W-2s ... W-3s ... W-4s ... W-9s ... I-9s ... 1099s.
“If churches don’t pay taxes, why should we care about these forms?”
Every church has two personalities: one spiritual, the other civil. Much as we would like to, we cannot ignore the civil personality. That’s what “church compliance” is all about. To fail to “render unto Caesar” as required exposes the church to myriad penalties, the most significant of which can be loss of federal tax exempt status under IRC §501(c)(3). There are plenty of other painful — and costly — penalties, too.
Perhaps the most misunderstood distinction between these forms is the difference between W-2s and 1099s. Employees must have their compensation reported on Form W-2. Compensation for independent contractors and the self-employed is reported on Form 1099-MISC as non-employees. (We’ll discuss “independent contractors” next month.) Pastors occupy a unique position in the tax code: they may be employees and self-employed simultaneously, and are exempt from income tax and FICA withholding. Pastors should receive a W-2 instead of a 1099-MISC.
The church or its payroll service must file Form W-3 with the Social Security Administration along with Copy A of each W-2 issued. W-3s should be filed electronically on the SSA.gov website, and there are substantial per employee monetary penalties for late filings or failures to file. E-filing requires a one-time “Business Services Online” login registration, which should be done long before the annual filing deadline in January.
W-4s and I-9s are required of all newly hired employees, and W-4s should be replaced annually (W-4s identify exemptions from income tax withholding). Employers are supposed to reject “frivolous” W-4s, such as an unmarried person who claims excessive exemptions in order to avoid income tax withholding.
The I-9 is a Customs and Immigration Service form that identifies a person’s legal right to work in the US, and is required of both citizens and non-citizens alike. A church’s failure to obtain an I-9 and verify the documentation required is a serious offense. Churches cannot lawfully employ or compensate any person who fails to submit an I-9. Falsifying an I-9 is a criminal offense, and officers and directors of the church are subject to criminal and civil penalties for non-compliance.
Form W-9 is a “Request for Taxpayer Information.” Churches should obtain a W-9 from every vendor or person the church could pay $600 or more in a calendar year. The church must provide a 1099-MISC to each unincorporated vendor it has paid $600 or more for services rendered in the year and file a copy of the 1099 with the IRS. If there is a “mismatch” in the Taxpayer ID Number, the church could be notified and required to deduct “backup withholding” from the vendor’s future payments, until the problem is corrected by the taxpayer.
Send questions about tax compliance to firstname.lastname@example.org, or call Max Herr at 559-256-0858.