October 21, 2016

2017 Social Security Changes

On October 18, 2016, the Social Security Administration announced the following 2017 Social Security Changes.
  • Monthly Social Security benefits will increase by a 0.3 percent cost-of-living adjustment. The adjustment begins with benefits paid in January 2017.
  • Maximum earnings subject to Social Security tax increased from $118,500 (2016) to $127,200 (2017). If you earn $127,200 or more annually, you will pay an additional $539.40 each year if an employee or $1,078.80 each year if self-employed.
  • The amount of earnings required for a quarter of coverage (also referred to as a Social Security credit) increased from $1,260 (2016) to $1,300 (2017).
The SSA’s 2017 Social Security Changes Fact Sheet can be found here.

October 20, 2016

Sizable Gift to Seminary Student


A church pays a monthly amount to a seminary student as support while he is school. He performs no services, and this money is truly a gift with no oversight of the use of the funds. The yearly amount exceeds $25,000. Is the student able to exclude this gift from taxable income? 


The church leadership is wise to be careful in the situation described here. If the payments are compensation for services present or future they will result taxable income.

An example is given in IRS Publication 970, "You are a candidate for a degree at a medical school. You receive a scholarship for your medical education and training. The terms of your scholarship require you to perform future services. A substantial penalty applies if you don't comply. The entire amount of your grant is taxable as payment for services in the year it is received."

If a scholarship program is established with nondiscriminatory and non-compensatory parameters, then the disbursement represents a truly nontaxable scholarship. The recipient will be required to report taxable income to the extent that the scholarship and other nontaxable support exceed qualified education expenses. 

According to IRS Publication 970, "A scholarship or fellowship grant is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution. A scholarship or fellowship grant is tax free only to the extent:
  •  It doesn't exceed your qualified education expenses;
  •  It isn't designated or earmarked for other purposes (such as room and board), and doesn't require (by its terms) that it can't be used for qualified education expenses; and 
  • It doesn't represent payment for teaching, research, or other services required as a condition for receiving the scholarship."
Qualified Education Expenses include (IRS Publication 970): 
  • Tuition,
  • Books, supplies, and equipment,
  • Fees paid to the institution, and
  • Student activity fees. 
Education Expenses that do not qualify:
  • Room and Board,
  • Insurance,
  • Medical expenses (including student health fees),
  • Transportation, and 
  • Similar personal, living or family expenses.
We should also note here that non-taxable scholarships may reduce or eliminate the student's eligibility for federal tax credits. 

October 18, 2016

Employee Mission Trip Funded by Employing Church


If an employee of the church is provided funds to go on a church mission trip are the funds considered a taxable benefit?


These funds may qualify as a non-taxable, reimbursed business expense. In order for an expense to qualify as a business expense, it must be ordinary and necessary according to IRS Publication 535. Pub 535 states, “An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.” As a church employee, one may be expect to assist in fulfilling the mission of the church, including participation in mission trips.

Proper documentation of expenses is required to enjoy this non-taxable classification (MinistryCPA past blog post).

If the trip was not required as a condition of employment by the church, then the employee may be able to take a tax deduction for the trip based on its charitable nature.

For further information on charitable trips and related reimbursements see the following MinistryCPA Blog post: 

Missionaries Receiving Support Directly From Individuals


A missionary receives all of his income from donations through his home church and specific individuals. Is all of his income taxable? Is he self-employed?


Monies received by a missionary in support of his work are taxable. Even though all of his income comes from "donations", the income is compensation for the services that he is performing as a missionary. 

According to IRS Minister Audit Technique Guide, “Contributions made to or for the support of individual missionaries to further the objectives of their missions are includible in gross income (Rev. Rul. 68-67, 1968-1 C.B. 38)”. The Minister Audit Technique Guide also gives an example of a court case that discusses this topic, "In the Charles E Banks and Rose M Banks v. Commissioner, T.C. Memo. 1991-641, case a structured and organized transfer of cash from members of the church took place on four special days of each year. Prior to making the transfers, members of the Church met amongst themselves to discuss the transfers. The amounts of the transfers were significant. Several members testified in Court. Their testimony indicated 'the primary reason for the transfers at issue was not detached and disinterested generosity, but rather, the church members' desire to reward petitioner for her services as a pastor and their desire that she remain in that capacity.' The Court ruled the transfers were compensation for services hence included in gross income." 

The "specific individuals" referenced in the question above should be contributing their support through a church or other Internal Revenue Code section 501(c)(3) organization such as a mission agency. These organizations are "in the business" of engaging missionaries to perform gospel work in their appointed location and duly report their support as taxable compensation.

Only contributions made to a church or recognized not-for-profit organization are tax deductible by donors. Gifts by individuals to other individuals for whom no services are provided are non-taxable gifts to the recipients.

Ministers by definition of the Internal Revenue Code are self-employed for purposes of the federal self-employment tax. Missionaries solely supported through mission agencies typically are provided either Form 1099-MISC (if the agency classifies its missionaries as independent contractors) or Form W-2 (if the agency classifies its missionaries as employees). In both cases, agencies typically do not withhold taxes since ministerial earnings are exempt from mandatory withholding. Some agencies, however, do provide for elective withholding of federal and state income taxes (but not FICA taxes) for the convenience of their clients who would otherwise be required to make estimated tax payments. 

See an earlier post regarding this complex topic:

October 13, 2016

Love Offering as Disguised Compensation


As a member of my church's audit team, I have been told many times by the financial secretary that our church takes a love offering for persons serving our church. The love offering is not counted; it is just given to the person. For this reason, no record is maintained for issuing Form 1099s. Is this  procedure in compliance with IRS rules for issuing Form 1099s when payments are $600 or more in a calendar year?


First, the offerings should be accounted for because it appears that the collections are received and distributed as compensation for work that is done for the church. When independent contractors receive more than $600 in a tax year, they must be issued a Form-1099 MISC. Of course, this will require that the offerings be counted and that information be collected from the recipient in order to facilitate filing the proper forms (typically, Form W-9 is used for this purpose).

Second, if these individuals are working for the church, they may very well be employees of the church and not independent contractors. As employees of the church, they should be receiving Form W-2's, and the church should be paying the employer's half of payroll taxes (in the case of non-ministerial employees). The church may also find it necessary to "gross up" the amount distributed in order to properly reflect the employee share of FICA taxes. For example, a $300 cash compensation amount represents a net check for gross pay of $324.85, with $24.85 of FICA tax withholding.