Church payroll isn’t just paperwork—it’s stewardship. And for many ministries, this is why they turn to a church payroll services provider.
But what do church payroll providers do? How can they help your ministry? Are they even necessary?
This guide will help your church leadership understand the value of payroll service providers. We’ll explain payroll common considerations, why outsourcing often makes sense and what to consider when paying your team.
What Makes Church Payroll Different
Church payroll isn’t just a variation of small-business payroll—it’s a category of its own.
Churches are subject to tax rules, employment classifications, and legal protections that simply don’t apply to most employers. That’s where confusion begins—and where costly mistakes often follow.
Here are just a few ways church payroll differs:
- Most ministers have dual tax status—they’re employees for income tax, but self-employed for Social Security.
- Classifying church workers is especially complex, with added nuance from the ministerial exemption, volunteer roles, and contractor relationships.
- Housing allowance designation is church-specific and must be carefully reviewed to claim the tax advantages.
- Volunteers or staff without ministry-specific expertise often manage payroll, increasing the risk of missteps.
These aren’t minor distinctions. They shape how your church stewards its finances, serves its staff, and maintains compliance with tax and labor laws.
What Churches Often Get Wrong About Payroll
There are a few areas where churches regularly stumble when managing payroll. These aren’t small technicalities—they’re fundamental issues that, if misunderstood, can put your church at risk.
They Misclassify Employees as Independent Contractors
Misclassifying a worker as a contractor when they should be an employee is one of the most common (and costly) errors churches make.
Under the Fair Labor Standards Act (FLSA), federal labor law uses an “economic realities” test to determine if a worker is truly independent or economically dependent on the church. Key factors include control, permanency, financial dependence, and whether the work is integral to your ministry.
In California, the ABC Test imposes an even stricter standard. Churches must prove the worker is free from control, doing work outside the usual course of the church’s activities, and independently established in their trade.
Getting this wrong doesn’t just affect payroll taxes—it can lead to lawsuits, penalties, and costly back pay.
Read our full guide on Independent Contractors»
They Misclassify Non-Exempt Employees as Exempt
Most employees who serve in ministry are usually non-exempt. These employees are eligible for minimum wage and overtime pay, and require accurate tracking of hours worked.
Exempt employees are typically in managerial, administrative, or professional roles. These positions are salaried and not entitled to overtime pay, but to be classified as exempt, a worker must meet strict criteria:
- Hours Test: The employee is full-time, working 2,080 hours annually (there is no such thing as part-time exempt)
- Compensation Test: The employee earns at least twice the minimum wage for full-time work
- Duties Test: The employee performs duties that are primarily managerial, professional, or administrative in nature
Incorrectly classifying a non-exempt worker as exempt can lead to back pay, penalties, and legal trouble.
Watch our webinar on the ABCs of Classifying Employees »
They Misapply the Ministerial Exemption
The ministerial exemption is a legal doctrine that protects a church’s right to make employment decisions about its ministers without government interference. It is rooted in the First Amendment and applies to employment laws—not tax laws.
This exemption gives churches freedom when hiring, supervising, or terminating ministers. However, it only applies to employees who qualify as ministers under a legal test, which looks at their job function, not their job title.
The U.S. Supreme Court has confirmed that it’s the duties of the employee that matter most. Preaching, teaching the faith, leading worship, and carrying out pastoral functions are key indicators.
But churches sometimes misuse the exemption, assuming it applies broadly. If a position doesn’t involve ministerial duties, the exemption won’t hold up—and that can expose the church to employment law claims.
Read our full guide to the ministerial exception »
They Don’t Understand Housing Allowance
The clergy housing allowance is one of the most valuable tax benefits available to ministers—but it’s also one of the most misunderstood.
When properly designated, the housing allowance allows a minister to exclude a portion of their compensation from federal income tax. But this benefit only applies if the allowance is:
- Officially designated in writing before it’s paid
- Used to pay for actual housing expenses
- Capped at the lowest of three values: actual housing expenses, the designated allowance, or the home’s fair rental value
Despite its value, housing allowance is often mishandled—either not properly documented or excluded from payroll systems altogether.
Read our full guide to the Clergy Housing Allowance »
They Mistakenly Pay for PEO Arrangements
Some churches consider using a Professional Employer Organization (PEO) as a way to simplify payroll and HR tasks. But while PEOs can seem attractive on the surface, they come with serious risks for religious employers.
By entering a co-employment relationship with a PEO, churches may unintentionally compromise their religious protections under federal and state law. Co-employment can blur the lines of who is the actual employer, which matters deeply when it comes to:
- Preserving First Amendment protections for religious hiring decisions
- Maintaining control over ministerial roles and leadership positions
- Defending against employment-related lawsuits with religious liberty arguments
In short, a PEO might make it harder for your church to claim key exemptions as a religious organization. If a dispute arises, courts may look at the co-employer relationship and decide that your church ceded too much control to an outside party—limiting your legal standing.
We strongly recommend avoiding PEO arrangements unless you’ve thoroughly consulted with legal counsel who understands the intersection of employment law and religious liberty.
Read more about why PEO’s aren’t a good fit for churches »
How Church Payroll Services Can Help
While traditional payroll providers can offer convenience and automation, they often fall short when it comes to the unique needs of churches. Sure, they can process paychecks and file tax forms—but ministry payroll requires more than that.
A provider with ministry-specific expertise doesn’t just get the job done; they help you avoid costly compliance errors, protect your tax-exempt status, and ensure ministers are treated correctly under the law.
The best payroll services for churches should:
- Process payroll accurately and on time: Calculate wages, taxes, housing allowance, and withholdings for each employee.
- Handle federal and state tax filings: Submit payroll taxes, including forms like 941, 944, W-2s, and 1099s.
- Manage employee records: Keep track of compensation, benefits, and time worked.
- Offer employee self-service tools: Allow staff to view pay stubs, update tax info, and access year-end documents online.
- Stay current on laws and compliance: Track changes to wage laws, tax codes, and labor regulations, including ministry-specific issues.
- Support special ministry needs: Properly apply clergy housing allowance, dual tax status, and other church-specific payroll rules.
Here’s what to look for in a church payroll provider:
- Church-specific expertise: Do they understand the dual tax status of ministers, the housing allowance, and religious exemptions?
- Ministry compliance support: Can they help you stay on top of federal and state requirements that apply specifically to churches?
- Flexible support for mixed roles: Can they handle both ministerial and non-ministerial staff correctly?
- Clear accountability: Will they own the process, provide audit support, and offer guidance when things get complicated?
A good payroll service should feel like a partner in compliance—not just a system that cuts checks.
Your Next Step
Church payroll isn’t just a back-office function—it’s a reflection of how well your church understands its legal responsibilities and how seriously it takes care of its people. From tax treatment to housing allowance to employment classifications, the details matter more than most churches realize.
The good news? You don’t have to figure this out alone.
If you’re looking for a church payroll services provider that truly understands ministry, we recommend MinistryWorks by Brotherhood Mutual—a trusted partner serving churches and ministries across the country.
