By Karen Sansone
Late last year, Congress passed legislation that it hoped would stimulate the United States economy by decreasing the taxes that employers withhold from workers’ paychecks in 2011. This new tax benefit, billed as a “tax holiday,” replaces the old “Making Work Pay Credit.”
Essentially, this new benefit means a 2 percent decrease to the employee’s Social Security (SS) liability — but only for one year, 2011. The higher withholding of income tax caused from the repeal of the old credit should be largely offset by this new cut in the employee’s share of SS tax.
This sounds great, but what immediate impact do these changes have on the church and its workers?
- First, the new tax relief — decreasing the employees’ SS withholding rate from 6.2 percent to 4.2 percent — sent treasurers and payroll clerks scrambling to reprogram their payroll systems.
Realizing that employers may not have had enough time to hear about the change or complete reprogramming before their first 2011 pay periods, the Internal Revenue Service (IRS) has given them additional time to correct the over-withheld amount and adjust the workers’ next check. It is important to emphasize that this percentage decrease only applies to the employee’s share of SS tax, not the employer’s.
- Second, the repeal of the old Making Work Pay Credit caused the IRS to revise its income tax withholding tables for 2011. By now, employers should have already started using these new tables. If not, they should implement them immediately to avoid any consequences of under-withholding their employees’ income taxes. The new tax tables and most of the information employers need to implement all these payroll tax withholding changes are contained in IRS Notice 1036 and Publication 15 (found at www.irs.gov).
- Third, the new SS rate reduction provides equal relief to LCMS commissioned and ordained ministers who contribute to SS by paying self-employment taxes. As a parallel to FICA (Federal Insurance Contributions Act) taxes, the SS component of the minister’s self-employment tax is reduced from 12.4 percent to 10.4 percent. Some churches supplement their ministers’ SS tax liability by paying them a SS allowance. In those cases, the decrease to the minister’s tax liability also benefits the church, enabling it to reduce the amount of the allowance respectively.
- Fourth, the reduced SS rate has unfortunately caused more complexity for ministers in calculating the coordinating adjustment to gross income on IRS Form 1040. The old, simpler “one-half of self-employment tax” reduction to AGI (adjusted gross income) is replaced with the following formula: 59 percent of SS plus 50 percent of Medicare taxes paid.
So, is this really a “tax holiday?” It may be for some. However, rarely are gifts from Congress given freely anymore. For the complexity in which it was packaged, this is an example of one that may be more costly than it is worth.
This information applies to only one area of tax legislation enacted by Congress for 2011 and is not all-encompassing. It is not intended to replace consultation with a tax or financial professional.
Karen Sansone is director of tax and compliance with the Synod’s Accounting Department. For help with church or clergy-related tax questions, contact her via e-mail at firstname.lastname@example.org.
Posted Feb. 16, 2011