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Why It Pays to Outsource Your Payroll
Using an outsourced payroll solution is typically more efficient for a church than processing payroll internally. Leaving payroll to experts frees up hours that you can devote to other important ministries of your church. Whether it is your time, staff time, or a combination, chances are the hours could be better spent ministering to church members, improving community outreach, fine-tuning church operations or launching missions. Among the areas where outsourcing will save time are:
- Processing payroll
- Cutting and distributing paychecks
- Calculating and paying withholding and employment taxes
- Preparing and distributing W-2s and 1099s at year-end
- Handling employee payroll inquiries
Many church leaders underestimate the cost of processing payroll internally by failing to account for all hours spent and resources allocated to pay employees and maintain payroll paperwork. A thorough cost assessment usually proves that a church saves money by outsourcing the processing, tracking and filing of payroll documents. To assess your own internal payroll costs, consider:
- How much the time spent is actually worth: consider the cost of your time and the time of anyone who processes or “touches” payroll? Often, many people in a small church are involved in the various parts of payroll processing.
- What savings would outsourcing provide: since an outside provider can handle all the responsibilities involved in managing payroll and answering employee questions, a church can often eliminate or reallocate an internal payroll resource?
Calculating federal, state, and local employment taxes and filing payroll-related tax paperwork can be more than just a hassle. If it’s done incorrectly, your church may face penalties and even interest on money owed since the mistake was made. In fact, it is estimated that one in three churches receive a tax penalty costing over $800 each year. Outsourcing payroll does away with the risk of many of these costs and hassles because:
- An outsourced payroll provider calculates payroll taxes, based on its expertise and close tracking of regulation changes
- Monthly or quarterly employment tax reports are managed by the payroll service, ensuring they are submitted correctly and on time
- Payroll providers may assume penalties that come as a result of incorrect tax calculations
- End-of-year paperwork — such as W-2s and 1099s — are handled directly by the payroll provider, so they are sent out on time.
Frequently Asked Questions
Form W-9 is used by an organization to request the name, address, and Social Security number for an independent contractor who will be providing services to the organization. Another term for an independent contractor would be consultant or freelancer. There’s a distinction made between independent contractors and employees. They are treated differently in how their income is taxed and reported to the IRS.
All non-employee recipients of church funds (i.e. guest speakers, independent contractors) who receive $600.00 or more during the year must receive a Form 1099. The funds cannot be classified as non-taxable “love offerings”.
A general rule is that anyone who performs services for your church is your employee if you can control what will be done and how it will be done. The church should maintain an accurate and current record of employees. If the church pays an individual more than $100.00 during the year, with exception of the Clergy, then that person is an employee and Medicare and Social Security taxes (FICA) must be withheld and a Form W-2 must be issued at the end of the year. Churches must withhold the employee’s share and pay their matching share of FICA for non-clergy employees. Churches cannot classify non-clergy employees as self-employed to avoid paying FICA.
Form W-9 is used by an organization to request the name, address, and Social Security number for an independent contractor who will be providing services to the organization. Another term for an independent contractor would be consultant or freelancer. There’s a distinction made between independent contractors and employees. They are treated differently in how their income is taxed and reported to the IRS. All non-employee recipients of church funds (i.e. guest speakers, independent contractors) who receive $600.00 or more during the year must receive a Form 1099. The funds cannot be classified as non-taxable “love offerings”.
Furthermore, musicians are not independent contractors and their compensation should comply with federal regulations. If the church can control (1) who performs the work, (2) what will be done (the end result), and (3) when it will be done, then the person performing that job is an employee of the church.
If your church incorrectly classifies an individual as an independent contractor, it can be held liable for employment taxes for that worker, plus a penalty. Even worse, you can be liable for some of his taxes! An employee is to be paid using the system of a W-2, which includes withholdings for Social Security and Medicare taxes.