MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: A church would like to replace its air conditioning system, but does not have the funds yet. Most of the employees have asked that it take the equivalent of one paycheck each month and deposit it to the “air conditioner fund." What are the pitfalls of handling it this way? Answer: The foregone compensation may be considered taxable (and an equal amount of donation deduction) under the taxation doctrine called "Constructive Receipt." IRS Publication 17: "Generally, you constructively receive income when it is set apart in any way that makes it available to you." This is at least one potential pitfall when the employees are given the option of receiving taxable income, but choose to have it contributed to some other purpose.

Question: A church compensates several individuals who have been considered as Form 1099-MISC independent contractors. However, they are under the direct supervision of the church’s pastor, and he controls the work to be done and the way in which it is done. Should these employees should be reclassified as Form W-2 employees? Answer: The IRS provides excellent guidance to answer this question on its website: Independent Contractor (Self-Employed) or Employee? The IRS site says, "In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. "Facts that provide evidence of the degree of control and independence fall into three categories: Behavioral : Does the company control or have the right to control what the worker does and how the worker does his or her job? Financial : Are the business aspects of the worker’s job controlled...

Question: A institution of higher education has a campus missionary partially supported by the school and partially by donations funneled through his mission board that are then advanced to the school for ultimate disbursement to the missionary. Should the school be considering this taxable and providing a Form 1099 to the missionary at year end? Answer: As the disbursing agent, the school is responsible to comply with IRS reporting requirements. If the missionary is not in the employ of the school, then Form 1099 should be issued to him as an independent contractor for the full amount disbursed to him. If the missionary is properly classified as an employee, then Form W-2 should be issued.

Question: If a minister forms an LLC for his church consulting, preaching and pastoral counseling ministries can a portion of his income be designated as housing allowance? Answer: No, the Minister Audit Technique Guide , published in April 2009, clarifies this. According to the Guide, "IRC § 107 provides an exclusion from gross income for a 'parsonage allowance,' housing specifically provided as part of the compensation for the services performed as a minister of the gospel. "The exclusion under IRC § 107 only applies if the employing church designates the amount of the parsonage allowance in advance of the tax year. The designation may appear in the minister's employment contract, the church minutes, the church budget, or any other document indicating official action. Treas. Reg. § 1.107-1(b)." The designation must be made by a church or qualifying IRC 501(c)(3) organization (e.g., certain religious educational institutions) for the services of ...