January 08, 2009

Missionary Income from Multiple Sources

I received the following questions from a father whose daughter serves on a foreign mission field. These are great (and common) questions that may benefit others who reference this blog.

Questions:

Sue (not her real name) receives support from multiple sources: 1) gifts channeled through a 501(c) missions organization ("Agency"), 2) gifts channeled through her local church, and 3) gifts sent directly to her by family members and others. How are these gifts treated for tax purposes?

Answers:

1. The amounts transferred from family members to Sue are non-taxable (to her), non-deductible (to family members) gifts. This is also true of other gifts received directly from individuals to whom she provides no services.

2. Support from her home church as its missionary are considered taxable compensation. Assuming that she is not an employee of the church (a safe assumption), the amounts are reportable on Schedule C as self-employment income. She likely has “business” expenses that she can use to reduce this taxable income. Schedule C net income is subject to both self-employment tax (Schedule SE) and income tax.

3. "Agency" is obligated (as the paying organization with regard to her other support) to issue Sue either a Form W-2 (employee) or a Form 1099 (non-employee). US missions agencies generally treat missionaries as employees (Form W-2) and withhold FICA tax (7.65% social security and Medicare tax) from non-clergy employees. Sue (or dad :^) ) will need to contact "Agency" to discern its practices.

With the benefits of the Foreign Earned Income Exclusion (Form 2555), it’s unlikely that she’ll owe any federal or State income tax. She will, however, owe self-employment tax if her net income on Schedule C is $400 or more.

4 comments:

  1. This is great thanks! Have been searching for this!!

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  2. Does the scenario change if the missionary is 85% self-supported with a job in the foreign country and a church gives them some money each year to help subsidize their child's overseas schooling? The church is not the "sending" church (no oversight, etc.) and no donations are received that are specifically for the missionary. The funds come from the general fund. Could this be considered a benevolence gift (i.e. non-taxable, non-reportable) instead? What if the checks were written to the child whose school is being subsidized?

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  3. Kelly's questions are much more involved than can be answered easily in this blog which is intended for "general consumption." MinistryCPA tackles these type of issues based on significant interaction with the ministries involved. But for the benefit of our blog guests, it is interesting to see Kelly's unique challenges and the competence with which they are articulated by Kelly.

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  4. I just want to say thank you for taking your time to do this. My husband and I are trying to figure out how much support to raise taking taxes into account. I will be scouring your website for more answers. Again, THANK YOU!

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