Posted by Christina Bell, CPA
Social Security and Medicare taxes are collected under the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA). Many people refer to contributions to Social Security and Medicare as either FICA or SE taxes. Employers and employees equally split the current 15.3% cost of Social Security and Medicare so that each party pays 7.65%. This is referred to as the payment of FICA. Self-employed taxpayers pay the full 15.3% themselves and often refer to this is as the payment of SE, or self-employment taxes.
Churches and qualified church-controlled organizations must pay FICA for employees (with the exception of ministers who are always considered self-employed for Social Security purposes and must pay SE taxes on their ministerial earnings) unless the organization has elected to exempt itself. The term “qualified church-controlled organization” means any church-controlled Section 501(c)(3) tax-exempt organization, other than an organization that:
1) Offers goods, services, or facilities for sale, other than on an incidental basis, to the general public at other than a nominal charge that is substantially less than the cost of providing such goods, services, or facilities, and
2) Normally receives more than 25 percent of its support from the sum of governmental sources and receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in activities that are not unrelated trades or businesses.
In order for churches and qualified church-controlled organizations to become exempt from paying the employer share of FICA, the organization must file Form 8274, Certification by Churches and Qualified Church-Controlled Organizations Electing Exemption from Employer Social Security and Medicare Taxes with the Internal Revenue Service (IRS). It is important to note that very specific timing rules apply to filing Form 8274. Form 8274 must be filed before the first date on which a quarterly employment tax return (Form 941) would otherwise be due from the organization. The organization may make the election only if it is opposed for religious reasons to the payment of FICA taxes.
The election can be revoked by the IRS if the organization fails to file Form W-2, Wage and Tax Statement, for two years.
Once the election is made, the organization will no longer be subject to the employer share of FICA on wages disbursed to its employees as they have shifted the burden of FICA to their employees. The organization’s employees now must pay self-employment tax on the wages received. As such, employees of the organization must attach Schedule SE (Form 1040), Self-Employment Tax, to their income tax return.
Organizations who have received exemption from FICA may give their employees a Social Security “allowance” to help them pay their self-employment taxes; however, this allowance is considered extra income and, therefore, employees must report this allowance as income for federal income tax purposes and also for self-employment tax purposes. This is also the case for ministers, who are always treated as self-employed individuals, even if the organization is exempt from FICA. In rare cases ministers can exempt themselves from paying their self-employment tax by meeting strict IRS guidelines.
If your organization is not sure it’s handling FICA and SE issues correctly, we’d be more than happy to answer your questions. Additionally, Publication 15-A from the IRS is a great resource.