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Top 10 Questions that Pastors Ask MinistryCPA: Q5 - What Reports are the IRS Looking For?

Question:

What reports do churches need to file with the IRS regarding pastors' compensation?


Answer:

Other than for the pastor, a church files the same reports for all employees and is subject to the same withholding rules for standard employees as any other organization. Ministers compensation, however, is exempt from all withholding. The only exemptions churches enjoy compared to other organizations are (1) an exemption from unemployment taxes, and (2) an exemption from FICA (Social Security and Medicare) tax for churches that file Form 8274IRS Publication 15 can answer church treasurers’ standard questions regarding church payroll.

Reporting a minster’s compensation is often confusing even to treasurers who are familiar with the rules for standard employees. Following is a sample compensation arrangement:


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Don’t Use a Tax PREPARER and Don’t DIY Online -- Use a Tax PROFESSIONAL

Your financial stewardship is too important to trust to a tax preparer (someone who only fills out tax forms) or a do-it-yourself tax software.

A true tax professional views the preparation of your tax returns as a final, relatively simple step. Well before that time the professional serves you with forward-thinking strategies for your financial health. This is true whether you are a year-after-year Form W-2 employee earner or a business owner in an ever-changing financial landscape.
Families whose primary sources of income are reported as Form W-2 wages have both before and after year-end tax opportunities that tax pros use to serve their clients and to offer services that more than pay for themselves.

Examples: Planning ahead: Your tax professional simply reminds you that your daughter will turn 17 next year—that’s typically a $1,500 hit to your wallet. BUT when your tax pro asks and then understands that she is also starting her college education next fall, your advisor reminds you …

Top 10 Questions that Pastors Ask MinistryCPA: Q4 - Should the Pastor Have a Car Allowance?

Question:

Should a church set up a car allowance for its pastor?

Answer:

Any financial assistance that a minster’s employer can give is appreciated. A car allowance can be especially helpful. Car allowances, however, must be established as “accountable plans.” This means that any advances given by the employer to the minster must be properly substantiated on a timely basis or the Internal Revenue Service requires the minster to refund the unspent, undocumented portion of the allowance.

It’s a better idea to offer a professional expense reimbursement under accountable plan rules of the IRS, instead of a car allowance. A reimbursement arrangement covers car expenses, plus other professional expenses. Documentation can then include non-auto costs such as air, travel, lodging, conferences, gifts, books, supplies, and any other legitimate ministry-related expenditure.

The minister documents car expenses when he provides a record of the date, business purpose, and number of miles for each tr…

Accountable vs. Nonaccountable Professional Expense Reimbursement Plans

Question:

What is the difference between an accountable and nonaccountable professional expense reimbursement plan? If a pastor's church advances him more than his actual expenses, can he keep the excess and simply report it as additional taxable income?

Answer:

Some churches have set up professional expense reimbursement plans for their pastors that are not in compliance with the Internal Revenue Code. For example, a church includes $100 per month in its budget to advance to the pastor for his ministry expenses. The church requires no substantiation, but assumes the pastor has at least that much in unreimbursed expenses. Therefore, the church does not report theses advances as taxable income. This procedure is incorrect.

Most pastors understand their duty to use these funds for church purposes. Some believe if they do not incur sufficient tax deductible expenses, they are permitted to report the excess advances as taxable income and use the undocumented monies for personal purpose…

Top 10 Questions that Pastors Ask MinistryCPA: Q3 - What's the Best Retirement Plan?

Question:

As a pastor, what are my retirement options and what are the advantages/disadvantages of each?
Answer:
The best retirement plan option for each minister depends on his objectives and his current tax situation. The three most common retirement plan options used by ministers include:
(a) Internal Revenue Code 403(b) plans (also called Tax Sheltered Annuities (TSAs)) (b) Traditional Individual Retirement Accounts (IRAs), and (c) Roth IRAs 
Ministers often select 403(b) plans when they want to maximize their eligible contributions, or to reduce their self-employment tax burden. For the year 2020, a minister may elect to have his employer withhold (“elective deferral”) up to $19,500 of his compensation and contribute it, instead, to his 403(b) qualified investment account. Ministers who are 50 and older are eligible to increase this amount by another $6,500 to catch-up for earlier years’ smaller deferrals (IRS Publication 571).
In addition, unlike other retirement plan choices, an…

Top 10 Questions that Pastors Ask MinistryCPA: Q2 - What Counts as a Housing Allowance?

