July 19, 2016

Self-Employed, but not an Independent Contractor

Question:

An associate pastor is treated as an employee of a church that exercises very substantial control over the daily activities of his work. Must he be considered self-employed even though he has no liberty that is typical of an independent contractor? 

Answer:

Because an associate pastor is a minister of the church, he is considered an employee of the church in every area of employment except for purposes of social security and Medicare (FICA tax), and federal and state withholding. Federal and state withholding is elective by the pastor/employee, but FICA tax is not. The church will report his earnings on Form W-2, but it will not pay the typical employer's portion of FICA. He is responsible for self-employment tax (see Minister Audit Techniques Guide). For this reason, pastors are called dual status employees.

See this post for further clarification: 
http://ministrycpa.blogspot.com/2012/10/review-of-form-w-2-reporting-for.html

Ministers' Potential to Claim the SE Health Insurance Deduction

Question: 

A minister who has filed Form 4361 exempting himself from SE Tax is unsure of his eligibility to claim the Form 1040 SE Health Insurance Deduction. Is he able to claim the Line 29 deduction?

Answer: 

First, whether a minister has filed Form 4361 is irrelevant to eligibility to claim the deduction. The presence or absence of Schedule SE within his tax return for the purposes of calculating self-employment tax is not the determinant of eligibility. Rather Schedule C which reports the income of an independent contractor business is the reference point for determining the amount of a SE health insurance deduction.

A minister whose sole income is from his church as a common-law employee may sometimes erroneously report his employment income on Schedule C. He may have been led astray by his congregation's simultaneous error of issuing him Form 1099-MISC which is intended for independent contractors instead of the required Form W-2 for employees.

However, some ministers are correctly required to report ministerial income on Schedule C. Sufficient independent contractor income from services such as weddings, funerals, speaking engagements outside of his employment, and truly itinerant-type income may very well enable a minister who secures his health insurance based on that income to claim the SE health insurance deduction.

If the individual is truly a self-employed individual, he may be able to claim the SE health insurance deduction on Line 29 of Form 1040 according Internal Revenue Service Publication 517. But before one claims this deduction, he should consider several factors:
·         Are the premiums subsidized by an employer?
·         Was the plan acquired through the Marketplace and enjoying a premium tax credit?
·         Does the deduction exceed net earnings from the business under which the insurance plan was established?

Visit older blog posts concerning this subject:

July 11, 2016

Mission Trips Involving Both Charitable and Personal Time

Question:

A church group went on a two-week mission trip, and a few of the members stayed an additional two weeks for personal time. Will the members who stayed the two additional weeks be able to deduct expenses from the trip?

Answer:

IRS Pub 526 covers the topic of Charitable Contributions and, more specifically, travel expenses associated with charitable trips. The publication states that travel expenses will be deductible “if there is no significant element of personal pleasure, recreation, or vacation in the travel.” The publication also states, “The deduction for travel expenses won't be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you don't have any duties, you can't deduct your travel expenses."

We addressed a very similar matter in a blog post linked below. Ultimately, the answer depends on the facts and circumstances of the specific trip.
http://ministrycpa.blogspot.com/2015/04/can-i-deduct-travel-costs-for-mission.html

Renting a Church Parsonage: Threat to Tax Exempt Status

Question:

A church renting its parsonage to a non-staff member:
1.) Must a special account be established for funds received from rental of a church parsonage?
2.) Can these funds be used for church expenses not related to the property without affecting the church's tax-exempt status?

Answer:

We will address some significant concerns with the actions of the church; but first, in order to answer the questions above, the subject of Unrelated Business Income Tax (UBIT) must be consideredAccording to IRS Publication 598, "Rents from real property ... are excluded in computing unrelated business taxable income." The IRS cites exceptions to this rule. One exception is if the rental is debt-financed, the organization may owe UBIT. 

Now to answer the questions submitted:

1.) The church does not need to establish a separate account. It will not owe UBIT unless specialized debt-financing is employed which is beyond the scope of this blog post.  
2.) The church tax-exempt status will not affected by the use of the rental income for expenses not related to the property. HOWEVER, the church may lose its real estate tax exemption for the property because it is not used for a exempt purpose. We recommend the church contact the local tax assessor to determine whether temporary housing of non-church staff may avoid reclassification of the exempt status of the property.


See a past blog post for more information:
http://ministrycpa.blogspot.com/2012/11/church-renting-building-unrelated.html

July 06, 2016

Benevolent Offerings for Specific Families

Question:

If a church solicits a benevolent offering for a specific family is the benevolent gift taxable to the recipient? Are the contributions tax deductible by the donors? For example, a church family experiences an uninsured fire, and fellow members respond in generosity.

Answer:

Gifts are excludable from taxable income if they are not compensation for services performed. A gift “proceeds from a ‘detached and disinterested generosity,’ ... ‘out of affection, respect, admiration, charity or like impulses’” (Commissioner v. Duberstein, 363 U.S. 278, 285 (1960)). But if the payments received come from a “the constraining force of any moral or legal duty” the income cannot be considered a gift (Commissioner v. Duberstein, 363 U.S. 278, 285 (1960)). Therefore truly benevolent gifts are not taxable to the recipient. 

The tax deductibility of a gift by a donor to a fund collected on behalf of a family is dependent on the fact and circumstances of each case. The deductibility lies in the control of the monies and purpose of the organization.  According to Richard R. Hammar in his book 2015 Church and Clergy Tax Guide, “If a donor stipulates that a contribution be spent on a designated individual, no deduction ordinarily is allowed unless the church exercises full administrative control over the donated funds to ensure that they are being spent in furtherance of the church’s exempt purposes” (p. 384-385). 

For other posts related to these issues see: