Some churches state that they are opposed to paying FICA taxes on employees for religious reasons. If the church feels strongly about these taxes, they are able to elect exemption from the employer portion of the Social Security tax. Here are a few important considerations before filing Form 8274 and enacting the exemption:
– Employees affected by the church’s exemption are required to pay the full amount of FICA, in essence a self-employment tax on the income on their personal tax return. (This applies to income of $108.28 or more for the tax year, and excludes business expense deductions.)
– Individuals affected by this election are considered employees for all other purposes, including federal income tax withholding. The church must continue to file Form 941 or 944 to report the wages covered by the exemption and the federal income tax withholding.
– The exemption takes effect when the next quarterly employment tax is due; it’s not pro-rated.
– The exemption can be revoked if the church fails to file Form W-2 for two years in a row, and fails to report requested information to the IRS. Then, the amount due would include the previous two-year period.
Qualified church-controlled organizations may also apply for the exemptions who also claim religious reasons for abstaining from the tax. Such organizations have a 501(c)(3) and are controlled by churches, but do not receive more than 25% of support from a combination of governmental sources and sales of goods or services that are unrelated business income. They also do not regularly offer goods, services or facilities for sale for more than a nominal charge. The Qualified church-controlled organization must meet both tests in order to qualify for the exemption.