Question:

As a pastor, what can I deduct for a housing (parsonage) allowance?

Answer:

A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. A minister living in a parsonage qualifies for a housing allowance to the extent of his own out-of-pocket costs. The IRS lists only food and servants as prohibitions to allowable housing expenses.

The minister’s church or other qualified organization (e.g. religious school or college with board members accountable to local churches) must designate the housing allowance by official action taken in advance of the payment. If none of the minister's salary has been officially designated as housing allowance, the full salary must be included in gross income. 

If a minister owns a home, the amount excluded from the minister’s gross income as a housing allowance is limited to the least of the following three amounts: (a) the amount actually used to provide a…

Important Changes for Seniors and Their IRA Retirement Options

On December 20, 2019 President Trump signed the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019). Effective January 1, 2020, two widely applicable changes to Individual Retirement Accounts (IRAs) have been made:

1)Seniors turning 70½ in 2020, can now wait until the year they turn 72 years old before being forced to take taxable money out of their IRA and other retirement investments. These are called RMDs (Required Minimum Distributions). 2)Beginning in 2020, seniors can continue to make deductible contributions to their IRA accounts as long as they’re still working and receiving earned income. Before 2020, taxpayer who turned 70½ lost their right to deduct contributions to IRAs even though they were still working.


Top 10 Questions that Pastors Ask MinistryCPA: Q1 - Employee or Self-Employed?

Question: 

As a pastor, am I an employee of the church or am I self-employed?

Answer:

The answer is "yes" to both. Most ministers are considered employees in every respect except for the purposes of paying self-employment tax (SECA), which includes Medicare and Social Security tax. This means that they are eligible for virtually all employee benefits that are given favorable tax treatment in the Internal Revenue Code. Many of these benefits are unavailable to the typical self-employed individual.

Ministers are not permitted to have employee Social Security and Medicare (FICA) withheld and matched by the church. Ministers who have not been granted exemption from SECA tax must pay the entire 15.3% of self-employment tax. Many churches provide additional funds to assist their ministers in the payment of this tax, but this additional compensation, while very helpful, is subject to both income and self-employment tax.

Itinerant evangelists are a common example of ministers who do …

Why We Give—Thoughts on Year End Giving from a CPA

How do we count our blessings at year end?           
As Certified Public Accountant and founder of MinistryCPA, I challenge us with lessons in counting our blessings at year end that I find I must revisit each December. The missions of more than 100 MinistryCPA charity clients constantly serve to re-center my thinking. Thankfully, early in my career I started a year end pattern of looking back on the past 12 months and looking forward to the next. In addition to the natural reflections you might expect, charitable giving is on my mind. It wasn’t until I was well into my 40s that my vision for giving was expanded beyond simply giving because of a sense of duty. Now I’m much more careful to check and recheck my motivations.
1.We give because we care about the impact of charities       Giving Tuesday, each Tuesday after Thanksgiving in the U.S., is past. But our favorite charity is still counting on us and others to give this December. The leaders, staff and volunteers of the organizations…

Insurmountable Wall for 2019 Charitable Contributions?

With recent law changes, the federal standard deduction now exceeds $12,000 for individuals and $24,000 for married couples filing jointly and grows each year with inflation adjustments. With only mortgage interest, state and local taxes, catastrophic medical, and charitable contribution deductions to accumulate, many families and individuals face a seemingly insurmountable wall to exceed the “free” standard deduction and, instead, itemize their own write offs.
Some have even questioned whether charitable contributions are deductible anymore; however, all is not lost!

MinistryCPA offers four strategies for you to consider as the 2019 calendar year comes to a close.
1. Many state income tax returns do not follow the federal itemized deduction rules. This allows taxpayers to continue gaining a tax benefit for charitable contributions. For example, a Wisconsin taxpayer with $50,000 of Wisconsin income is granted a standard deduction of $6,709 (married filing joint is $14,641). While Wisc…