April 25, 2009

Self-Employed Health Insurance Deduction

Question:

If a minister receives a Form W-2 as an employee and is subject to self-employed income tax on the amount from the Form W-2 plus housing allowance, then can he deduct his health insurance (that he paid) on Form 1040, line 29 as self-employed health insurance or Schedule A. If not on line 29, what is the logic to make him pay SE tax, but not get to deduct SE insurance?

Answer:

A minister's health insurance premiums are deductible only on Schedule A. A minister employed by a church or other Christian organization is considered an employee in every respect except for purposes of SE tax. As an employee he enjoys access to numerous Internal Revenue Code (IRC) tax benefits available only because of his employment status (e.g., IRC 403(b) plans and matching contributions). While it might be annoying to not qualify for an "above-the-line" write-off of his health insurance premiums, overall he is better off tax-wise as an employee. Itinerant evangelistics, for example, do not qualify for employee benefit provisions of the IRC, but do qualify for line 29 write-offs.

Logic? Since when have logic and the IRC been in lock-step harmony? :^)

April 21, 2009

More Missionary Form 1099-MISC Questions and Answers

Question:

A church provides financial support to a retired couple who works in a ministry that the church also supports through its Missionary Fund. The amount exceeds $600. Should it provide them with a Form 1099-MISC?

Answer:

If a church sends the checks directly to them, not the ministry, then it needs to issue Form 1099-MISC since these disbursements relate to services they provided which were being compensated by the church's support.

Question:

A church sent support to a missionary through a Mission Board, but then made some direct payments to him for love offerings given so he could take a missions trip. The treasurer provided a Form 1099-MISC for the amount paid directly to him as a result of the love offering. Was the treasurer correct in filing Form 1099-MISC?

Answer:

It is very difficult to separate compensation for missionaries whose livelihood is from the ministry from disbursements not related to their "employment." This is why all gifts to employees or independent contractors (missionaries in the case citing here) are considered taxable compensation. Unlike the situation when a volunteer raises support for travel expenses to go to a foreign field, missionaries are considered to be engaged in for-profit business activity. Accordingly, I believe it is correct to issue the Form 1099-MISC for the love offering directed to the missionary's travel ("missions trip") fund. To the extent he can document his deductible business travel expenses he will avoid income and SE tax on the earnings.

Church Records Retention

Question:

How far back should our church hold on to financial records?

Answer:

While I'm not a lawyer, my understanding is that the legal statute of limitations that will generally apply to the church is 7 years. Many churches label boxes of financial records with the applicable year, plus a “Destroy” date 7 years later. They maintain copies of annual reports to the body in perpetuity.

Church Worker: Employee or Independent Contractor

Question:

An individual providing services to a church for compensation receives a Form 1099-MISC reporting the earnings to the church worker. Unlike the typical Form W-2 provided to an employee which reports both earnings and withholdings, no taxes were withheld on the money. At tax time, these individuals are often surprised to learn that the Internal Revenue Service and their tax software provider treat them as small business owners subject to both self-employment (SE) and income taxes on the earnings. Is there another way to report these earnings and avoid SE tax?

Answer:

Form 1099-MISC reports payments to individual independent contractors (e.g., not corporations) for services rendered when the amount exceeds $600 per year. Unfortunately, many churches are unfamiliar with the rules for classifying a worker either as an employee or an independent contractor. IRS Form SS-8 may be submitted to the Service for a determination. However, this step is rarely necessary if the church officers carefully consider the guidance provided by the IRS either in the instructions for Form SS-8 or on its website. Typing "independent contractor" in the IRS search window is sure to bring a hit near the top of the list on this topic.

In most cases, non-ministerial church workers (individuals who are not performing the functions of a minister) should be classified as employees and subject to FICA withholding (and matching by the church) and income tax withholding. A common situation when independent contractor status is appropriate relates to a church employing a janitorial or other service firm to render services. On the other hand, the typical church janitor, office employee, etc. should not be treated as an independent contractor.

When an error in classification is discovered the church should take immediate action to correct the error. This may require the use of newly adopted IRS Form 941-X and correction of previously issued paychecks. The employee may owe the church his or her share of the FICA tax not previously withheld.

When the error is not discovered until well after the previous year is complete, the employee who was erroneously classified as an independent contractor may have little recourse but to pay the full SE tax.

Missionary Business Use of Home

Question:

A self-employed missionary receives a Form 1099-MISC reporting his support income and files Schedule C to claim his earnings and business expenses. The expenses that he can deduct on Schedule C include a long list of typical costs such as business mileage, office supplies, conference fees, and travel and entertainment. He spent $14,000 of his support to build a room attached to his house. The room is used exclusively as a church and ministry center. Is there any provision for him to reduce his income and self-employment tax by reporting a business expense deduction related to business use of his home?

Answer:

By spending his support to add to his personal residence (a home he owns and not one owned by the church), he will presumably be the ultimate beneficiary of the income since the sale of his home will likely bring greater value than without the addition. Hence, I see no provision to immediately write-off the expense in the year of expenditure. However, since it is an exclusive business use of his home it will likely qualify for a Form 8829 deduction. A percentage of his total home expenses will be deductible as a reduction of taxable income both for income and for self-employment tax purposes.