B – This will not apply to church employees.
C – You (the church) provided your employee with more than $50,000 of group term life insurance. Report the cost of coverage in excess of $50,000. It should also be included in Box 1 (and in Boxes 3 and 5 for nonminister employees). See page 12 for additional information.
D – Generally not applicable to churches.
E – The church made contributions to a 403(b) plan pursuant to a “salary reduction agreement” on behalf of the employee. Report the amount of the contributions. While this amount ordinarily is not reported in Box 1, it is included in Boxes 3 and 5 for nonminister employees since it is subject to Social Security and Medicare taxes with respect to such workers.
F – Generally not applicable to churches. G – Generally not applicable to churches. H – Generally not applicable to churches.
J – You (the church) are reporting sick pay. Show the amount of any sick pay that is not includable in the employee’s income because he or she contributed to the sick pay plan.
K – Generally not applicable to churches.
L – You (the church) reimbursed the employee for employee business expenses using the standard mileage
rate or the per diem rates, and the amount you reimbursed exceeds the amounts allowed under these methods. Enter code “L” in Box 12, followed by the amount of the reimbursements that equal the allowable standard mileage or per diem rates. Any excess should be included in Box 1. For nonminister employees, report the excess in Boxes 3 (up to the Social Security wage base) and 5 as well. Do not include any per diem or mileage allowance reimbursements for employee business expenses in Box 12 if the total reimbursements are less than or equal to the amount deemed substantiated under the IRS-approved standard mileage rate or per diem rates.
M, N – Generally not applicable to churches.
P – You (the church) paid qualified moving expense reimbursements directly to an employee. Report the amount of these reimbursements but only if they were made under a nonaccountable arrangement. Do not report reimbursements of qualified moving expenses that you paid directly to a third party on behalf of the employee (for example, to a moving company), or the employee under an accountable arrangement.
R – Report employer contributions to a medical savings account on behalf of the employee. Any portion that is not excluded from the employee’s income also should be included in Box 1.
S – Report employee salary reduction contributions to a SIMPLE (Savings Incentive Match Plan for Employees) retirement account. However, if the SIMPLE account is part of a 401(k) plan, use code D.
T – Report amounts paid (or expenses incurred) by an employer for qualified adoption expenses furnished to an employee under an adoption assistance program.
W—Report employer contributions to a health savings account (HSA). Include amounts the employee elected to contribute using a cafeteria plan.
Y— It is no longer necessary to report deferrals under a section 409A nonqualified deferred compensation plan in Box 12 using codeY.
Z—Report all amounts deferred (including earnings on deferrals) under a nonqualified deferred compensation plan that are included in income under section 409A of the tax code because the NQDC fails to satisfy the requirements of section 409A. Do not include amounts properly reported on Forms 1099-MISC or W-2 for a prior year. Also, do not include amounts considered to be subject to a substantial risk of forfeiture for purposes of section 409A.The amount reported in box 12 using code Z is also reported in box 1.
BB—Report designated Roth contributions under a section 403(b) salary reduction agreement. Do not use this code to report elective deferrals under code E.
DD—Starting in tax year 2011, the Affordable Care Act requires employers to report the cost of coverage
under an employer-sponsored group health plan. To give employers more time to update their payroll systems, IRS Notice 2010-69 made this requirement optional for all employers in 2011. IRS Notice 2011- 28 provided further relief for smaller employers filing fewer than 250 W-2 forms by making the reporting requirement optional for them for 2012 as well and continuing this optional treatment for smaller employers until further guidance is issued. The reporting under this provision is for information only; the amounts reported are not included in taxable wages and are not subject to new taxes.

Box 13. Check the appropriate box.

Statutory employee. Churches rarely if ever have statutory employees. These include certain drivers, insurance agents, and salespersons.
Retirement plan. Mark this checkbox if the employee was an active participant (for any part of the year) in any of the following: (1) a qualified pension, profit-sharing, or stock bonus plan described in section 401(a) (including a 401(k) plan); (2) an annuity contract or custodial account described in section 403(b); (3) a simplified employee pension (SEP) plan; or (4) a SIMPLE retirement account.
Third party sick pay. Churches generally will not check this box.

Box 14. This box is optional. Use it to provide information to the church employee. Some churches report a church-designated housing allowance in this box. The IRS uses Box 14 for this purpose in a comprehensive minister tax example in the current edition of its Publication 517, but this is not a requirement.

$ TAX TIP: The IRS has provided the following suggestions to reduce the discrepancies between amounts reported on Forms W-2, W-3, and Form 941: First, be sure the amounts on Form W-3 are the total amounts from Forms W-2. Second, reconcile Form W-3 with your four quarterly Forms 941 by comparing amounts reported for: (1) income tax withholding (Box 2). (2) Social Security and Medicare wages (Boxes 3, 5, and 7); (3) Social Security and Medicare taxes (Boxes 4 and 6).Amounts reported on FormsW-2,W-3,and 941 may not match for valid reasons. If they do not match, you should determine that the reasons are valid.

Step 11. Prepare a Form 1099-MISC for every self-employed person receiving nonemployee compensation of $600 or more.

Key Point. The Affordable Care Act, enacted by Congress in 2010, contained a provision eliminating the exemption of payments to corporations from the Form 1099-MISC reporting requirement for payments made after 2011. This provision ignited a firestorm of protest. Congress responded by enacting the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, which repealed the Form 1099-MISC requirement for payments made to corporations.

A Form 1099-MISC must be issued to any nonemployee who is paid self-employment earnings of at least $600 during any year. For compensation paid in 2011, furnish Copy B of this form to the recipient by January 31, 2012, and file Copy A with the IRS by February 28, 2012. If you file electronically, the due date for filing Copy A with the IRS is April 2, 2012. Form 1099-MISC is designed to induce self-employed persons to report their full taxable income.

Self-employment earnings include compensation paid to any individual other than an employee. Examples include ministers who report their income as self- employed for income tax reporting purposes, some part- time custodians, and certain self-employed persons who perform miscellaneous services for the church (plumbers, carpenters, lawn maintenance providers, etc.) and who are not incorporated.

To illustrate, if a guest speaker visited a church in 2011 and received compensation from the church in an amount of $600 or more (net of any travel expense reimbursement properly accounted for by the recipient), then the church must issue the person a Form 1099-MISC before February 1, 2012.

Exceptions apply. For example, a church need not issue a 1099-MISC to a corporation, or to a person who will be receiving a Form W-2 for services rendered to the church. Also, travel expense reimbursements paid to a self- employed person under an accountable reimbursement plan do not count toward the $600 figure.

To send the individual a properly completed Form 1099-MISC, the church will need to obtain his or her name, address, and Social Security number. Churches should obtain this information at the time of the person’s visit, since it often can be difficult to obtain the necessary information at a later date. IRS Form W-9 can be used to obtain this information. If a self-employed person who is paid $600 or more during the course of a year by a church refuses to provide a Social Security number, then the church is required to withhold a percentage of the person’s total compensation as “backup withholding.” The backup withholding rate for 2011 and 2012 is 28 percent.

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