Penalties for an Incorrect Form W-2

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 this article: Preventing Payroll Problems: Part 2.