Penalties for an Incorrect Form W-2

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Compensation & Payroll

Q: What is the risk if a church fails to properly capture and report all income on the pastor’s W-2?

A: It’s very important to make sure income is reported properly and all required payroll forms are complete and timely, including the IRS Form W-2.

The IRS has significant fines and penalties for underreporting income and these penalties can directly affect the employee, the church and the church leaders.

For example, failure to properly report taxable income on the Form W-2 could have significant consequences for the employee if the employee also fails to report the income. Besides the unpaid taxes, the employee faces a 25% penalty and a 200% excise tax.

For the church, a failure to properly report income and withhold taxes can result in a penalty equal to 100% of the taxes not withheld or deposited. The penalty can be assessed against the organization or its officers. Similarly, a failure to file a timely Form W-2 will result in a $50, $110, or $290 penalty, based on the number of days late.

Church leaders are also subject to penalties. Organizational leaders, including board members, can face a 20% penalty up to $20,000, for failing to properly report income and withhold taxes. If the failure to withhold or deposit payroll taxes is willful, the officer or employee responsible can be charged with a felony, fines, and face up to 5 years’ imprisonment.

For more information on this topic, read Preventing Payroll Problems: Part 2.

These percentages are not meant to be prescriptive, but comparing your church activity to these averages may be helpful or insightful.

Here are some additional ideas to consider as you develop and review your budget:

  • Seek counsel within your network of pastors who may be in a similar sized church or face similar socio-economic factors. Even if your church doesn’t fit precisely into the same model as another church, the comparison of where your church is on staffing levels, debt, facility expenses, number of individuals being served, etc., can be extremely valuable in helping you establish an appropriate budget for your church.
  • Consider your mission and vision for the church. Create a budget that reflects those priorities. For example, if the church has a vision to reach young families, more funds may be allocated to developing family-friendly environments, programs, and outreach opportunities.
  • Consult experienced members within your church for help. Find businessmen and -women within your church who create and execute budgets as part of their daily job. They will have expertise that will be invaluable to you.
  • Lastly, the IRS requires compensation provided to ministers to be reasonable. As you create your budget and review compensation packages, one way to determine reasonableness is to consult independent compensation surveys for comparison. Christianity Today has a great compensation tool for churches.  You can find that at churchsalary.com.

The Southern Baptist Convention also publishes a compensation survey that is freely available on their website.

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