December 20, 2008

Church's Issuing Form 1099-MISC to Missionaries

Question:

In the case of giving cash donations to a missionary who has applied for and received an Internal Revenue Code 501(c)(3) determination letter as a tax-exempt organization, what is the amount that can be given before it becomes a Form 1099-MISC issue? What about those who do not have a 501(c)(3) organization but are members of a known missionary organization?

Answer:

Payments to non-employee individuals for services rendered in excess of $600 per year are reportable on Form 1099-MISC (see instructions for the Form at www.irs.gov). Since a 501(c)(3) tax-exempt organization is not a "non-employee individual," no Form 1099-MISC requirement applies. The payments are considered to be made by one tax-exempt organization to another.

If the church wishes to receive confirmation of a missionary's statement about the organization, it can request a copy of its determination letter (a common practice for many 501(c)(3) charities). Perhaps just as effective is to simple send the missionary IRS Form W-9 -- Request for Taxpayer Identification Number and Certification. If the missionary is not an individual, but, rather, employed by a 501(c)(3) organization, he or she can check a box labeled "exempt payee."

If the missionary is not associated with a missions board or other tax-exempt charity, then Form W-9 will facilitate collection of the necessary information to issue Form 1099-MISC. Missionaries affiliated with a missions board are considered employees of their agencies and receive Form W-2 from them.

Benevolence Policies

Question:

What are the tax code rules applicable to a church giving financial help to families it deems necessary for benevolence? Does it matter whether any assistance is paid indirectly on the beneficiaries' behalf (i.e. rent, utilities, grocery gift card) versus directly in the form of cash?

Answer:

IRS Publication 525 stipulates that gifts received for which no services were provided are not taxable income. Hence, no Form 1099-MISC requirement applies.

If the gift was received in exchange for goods or services, it is taxable. This includes all gifts received by employees from their employers with only minor exceptions for non-cash gifts such as the Thanksgiving turkey (see also IRS Pub. 525). The value of taxable gifts must be reported to employees on Form W-2.

A few cautions:

1. Benevolent gifts to families of employees must be treated with extreme care. The "safe" route is to include the gift on Form W-2. However, if there is a demonstrated need (e.g. a child's medical bill) by a family with one member employed by the church, and the church follows the same procedure with that family as it would with any other family, then it may not be taxable. I recommend careful documentation of the situation.

2. Avoid becoming a "conduit" for re-characterizing a donor's payment of a personal obligation as a contribution to the benevolent fund. For example, while the church may offer scholarships to send children to a Christian camp it should not accept a family member's contribution with the designation that it be forwarded to one of his or her own family. My suggestion when confronted with this potentially disingenuous (or well-intentioned) contribution is to respond as follows: "We'd be happy to assist you in maintaining your anonymity with regard to your gift to [your granddaughter] but, of course, we cannot provide you a receipt for tax deduction purposes."

More on Health Insurance and Section 125 Plans

Question:

This is a follow-up on the posting of December 16 regarding health insurance:

Must a health insurance policy be held by the organization in order to qualify health insurance premium payroll deductions for tax-free treatment under a Section 125 cafeteria plan? or can the employee hold the policy?

Also, must the employer pay at least a portion of the premium, or can the full amount be withheld through payroll deduction?

Answer:

I'll give this question "my best shot" -- employee benefit plans are not my forte. Further, there may be some insurance industry regulations or requirements of individual insurance firms that can affect this issue (e.g., I believe that Golden Rule Insurance here in Wisconsin does not permit a church to own (or even reimburse premiums) the policy).

Having said this, I do not believe that the Code stipulates the owner of the insurance plan nor requires partial payment by the employer. However, before a church and its pastor jumps into such as arrangement, its leadership is well-advised to clearly understand and communicate the specific requirements of Section 125 -- especially its use-or-lose-it component.

December 16, 2008

Minister's W-2 Form

Question:

If a minister gets a W-2, does the minister have to fill out the SE form for salaries paid in Box 1 of the W-2?

