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Do You Have to Pay Estimated Taxes?
By Raul Rivera
Pastor Walker recently took over the senior pastor position for New Beginnings Church. The church had been growing and was now ready to give him a salary for the first time. This was the first paid position Pastor Walker had accepted as a minister. The board of directors voted and approved his salary and housing allowance. But now he was not sure what to do next.
Should the church hire a payroll company? Or should he just get a check? Did Pastor Walker have to consider paying taxes during next tax season? Or was he entirely exempt from taxes?
If you have ever been in Pastor Walker’s situation, you know that understanding minister’s taxes can be rather confusing.
Consider, for instance, that ministers are exempt from income tax withholding. This is great news, but this also leaves many ministers thinking they are exempt from paying income taxes altogether. But this is simply not true.
What this actually means is that ministers pay their taxes in estimated quarterly installments. However, it is not clear if estimated quarterly payments are optional.
So do many ministers really have to pay estimated taxes?
Why estimated tax payments can be confusing
If you have ever held a non-ministerial job, then you know that each time you get paid taxes are withheld, and come every January you receive your Form W-2.
When ministers transition into being employed by their church, the tendency is to assume that their pay and withholding of taxes should be handled in a similar manner. In reality, the pay and withholding of taxes for ministers should not be treated the same as non-ministerial employees.
In part, this is due to the fact that ministers have what is known as a dual-tax status.
Pastors are employees for the purposes of federal income tax, and, at the same time, they are considered self-employed for Social Security tax purposes.
As a result, pastors are responsible for withholding and making quarterly estimated tax payments unless they have entered into a voluntary withholding agreement with the church.
The IRS Tax Guide for Churches & Religious Organizations (Publication 1828) states the following:
“Unlike other exempt organizations or businesses, a church isn’t required to withhold tax from the compensation it pays to its duly ordained, commissioned or licensed ministers for performing services in the exercise of their ministry. An employee minister may, however, enter into a voluntary withholding agreement with the church by completing IRS Form W-4, Employee’s Withholding Allowance Certificate.”
The bottom line is that if you, as a minister, have not entered into a voluntary withholding agreement with your church, then you must make quarterly estimated tax payments.
If you are unsure how to determine how much your quarterly estimated tax payments will be, we can help! Our Minister’s Withholding Plan was created specifically to give ministers a better understanding of how they should report and pay their taxes! If you need help call 877-494-4655.
How to make quarterly estimated tax payments
If you choose not to enter into a voluntary withholding agreement, the IRS provides several ways for you to make your quarterly estimated tax payments.
1. Pay online
The IRS offers several electronic payment options via www.irs.gov/payments. Consider the following online payment options:
- IRS Direct Pay - This option is for online transfers directly from your checking or savings account. There is no fee to use this option.
- Pay by Card - Use this option to pay by debit or credit card. A convenience fee is charged by service providers for this option.
- Electronic Fund Withdrawal (EFW) - This is an integrated e-file/e-pay option offered when filing your federal taxes electronically using tax preparation software, through a tax professional, or the IRS.
- Online Payment Agreement - If you cannot pay in full by the due date of your tax return, you can apply for an online monthly installment agreement. Once you complete the online process, you will receive immediate notification of whether or not your agreement has been approved. A user fee is charged.
- IRS2Go - This is a mobile application of the IRS. By downloading the application to your mobile device, you can access Direct Pay or Pay By Card.
2. Pay by phone
Paying by phone is another option you can use to pay your quarterly estimated taxes.
You can call one of the three service providers of the IRS, but take note that each service provider charges a fee.
- WorldPay US, Inc - You can reach them at 1-844-729-8298 or on the web at www.payUSAtax.com
- Official Payments - You can reach them at 1-888-872-9829 or on the web at www.officialpayments.com
- Link2Gov Corporation - You can reach them at 1-888-729-1040 or on the web at https://www.pay1040.com
3. Electronic Federal Tax Payment System® (EFTPS)
To use EFTPA, you must be enrolled either online or have an enrollment form mailed to you. To make a payment using EFTPS, call 1-800-555-4477 (English) or 1-800-244-4829 (Español). You can learn more about EFPTS at www.eftps.gov.
4. Use the Estimated Tax Payment Voucher
You can mail in your quarterly estimated taxes by using the estimated tax payment vouchers of Form 1040-ES. Take note that there is a separate estimated tax payment voucher for each due date.
Form 1040-ES provides an estimated tax worksheet to help you determine your quarterly estimated tax payments.
However, with our Minister’s Withholding Service, we can walk through this process with you and let you know how much your quarterly estimated tax payments will be.
3 things to know about voluntary withholding
Perhaps you are the kind of person who would prefer not to worry about withholding your own taxes. As previously mentioned, you can enter into a voluntary withholding agreement with your church which would allow the church to withhold your taxes.
If you are interested in establishing a voluntary withholding agreement, here are three things you need to know.
1. Initiate voluntary withholding
As a minister, you can elect to enter into a voluntary withholding agreement with your church by simply completing Form W-4. Filing this form with your church is considered to be a request for voluntary withholding.
2. The duration of a voluntary withholding agreement
It is important to note that you or your church can terminate the voluntary withholding agreement at any time. Furthermore, as the minister, you can specify that the voluntary withholding agreement end on a specific date.
As the employer, it is important for churches to note that a voluntary withholding agreement with the pastor(s) will affect the filing of the church’s quarterly Form 941.
3. What to do about self-employment taxes
For Social Security purposes ministers are always considered self-employed.
This means that unless you have “opted-out” of self-employment taxes, you are responsible for withholding and paying the full 15.3% self-employment tax.
When a minister enters into a voluntary withholding agreement with the church, the church is only obligated to withhold the minister’s federal income tax. In this instance, the minister would still be required to withhold and pay his or her own self-employment tax.
However, ministers who have a voluntary withholding agreement can indicate on line 6 of Form W-4 an additional amount of income to be withheld that would be a sufficient amount to pay his or her estimated self-employment liability.
The church would report this amount as additional income tax withheld on its quarterly Form 941, and the minister would report the excess withheld income on line 64 of his/her Form 1040. This amount would be applied to all taxes reported on Form 1040, including self-employment tax.
Part of our compensation agreement service offers a voluntary withholding agreement. If this is something you would like to implement, call us at 770-638-3444.
Be confident in your new role
After walking through this information with Pastor Walker, he was much more informed and confident about his role as the new senior pastor.
Understanding the options you have as a minister is key to ensuring that you are reporting your income correctly. After all, as a pastor or minister, you want to lead your congregation with confidence. And understanding your unique situation as a minister should not be a hinderance to you.
If you need help with calculating your estimated quarterly tax payments or want to make sure your compensation agreement includes a voluntary withholding agreement, call us at 877-494-4655.