Is it Against the Law to Pay Church Workers Without Keeping Records?

Paying church personnel "under the table," or off the books without letting the tax authorities know about their income, is a dangerous practice that can have major legal and financial ramifications. You might think it's a good idea to pay your employees under the table to save money or make payroll easier, but it's usually against the law and might put your church's tax-exempt status at risk, lead to expensive audits, and hurt your reputation.

A lot of people want to know if it's against the law to pay church staff with cash. This article answers that question. We'll talk about what the IRS wants, the risks of not following the regulations, and the best ways to keep your ministry safe and legal when it comes to paying church workers.

What Payments "Under the Table" Are

When you pay someone "under the table," you give them money without telling the IRS or any other government authority. This means:

• No withholding of income tax
• No FICA taxes taken out for Medicare and Social Security
• No payments for unemployment insurance
• There are no formal records of salary.

These kinds of payments break both state and federal laws and help you avoid paying taxes.

Is it Against the Law to Give Church Personnel Cash?

In almost all circumstances, it is against the law to pay workers "under the table." Churches have to follow the same rules about taxes and workers as other businesses. Here they are:

• Filling out IRS papers correctly with salaries, such as W-2 for workers
• Taking out and sending in payroll taxes
• When the law says you have to, you have to give pay stubs or income statements.
• Keeping good records of work

If the church and its officials don't follow the rules, they could go to jail, pay fines, or face other sanctions.

Why Some Churches Might Want to Use Cash

Churches, especially smaller ones or those that are just starting out, might think about paying people off the books because:

• Problems with financial flow or a tight budget
• Wanting to avoid paying taxes on income and other costs
• Doing work for free for family or friends
• Not knowing the rules around payroll

But these short-term "savings" almost never make up for the risks in the long term.

The Legal Risks of Paying Someone Under the Table

1. The IRS can audit you and punish you. The IRS looks into unreported wages and can charge big fines, back taxes, and interest. Churches could lose their tax-exempt status if they don't follow the rules.
2. Not respecting the laws for work in your state. States have standards about hours and compensation, and paying off the books goes against the rules about keeping records, paying the minimum wage, and working extra hours. States can punish people and make them pay back their wages.
3. Claims for unemployment and workers' comp. People who work "under the table" can still be able to collect benefits. The church could lose its insurance and be sued if it doesn't report its income.
4. Damage to the Church's Image. When there are legal problems, people may not trust each other as much or provide money, which can make the ministry less effective.

What Churches Need to Do to Pay Their Employees

Churches should undertake the following to stay on the right side of the law:

• Make sure you correctly identify workers as employees or independent contractors.
• Get the W-4 and other tax papers you need for employees.
• The IRS and your state's tax department can help you with your taxes.
• Send in taxes on your income, Social Security, Medicare, and unemployment.
• Keep detailed records of payroll and hand out pay stubs.
• Give your workers W-2 forms every year.

Things to Think About When You Pay Pastors

Pastors often have to follow certain tax rules, such as those that apply to housing allowances and taxes on self-employment. They still need to have their pay documented, reported, and processed through payroll to stay in compliance.

How to Pay Church Employees Legally

1. Hire an expert to handle your payroll. Third-party payroll providers do an excellent job of taking care of the payroll for churches and other nonprofits, including ensuring everything is in order and paying taxes.
2. Keep good records. Keep a record of all your income, hours worked, benefits, and tax returns.
3. Teach Leaders. Make sure that the church leaders know how to pay their workers so they don't break the law.
4. Make sure that your regulations are clear. Write down the rules for how you pay personnel, classify them, and deal with their payments.
5. Get guidance from lawyers and tax experts. Talk to those who know a lot about church law and tax compliance about how you handle payroll on a regular basis.

When There Are Volunteers or Independent Contractors Involved

There are people who work for a church who don't get paid. Independent contractors have to pay different taxes than volunteers, who usually don't get paid. It's very important to appropriately classify personnel because making a mistake could cost a lot of money.

How Church Law and Strategy Can Help

Regan is in charge of Church Law and Strategy, which helps churches with things like following the law, payroll, and job categorization. Audits and one-on-one counsel are included with the FOUNDATION PLUS PLAN and our other subscription options to help your church avoid making expensive mistakes.

A List to Assist You Not Pay Individuals Off the Books

• Put all of the staff personnel in the right groups.
• Report and keep track of the right amount of payroll taxes.
• Use payroll software or services to make sure everything is correct.
• Keep track of all the hours worked and paid.
• When asked, hand out W-2s and pay stubs.
• Talk to professionals on a frequent basis.

In Short

It is against the law to pay church workers under the table, and it could affect your church's mission and finances. Following the rules and best practices for payroll keeps your ministry safe, shows respect for your workers, and protects your tax-exempt status.

If you don't know how to set up your salary or follow the regulations for payroll, Church Regulations and Strategy is here to help you every step of the process.

Links Inside

• Find out more about following the rules of church HR and hiring.
• Learn the best way to handle church payroll.
• Look into the legal way to pay pastors.

Links to Other Sites

• IRS page on Employment Taxes
• Department of Labor on Wage and Hour Laws
• ECFA article on Nonprofit Payroll Compliance

This blog post is just meant to give you information, not legal advice. Reading this does not make you a client of Church Law and Strategy or its agencies. For specialized legal guidance, please talk to a lawyer who is familiar with your church or group.