Answer:

This question was reproduced here verbatim from a recent Comment I received. Let me address a few items of clarification relative to the posting.

1. Churches are required to prepare Form W-2 for their pastors' compensation. Form 1099-Misc may be used to report non-employee compensation (e.g., the snow-plowing service), but not for the pastor.

2. The general formula I use to report a minister's self-employment income on Form 1040, Schedule SE is as follows:
Form W-2, Box 1 amount + Housing allowance (and fair rental value of parsonage, if applicable) - Unreimbursed Employee Business Expenses (from Form 2106).

Health Insurance Premiums Withheld

Question:

In your blog post on September 12, you say that health insurance premiums paid are “not reported as taxable income.” If the amount for the pastor’s health insurance is paid by payroll deduction, does that decrease the amount of taxable income? What benefit could there be to a pastor to have his health insurance paid by payroll deduction? What way is most appropriate to handle this if the church will not assume the payments?

Answer:

According to Table 2-1 of 2009 IRS Publication 15-B, health benefits paid by the employer are tax-free. When an employer wishes to offer employees a choice between receiving taxable and nontaxable benefits, a Internal Revenue Code section 125 plan must be established if benefits such as health insurance are to avoid taxation. In the question posed above, the pastor is offered the choice between receiving his full salary or having a health insurance premium withheld. In order to avoid inclusion of his full salary in Box 1 of his Form W-2, a Section 125 must be established. Of course, the best arrangement for him is to have his employer agreed to paying the premium as a benefit. He loses the flexibility to receive that amount as cash, but enjoys tax-free status, and the church most likely assumes more responsibility for premium increases.

External Audits of Churches

Question:

If a church wants to have its books externally audited, are there CPAs out there who understand church accounting who could perform a church audit?

Answer:

Church financial statements prepared in accordance with Generally Accepted Accounting Principles follow the FASB 117. Just as other tax-exempt organizations, this requires classification of the church's Net Assets (the amount by which Assets exceed Liabilities) in three funds: Unrestricted, Temporarily Restricted, and Permanently Restricted.

Unless the statements are to be prepared using an Other Comprehensive Basis of Accounting (OCBOA), most CPAs will likely require preparation of the audited financial statements following FASB 117. Most CPA firms, I believe, are fully capable of providing this service.

My experience tells me that many churches have not adequately accounted for the activities of these three funds. For this reason and others, most churches will find an external audit to be cost prohibitive. I do not provide these services, but a quote receive by a small congregation in Wisconsin within the past five years placed the annual cost at $12,000.

Accordingly, many churches have adopted internal audit policies.

December 15, 2008

Christmas Gifts to a Minister

This is probably a good time to review the tax law on Christmas gifts given to ministers. For more details, you can check out my blog entries on November 23 and January 31, 2008.

IRS Publication 525 directly addresses what it calls holiday gifts. "If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. However, if your employer gives you cash, a gift certificate, or a similar item that you easily can exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved."

At Christmas time, generous lay people often seek opportunities to give to those who have ministered to them during the year. Great idea! Gifts between individuals are neither taxable to the recipient, nor deductible to the donor.

The challenge comes when the entire congregation as the minister's employer (IRS Topic 417 and Publication 517) decides to take a collection and give him a Christmas bonus. This is viewed as an action by the minister's employer to compensate its employee--it's taxable. Of course, church revenues are almost entirely from the tax-deductible, charitable contributions of its members and guests. To rephrase my last sentence from the previous paragraph: Gifts between employers and employees are taxable to the recipient and deductible to the payer. Of course, a tax-exempt church "payer" is not concerned about receiving a tax deduction, but its contributors are.

I suppose that a church's lay leaders could remind its members: "Now we're getting close to Christmas. Don't forget to add our minister to your Christmas list. You can catch him in his office or here's his home address." But as soon as the congregation acts in concert as his employer ... well, refer to the previous paragraph.