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Showing posts from September, 2009

Ministerial Tax Status: Let Me Out!

Question:

An individual who has previously been employed by a church as a non-ministerial employee now has been added to the church staff as an ordained minister. He finds that his tax situation is worse now. How could this happen? Let me out!

Answer:

This question has a lot of variables. I'll try to get right to the point.

As a non-minister, his full compensation was subject both to federal and state income taxes and to FICA tax withholding of 7.65 percent. The church was required to pay the other 7.65 percent of his social security and Medicare tax. These withholdings were mandatory.

As a minister, he now qualifies for a housing allowance which is free of federal and state income taxes. However, he is now considered self-employed (SE) for purposes of his social security and Medicare tax obligations. He is responsible for the full 15.3 percent SE tax on his income including the housing allowance. According to the Internal Revenue Code, withholdings are optional for him, but without a …

Parsonage as Only Compensation

Question:

A church is looking to bring on a youth minister but is unable to offer compensation other than living arrangements in a church home. The minister is not ordained. Can housing be offered as the sole compensation? Would the person need to be hired as a regular employee or as an independent contractor? How would the church and the youth minister report this?

Answer:

Regardless of the ordination, licensure or other formal recognition of the minister, he will qualify for ministerial status as long as he is providing what the IRS calls sacerdotal (ministerial) duties for a qualifying church. Licensure, at a minimum, certainly helps to establish (or document, if necessary) his call to the gospel ministry. Generally, an ordained minister performing solely non-ministerial duties does not qualify for clergy tax status.

While the minister in this case will most likely be properly classified as an employee, he will not be issued Form W-2 because he has received no taxable compensation. He …

Missionary Furlough: Deductible Travel Expenses

Question:

Most commonly, mission agencies treat their missionaries as Form W-2 employees (and, I believe, properly do so). They classify disbursements to them in categories such as cash compensation, housing allowance, and reimbursable employee business expenses.

The question has been asked, "Are there any IRS restrictions to consider in a mission agency's policy for the quantity of trips back to the home country? Because long-term missionaries are employees and eligible for accountable expense reimbursement arrangements, a common practice is to classify travel costs for furlough leave as reimbursable business expenses."

Answer:

This question is addressed by IRS Publication 463. The Publication asks the question, "What Travel Expenses Are Deductible?" then answers it:

"Once you have determined that you are traveling away from your tax home [the foreign mission location, in most cases], you can determine what travel expenses are deductible. You can deduct ordin…

Designated Funds: Liability or Equity accounts?

Question:

A recent question came up on how certain designated funds should be reported on our balance sheet – we have funds like benevolence, scholarship, etc. – a previous treasurer changed these accounts from liability to equity and now we have another individual saying that these accounts must be liabilities; any recommendations on which way is correct?

Answer:

Unless the ministry is undergoing a certified audit or otherwise committed to strictly following Generally Accepted Accounting Principles (GAAP), I believe the classification is irrelevant. The key point is that the unspent balances will be carried over from one fiscal year to the next.

For us accountants:
Technically, the accounts are equity accounts in not-for-profit organizations following FASB 116,  which stipulates this treatment in order to comply with GAAP.

100% of Compensation Designated as Housing Allowance

Questions:

Are both full- and part-time pastors considered as employees who receive year-end earnings Form W-2? Can 100% of their pay be designated as housing?

Answers:

All church employees should receive Form W-2 regardless of their full- or part-time status. Form 1099-MISC is reserved for reporting independent contractor compensation only. Common examples of independent contractors compensated by church include janitorial services and guest speakers.

The housing allowance is limited to the lesser of three amounts: a) the amount actually used to provide a home, b) the amount designated by a minister's employer, c) the fair rental value plus actual cost of utilities. It may be that a minister expects a) and c) to exceed his full cash compensation, especially if he is part-time. Accordingly, a 100% designation may be appropriate.

