February 24, 2009

Church Accounting for Fixed Assets

Question:

What would a church consider as "Fixed Assets"? Would things like media equipment used for worship or chairs be considered fixed assets? And is there a dollar minimum/life span for anything to be considered a Fixed Asset? Also, do churches need to depreciate any of their assets?

Answer:

Unless a church wishes to report its financial results using full GAAP accounting, I recommend recording equipment purchases as expenses and omitting any depreciation concern. For non-GAAP compliant churches I recommend a modified cash basis of accounting with the Balance Sheet containing only Cash, Savings, and Investments in the asset section, Accounts Payable and other short-term debts in the liability section, and Designated Funds plus the General Fund balance in the Equity section. Both long-term debt payments and long-term asset purchases generally are made out the the church general fund budget monies and the members best understand these disbursements as expense-type items. I do not refer to the statement reporting income and expenses as a Profit or Loss Statement. Rather, I prefer to call it a Statement of Receipts and Disbursements.

February 14, 2009

Reporting of Income by Foreign Missionaries

Question:

Some of the churches supporting a foreign missionary have issued him Form 1099-MISC reporting non-employee compensation. Does he need to fill out a Form 1040, Schedule C (or C-EZ)?

Answer:

Yes, he must file Schedule C. Most churches send their support to a missionary's mission agency. The agency then typically issues to him a Form W-2 for employee earnings. Churches bypassing the agency and making direct contributions to the missionary are treating him as an independent businessman (in the eyes of the Internal Revenue Service) rather than as an employee of the agency. For a number of reasons that I've spelled out in earlier blog postings (type "mission" in the search window of this blog) I believe that best practice is to use the agency as a conduit for the contributions.

February 12, 2009

Missionary Qualifies for SE Tax Exemption

Question:

Can a missionary who is an ordained minister living and performing the duties of a minister in a foreign country apply his SE tax exemption granted by the IRS to Form 1099-MISC income received from his home church?

Answer:

As a U.S. citizen, the minister is subject to Internal Revenue Code provisions regardless where he lives in the world. But its benefits also apply to him. His Form 4361 exemption granted years earlier when he was a minister in the U.S. is valid. This is true regardless whether he is a Form W-2 employee of his home church (a rare situation for a missionary whose support is not funnelled through a mission agency) or an independent contractor supported by perhaps many sources.

Question:

Can he also receive a housing allowance as a Form 1099-MISC missionary?

Answer:

Yes, the housing designation must be made by the church sending the support. Of course, he must apply all of the standard rules of the Clergy Housing Allowance Clarification Act of 2002 in order to exclude this support from income tax.

February 05, 2009

Required Church Filings with IRS

Question:

What IRS "tax" forms are newly organized churches required to file?

Answer:

Here's a quick checklist to answer this question:

Required: Form SS-4 - Application for federal Employer Identification Number (EIN)

Required: Form W-2 (and related W-3) - Annual Wage and Tax Statement

It Depends: Form 941 - Employer’s Quarterly Federal Tax Return. If the pastor is the only employee and he does not elect voluntary federal income tax withholding, then none is required.

Optional: Form 1023 - Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Churches are automatically income tax exempt, but the Tax Determination Letter issued by the IRS after completion of Form 1023 can be helpful (e.g., to secure a bulk mailing permit with the USPO). Caution! It's 28 pages long and complicated!

Optional, but beneficial: Application for [your State] Sales and Use Tax Certificate of Exempt Status. Many States apparently instruct churches to include a copy of their Tax Determination Letter which is received from the IRS only after filing and acceptance of Form 1023. My State (Wisconsin) does list this letter as required in its instructions for the Certificate, but I've rarely seen a church file Form 1023 and I've never seen a church denied a State sales tax exempt certificate.

Very Rare: Form 990-T - Exempt Organization Business Income Tax Return. This form is for churches to pay income tax on income earned in excess of $1,000 per year that is not related to its tax exempt purpose. It's called Unrelated Business Income Tax (UBIT).

No way: Form 1120 - U.S. Corporation Income Tax Return. While churches are considered corporations, they do not file the corporate income tax return.

February 03, 2009

Form 1099 for Non-profit?

Question:

If a church sends periodic payments (mission contributions) to an unincorporated non-profit, is the church required to send the entity a Form 1099-MISC, even if they are a non-profit? Our church sends Form 1099's to tax exempt entities that we support if their W-9 shows they are not a corporation. Is that wrong?

Answer:

The IRS instructions for Form 1099-MISC state: "File Form 1099-MISC, Miscellaneous Income, for each person to whom you have paid during the year at least $600 in rents, services (including parts and materials), prizes and awards, [and] other income payments ... to an individual, partnership, or estate (my emphasis)."

Payments to non-profit organizations are considered to be payments to corporations, not to individuals. Accordingly, no Form 1099-MISC filing is necessary.

Refund of Incorrectly Withheld FICA Taxes from a Minister

Question:

A minister exempt from social security has an employer who withheld social security and Medicare taxes from of his paychecks. What does he do to get his money back?

Answers (take your pick):

1. If the employer is not a church or qualifying tax exempt organization, he does not get his money back. An exemption from social security and Medicare tax applies only to his ministerial income.

2. If the employer is a church, then the church must file Form 941c to get the money back and then forward the minister's portion to him. It will also be necessary for the church to file corrected Forms W-2c and W-3c. A previous post today (and probably others earlier) explain that the churches may not withhold FICA taxes from a minister even if he requests it. The Internal Revenue Code clearly classifies a minister as self-employed for purposes of social security and Medicare tax matters.

Form W-2 When 100% of Pastor's Pay is Designated as Housing

I received some excellent questions from a dedicated bookkeeper trying to start off right with a newly formed church...

Question:

Our pastor's initial pay is quite low and designated 100% as housing allowance. I am treating him as an employee. He is receiving a Form W-2 for 2008 and the compensation is noted as 'Housing Allowance' in box 14 only. Where do I report this compensation on the Form W-3?

Answer:

If the minister's compensation is 100% housing allowance, no Forms W-2 and W-3 are required (unless the church has other non-ministerial employees). My experience is that a filing of Form W-2 with zeros in Box 1 will only confuse the system and may initiate an IRS inquiry.

I do recommend that church treasurers who find themselves in these rare situations provide a letter to the pastor indicating the housing allowance amount so that he can accomplish several responsibilities. One, he must determine that he has adequate documentation for actual expenses equaling or exceeding the designated amount. Two, unless he has filed an approved Form 4361 opting out of social security, he must report the housing allowance as self-employment income on Schedule SE. Finally, he must limit or eliminate his deduction for Form 2106 Employee Business Expenses after they carryover to Schedule A (Itemized Deductions).

Housing allowance compensation is not reported on quarterly Form 941.

Question:

Does the church withhold taxes from earnings or report earnings differently based on whether the pastor has opted out of social security?

Answer:

The short answer: No. Income tax withholding is optional for a pastor. Because he is a minister and subject to self-employment not FICA tax, no social security or Medicare can or should be withheld. No election exists allowing a pastor to violate this provision of the Internal Revenue Code.

Many pastors request a large amount of federal income tax withholding in order to pay both their federal income tax and their SE tax (since both are reported on page 2 of Form 1040). Further, it is my experience that many churches contribute to paying at least one-half of what their FICA obligation would be if he were not a minister, but this helpful contribution is also subject to income and SE tax. I recommend that churches consider increasing the pastor's pay by 7.65% for "their" one-half and then immediately withholding the same amount as federal income tax along with any additional withholding the pastor requests.