05 May I’m a new ordained Minister. What are estimated tax payments?
For those just starting as Clergy, you may not be familiar with how clergy taxes are paid. The United States has a pay-as-you-go tax system. This means that the Internal Revenue Service expects you to pay your taxes throughout the year, rather than just making a lump sum payment in December.
For the majority of taxpayers who work as wage earners, this happens automatically. Most people have income tax, Social Security tax and Medicare tax automatically removed from their paychecks. The employer is responsible for handing these over to the federal government, and the employee gets credit for it on their return.
Self-employed individuals (like plumbers, carpenters or other small business owners) are treated a little differently. Because they do not have an employer or a boss, they have to make all these payments themselves. These payments are called estimated payments.
Clergy are unique because they have a “dual tax status” that falls somewhere between wage earners and self-employed individuals. They can opt to have income tax withheld by their employer, but they are 100% responsible for making estimated payments for the Social Security and Medicare taxes on their own. This is where most first-year clergy get tripped up, because they forget to make these quarterly payments and end up owing a large tax bill at the end of the year!
What Happens if You Don’t Pay Quarterly Tax Payments But Should?
If you did not pay enough tax throughout the year, you may incur a penalty for the underpayment. The penalty is a complicated formula; it is imposed on the amount of underpayment for the number of days it remains unpaid, starting with the first quarter’s payment.
This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.