Skip to main content

Partially Retired Minister Compensation

Question:

A minister is partially retired and receiving Social Security benefits that will be limited by the Social Security Administration (SSA) if his earnings exceed the SSA's thresholds. at age 62. Can the church continue to employ him and compensate him appropriately without exceeding the threshold? The church did investigate a deferred compensation arrangement called a "rabbi trust" but found it to be overly complex.

Answer:

According to the SSA website:

"If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2009 and 2010, that limit is $14,160.

"In the year you reach full retirement age, we deduct $1 in benefits for every $3 you earn above a different limit, but we only count earnings before the month you reach your full retirement age. If you will reach full retirement age in 2009 or 2010, the limit on your earnings for the months before full retirement age is $37,680.

"When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net profit if you're self-employed. We include bonuses, commissions and vacation pay. We don't count pensions, annuities, investment income, interest, veterans or other government or military retirement benefits.".

For most ministers, the amount reported on Schedule SE to Form 1040 will be the amount compared to these limits. This amount includes cash compensation plus housing allowance, but does not include the following:
  • professional expense reimbursements from an accountable plan
  • health care benefits
  • other non-taxable fringe benefits (e.g., employer matching of 403(b) plan contributions)
In addition, elective deferrals to a 403(b) plan by a minister are excluded from SE income
(IRS Revenue Rulings 68-395 and 78-6). Also, please search other postings in this blog.

Comments

Popular posts from this blog

Housing Allowance when Bartering for Rent Payments

Question:

If a minister rents his principal residence, but he performs services (mowing the lawn, repairing the roof, etc.) in lieu of rent, can he still qualify the rent amount for a housing allowance tax benefit?

Answer:

Of course, bartering income is taxable. The Internal Revenue Code interprets that above situation as follows: tenant/minister receives taxable income for the fair market value of the services he provides, andtenant/minster pays landlord for renal of residence. The minister in this case reports taxable income for services provided in lieu of rent. It is also likely subject to self-employment tax. He may then claim as qualifying housing allowance expense equal to the amount he "pays" for rent of his personal residence. Essentially, there is no difference than if the minister and his landlord simply traded checks.

See a past MinistryCPA post regarding this topic: http://ministrycpa.blogspot.com/2016/09/services-to-church-in-lieu-of-rent-of.html

Mission Trips Involving Both Charitable and Personal Time

Question:

A church group went on a two-week mission trip, and a few of the members stayed an additional two weeks for personal time. Will the members who stayed the two additional weeks be able to deduct expenses from the trip?

Answer:

IRS Pub 526 covers the topic of Charitable Contributions and, more specifically, travel expenses associated with charitable trips. The publication states that travel expenses will be deductible “if there is no significant element of personal pleasure, recreation, or vacation in the travel.” The publication also states, “The deduction for travel expenses won't be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you don't have any duties, you can't deduct you…

403(b) Contribution Calculations Exclude Housing Allowance

Question:

Should 403(b) contributions and the subsequent match be based on the pastor's total income from the church (including housing allowance) or just from the salary minus housing allowance?

Answer:

According to Richard R. Hammar, J.D., LL.M., CPA, in his book 2015 Church & Clergy Tax Guide, “Section 107 of the tax code specifies that a minister’s housing allowance (or the annual rental value of a parsonage) is not included in the minister’s gross income for income tax reporting purposes. Therefore, it would appear that the definition of includible compensation for purposes of computing the limit on annual additions to a 403(b) plan would not include the portion of a minister’s housing allowance that is excludable from gross income." 

Hammar's Church Law and Tax Report is an excellent resource that many ministries should consider as annual subscribers.