Both full- and part-time ministers are eligible for the full list of allowable employee business expense deductions reportable on Form 2106. See the Form 2106 …

Payments to Former Pastor

Question:

A church sets up a fund to pay a former pastor's nursing home, housing and other expenses. He and his wife are current members of the church. Is the church required to issue him a Form 1099-MISC (or Form W-2)? Is there a limit as to how much he can receive?

Answer:

Situations such as this are common. Typically, the church has been unable to compensate the former minister as well as it would have wished and now intends to provide some current support to address this undercompensation. Such payments to the minister or on his behalf are taxable as compensation. The church can designate a portion to housing allowance and the minister may elect Internal Revenue Code section 403(b) elective deferrals which may reduce the tax bite.

There is no limit to the amount other than possible Social Security retirement limitations on those who have not reached full retirement age (between age 65 and 67 or so).

Another possible motivation for these payments produces an entirely different tax e…

Housing Allowance and Form 1099-MISC Reporting

Question:

A church provides its minister a housing allowance, but for other purposes it believes that it must report the full amount of compensation (including the non-taxable housing allowance portion) on Form 1099-MISC (in order to demonstrate the full earnings of the minister). If the church reports his compensation,including the housing allowance, on Form 1099-MISC as taxable income, will he be able to deduct his housing expenses somewhere else on the Form 1040?

Answer:

This questions brings up a couple of issues. First, most ministers are properly classified as employees who receive Form W-2, not as independent contractors who receive Form 1099-MISC. On Form W-2, Box 1 for taxable compensation is reduced reflecting the church's designation of a portion of his pay as non-taxable. Then in Box 14, it typically reports as a memorandum item his additional non-taxable, housing allowance compensation. In the situation addressed in the question, this Form W-2 reporting may or may not a…

Two Residences for Housing Allowance Purposes?

Questions:

A minister temporarily commutes 100 miles from his principal residence to serve in a Christian ministry, also renting an apartment near the ministry while away from home. Can he claim a housing allowance on this second dwelling as well as his principal residence?

And what about the commute from home to the ministry--is it deductible? Can the ministry reimburse him on a tax-free basis?

Answers:

A housing allowance is available for only one principal residence. Plus, commuting from a minister's home to his place of business is non-deductible. Hence, reimbursements by a church for non-deductible expenses, while certainly appreciated, will be taxable income.

An exception may be important to consider. It relates to the Internal Revenue Code definition of Tax Home. Travel and lodging expenses while away from one's Tax Home for business purposes may be deductible (and reimbursements non-taxable). According to IRS Publication 463, "if you do not have a regular or a main pla…

Minister Performing Services as an Independent "Business" Activity

Question:

Can a private pastoral counseling practice - including pastoral counseling, church consultation, and education - qualify for the housing tax deduction? The individual seeking ministerial status is not paid by his church; however, his ministry is affirmed as an extension of a church's ministry. Essentially, he operates a sole proprietorship earning income that supports his ministry at a church.

Answer:

IRS Publication 517 addresses this situation in its definition of a minister:

"Most services you perform as a minister, priest, rabbi, etc., are qualified services. These services include: performing sacerdotal functions, conducting religious worship, and
controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination."

Publication 517 also addresses services for nonreligious organizations:

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Benevolent Fund Review

Question:

I have currently been made aware of a family in our church that has experienced some serious medical issues. One of our members would like to pay for these expenses. The only stipulation that I can find in the Internal Revenue Code is that the money cannot be given with a particular designation. Can the church receive these funds, give a tax-deductible receipt or acknowledgement to the donor, and disburse the funds to pay these medical expenses?

Answer:

Churches maintain ongoing Benevolent Funds to prepare to meet these type of needs. All members are generally encouraged to give monies to the fund to allow the church (through an authorization process observed by church officers) to respond.

The caution that I offer is that the church must avoid becoming a conduit for donors to convert their noncharitable obligations into tax deductible gifts. For example, if one family member "donates" a substantial portion of the benevolent monies given to another immediate family mem…