December 18, 2009

Missions Trip Income (long-term but less than one year)

Question:

A couple plans to move overseas to work with a mission organization on temporary assignment (less than one year). The church managing their support intends to issue Form 1099-MISC reporting their earnings.

How do they report the income for tax purposes? Do they owe federal and state income taxes and self-employment (SE) taxes? Can they deduct business expenses (such as computer, camera, etc. used for the mission trip)?

They believe that they will be out of the US for a long enough period to qualify for Foreign Earned Income Exclusion.

Answer:

There are many facts and circumstances that must be considered in this case, but many of the rules to interpret their implications are covered in IRS Publication 463. Questions to be answered include the following:

1. What is the couple's "tax home"?
2. Is the assignment temporary or indefinite?
3. Is the trip primarily for "business" or personal reasons?

If the couples' support is only enough to cover travel costs, then the support is nontaxable. Any additional costs they incur for ministry purposes may be eligible for deduction as a charitable contribution.

On the other, as may be the case here, support is expected to exceed these costs and to augment their living expenses while serving on the missions trip. They should read the above Publication and point their preparer to consider their unique facts and circumstances.

December 16, 2009

SE tax on Housing Allowance as Well as Salary

Question:

Is it true, when a minister files his yearly taxes, he pays Social Security & Medicare taxes on his salary dollars as well as his housing allowance?

Answer:

You are correct. As a combined 15.3 percent tax, called self-employment (SE) tax, ministers calculate the tax on Schedule SE and include the tax payment along with their Form 1040 filing.

Some are not aware that the amount subject to the tax ("SE income") can be reduced by unreimbursed employee business expenses (Form 2106). Also, elective deferrals to a IRC 403(b) reduce SE income. Qualifying employee health benefits are also exempt.

Deductions for Uncompensated Minister

Question:

An unpaid, ordained minister works with his local church pastor. He participates in several ministerial duties. His main out of pocket expense is transportation to and from these duties. He also purchases reference books and software. He receives no income from the church nor does he receive mileage reimbursement.

Does he have a choice in deducting for the best tax result--either claiming a charitable contribution on Schedule A for his miles driven in performing volunteer duties, or claiming a miscellaneous deduction on Schedule A via Form 2106 (at a more generous IRS standard mileage rate available for employee business expenses)?

Answer:

Since he is not an employee he cannot claim employee business expenses. He must use the appropriate charitable rate.

However, all is not bad news. A minister employee cannot deduct mileage from his home to his church office (it is considered personal commuting). However, volunteers can deduct mileage from home to the church and to any other destination to perform charitable activities. Of course, if the sole purpose of the trip to church is to attend services this is considered personal, not charitable, use of one's vehicle. But the minister, in the above case, appears to be performing substantial ministry activity as a volunteer.

His out-of-pocket expenses for consumable materials are also charitable contributions.

December 15, 2009

Ministry Compensation Other than from a Church

Question:

An itinerant minister serves as a workplace chaplain (as the sole proprietor for a religious organization he has established), compensated by the businesses he serves. Instead of compensating him directly, some businesses contribute to an established tax-exempt ministry which, in turn, compensates him. He also speaks at civic and Christian organization gatherings and is provided a stipend. He's trying to follow the example of "circuit riding preachers."

Without obtaining Internal Revenue Code 501(c)(3) status from the IRS for his sole proprietor religious organization can he claim ministerial tax benefits for earnings received from his business clients?

Answer:

The only organizations that qualify as IRC 501(c)(3) organizations without formally filing for exempt status are churches and associations of churches (IRS Form 1023 instructions).

When the chaplain cited above receives compensation from a church for his ministerial services as a licensed or ordained minister, his income is considered as ministerial. Typically, I recommend that itinerants request housing allowance designations for an appropriate portion of their compensation at the time of receipt. Further, the ministry should first reimburse the minister fully for his specifically identified and documented travel and other expenses that he incurred to provide the services.

However, his payments received from for-profit business do not mirror the circuit riding preacher analogy cited above. The circuit riding preacher typically received compensation only from churches.

In order to qualify his religious organization as a IRC 501(c)(3) organization which, in turn, could compensate him as a minister, he will need to gain a corporate charter from his local state government, then file Form 1023 to gain recognition as a religious tax-exempt. Christian camps, schools, and other parachurch organizations typical follow this procedure.

Alternatively, he could bring his ministry (and all receipts) under the oversight of a church which was willing to partner with him in his unique ministry.

December 07, 2009

Annual Review of Church Christmas Gifts to Their Pastors (December 2009)

I’m getting the idea that every December will present another opportunity to review the tax law on Christmas gifts given to ministers. If you type “Christmas” in the above Search Window, you will find a number of postings on this topic. Here’s a review (much of it coming from my 12/15/08 post).

IRS Publication 525 directly addresses what it calls holiday gifts. "If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. However, if your employer gives you cash, a gift certificate, or a similar item that you easily can exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved."

At Christmas time, generous lay people often seek opportunities to give to those who have ministered to them during the year. Great idea! Gifts between individuals are neither taxable to the recipient, nor deductible to the donor.

The challenge comes when the entire congregation as the minister's employer (Publication 517) decides to take a collection and give him a Christmas bonus. This is viewed as an action by the minister's employer to compensate its employee--it's taxable.

I suppose that a church's lay leaders could remind its members: "Now we're getting close to Christmas. Don't forget to add our minister to your Christmas list. You can catch him in his office or here's his home address." But as soon as the congregation acts in concert as his employer the gifts are taxable to him and deductible as charitable gifts by the donors.

A few additional comments from my 1/22/09 post:The rules I’ve stated above apply when an employer (the church congregation acting as a corporate body) takes a collection and gives it to its employee (the pastor). As a 501(c)(3) organization, a church is a qualified charitable organization. Gifts to it are tax-deductible. Compensation paid to an employee is taxable.

When I’m asked about this subject, all I need to hear is "the church solicits..." and I know we are addressing compensation issues, not gift issues. Making checks out to cash accomplishes nothing to defeat both the letter and spirit of the law.