January 19, 2015

When a Minister Earns Non-Minister Wages

Question

A church has recently hired a minister who will also work 5-10 hours each week as the church's custodian. Are all of the minister's wages exempt from FICA? Are there any issues the church should consider when issuing the minister his W-2? 

Answer

The church must understand that the minister is exempt from FICA taxes only for wages he earns performing ministerial duties. 

A review of the definition of a minister is helpful. The Internal Revenue Service's Minister Audit Technique Guide states the following:

Treas. Reg. 1.1402(c)-5(b)(2) provides that service performed by a minister in the exercise of the ministry includes:
  • Ministration of sacerdotal functions;
  • Conduct of religious worship;
  • Control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body consulting a church or denomination.
If the minister performs other duties for the church that are outside of ministerial duties, he should be compensated as a non-minister. Therefore, FICA taxes should be withheld from his earnings as a custodian. 

For bookkeeping sake, it may be easier for the church to issue two separate checks to the minister each pay period. One check would report the custodian earnings (with FICA taxes withheld) and the other check would report the ministerial earnings. 

When issuing the minister's W-2, the church could either issue one W-2 or issue two W-2s. If the church issues one W-2, Box 3 and Box 5 should only report the total amount of custodian earnings.

From a tax preparation perspective, two From W-2s would be preferred. 

January 15, 2015

Religious Exemption from "Shared Responsibility Payment"

Question:

What qualifies as a religious exemption from the shared responsibility payment that individuals must pay if they do not have qualified health insurance? 

Answer:

Those who have stayed current with our blog have educated themselves on the fee ("shared responsibility payment") they will have to pay on their 2014 tax return if they do not have minimum essential health insurance. In our October 28, 2014 post, we gave an overview of the exemptions from the "shared responsibility payment." 

In our October 31, 2014 post, we discussed how health care sharing ministries offer the most common exemption that our readers may qualify for. A separate exemption, officially listed on HealthCare.gov, states that an individual does not have to pay the fee if the individual is "a member of a recognized religious sect with religious objections to insurance, including Social Security and Medicare." 

Deciphering who qualifies for this religious exemption may sound a little tricky. Practitioners of certain religions will be free from tax penalties. Under this exception, taxpayers must certify they are a member of a recognized religious sect. Qualified sects and required documentation are described in Internal Revenue Code Section 1402(g)(1).

For example, an exempt people must adhere to the established teachings of a sect that has been in continuous existence since 1950. Such people must be "conscientiously opposed" to accepting benefits from any private or public insurance that makes payments in the event of death, disability, old age or retirement, or that makes payments toward the cost of medical care. This includes Social Security. 

For instance, Amish people who are exempt from Social Security and Medicare taxes (and therefore do not accept any of their benefits) may be exempt from the health care mandate and tax penalties.

January 10, 2015

Health Care Sharing "Premiums" Do Not Qualfiy for Cafeteria Plans

Question:

Is it legal to use a Section 125 cafeteria plan or Health Reimbursement Arrangement (HRA) to pay the monthly "premiums" ("share payments") of a health care sharing ministry?

Answer:

First, let's discuss what a cafeteria plan is... Generally, the terms "Section 125 plans" and "cafeteria plans" are synonymous. According to a page on the  IRS website, a cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements of and regulations of Section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pretax basis. Participants in a cafeteria plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit.

Second, let's discuss what an HRA is... An HRA is a tax-advantaged benefit that allows both employees and employers to save on the cost of healthcare. HRA plans are employer-funded medical reimbursement plans. The employer sets aside a specific amount of pre-tax dollars for employees to pay for health care expenses on an annual basis. One should ask his or her tax professional about the regulations concerning HRAs.     

Now, let's answer the question... HRAs or Section 125 cafeteria plan benefits cannot be used to reimburse individuals for share payments because they are not medical expenses as defined under Section 213; however, they can be used to pay medical expenses paid directly by the taxpayer, such as co-pays, prescriptions, and preventative care as permitted by Section 213. 

As a reminder, however, the Affordable Care Act has changed the requirements when reimbursements are allowed under a Section 125 plan or with an HRA. The ACA market reforms affect every employer having two or more participating employees in employer-sponsored health plans. DOL FAQs published on November 6, 2014 and IRS Notice 2013-54 provide details of ACA requirements. Individuals should contact their tax professional for guidance on this matter. 

One interesting state tax issue: According to the American Legislative Exchange Council, "In 2007, Missouri became the first state to amend its income tax code to allow a full personal deduction of health care sharing ministry expenses."

January 04, 2015

IRS Determination Letter for Church

Question:

Does a church need an IRS Determination Letter?

Answer:

Generally, a church is already considered tax exempt and is eligible to receive tax-deductible contributions; therefore, a determination letter is not needed. But sometimes a church does need an IRS Determination Letter. To ascertain if a church needs a letter, the church should consult an attorney or CPA. 

Requesting a 501(c)(3) IRS Determination Letter can be a time-intensive and costly process, if a letter is needed. Form 1023 needs to be filed to request the determination letter. The IRS's filing cost for Form 1023-EZ is $400. If a full Form 1023 is needed, the filing costs are higher. We encourage any nonprofit to work with a law firm or CPA firm when filing the Form 1023. 

Here is an excerpt from the Form 1023 Instructions:
Form 1023 not necessary. The following types of organizations may be considered tax exempt under section 501(c)(3) even if they do not file Form 1023. 
  • Churches, including synagogues, temples, and mosques.
  • Integrated auxiliaries of churches and conventions or associations of churches.
  • Any organization that has gross receipts in each taxable year of normally not more than $5,000. 
Even though the above organizations are not required to file Form 1023 to be tax exempt, these organizations may choose to file Form 1023 in order to receive a determination letter that recognizes their section 501(c)(3) status and specifies whether contributions to them are tax deductible.

December 31, 2014

MinistryCPA's Ten Most Viewed Blog Posts

As we head into the new year, let's take a look into the past! Almost seven years ago to the day, Dr. Corey Pfaffe put up his first blog post. In honor of the blog's seven year anniversary, here are the ten blog posts that have been visited the most since the blog's inception. 
  1. Housing Allowance and Form 1099-MISC Reporting (most page views all-time)

  2. Missions Trip Giving

  3. Churches Recording Depreciation

  4. Rental of a Church Parsonage to a Non-minister

  5. Travel for Mission Trip Deductible as Charitable Donation

  6. Church Withholding of FICA Taxes

  7. Self-Employed Health Insurance Deduction

  8. Benevolent Gift Rules Review

  9. Ministers' Retirement Options

  10. Benevolent Fund Giving and Disbursement