Friday, November 27
A writer of Christian books wishes to enjoy the benefits of ministerial status. What organizations can ordain (or license) him to the gospel ministry? The minister plans to launch his ministry career from these books and would like to get a ministerial license through this ministry.
The most frequent instance when a minister must provide proof of his status relates to the filing of Form 4361 applying for exemption from social security tax. The instructions to the form state the following:
"Enter the date you were ordained, commissioned, or licensed as a minister of a church...
"Attach a copy of the certificate (or, if you did not receive one, a letter from the governing body of your church) that establishes your status ...
"[E]nter the legal name, address, and employer identification number of the denomination that ordained, commissioned, or licensed you ...
"You must be able to show that the body that ordained, commissioned, or licensed you ... is exempt from federal income tax under section 501(a) as a religious organization described in section 501(c)(3). You must also be able to show that the body is a church (or convention or association of churches) described in section 170(b)(1)(A)(i).
"[Y]ou can attach a copy of the exemption letter issued to the organization by the IRS. If that is not available, you can attach a letter signed by an individual authorized to act for the organization stating that the organization meets both of the above requirements."
While denominational polity differs, as a member of an independent Baptist church, I believe (from a theological standpoint) that only a local assembly of believers in Jesus Christ can recognize the call to the gospel ministry upon a qualified member of the church. The IRS readily accepts this type of recognition as well. Other churches may certainly have different methods for ordination or licensure but I cannot attest to their defensibility before the IRS.
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.
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" (http://www.ssa.gov/retire2/whileworking.htm).
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)
(IRS Revenue Rulings 68-395 and 78-6). Also, please search other postings in blog.
Monday, November 23
A pastor writes, "Every year I break my package down how I want (base salary, housing, and a professional reimbursement). Can I carry over my excess unspent professional reimbursement or excess expenses into the following year?
IRS Publication 15 spells out the rules for accountable plans--required conditions for employees to receive non-taxable employer advances for business expenses:
"To be an accountable plan, your reimbursement or allowance arrangement must require your employees to meet all three of the following rules.
1. "They must have paid or incurred deductible expenses while performing services as your employees. The reimbursement or advance must be paid for the expense and must not be an amount that would have otherwise been paid by the employee.
2. "They must substantiate these expenses to you within a reasonable period of time.
3. "They must return any amounts in excess of substantiated expenses within a reasonable period of time."
Publication 15 goes on, "Amounts paid under an accountable plan are not wages and are not subject to the withholding and payment of income ... taxes.
"If the expenses covered by this arrangement are not substantiated (or amounts in excess of substantiated expenses are not returned within a reasonable period of time), the amount paid under the arrangement in excess of the substantiated expenses is treated as paid under a nonaccountable plan. This amount is subject to the withholding and payment of income ... taxes for the first payroll period following the end of the reasonable period of time.
"A reasonable period of time depends on the facts and circumstances. Generally, it is considered reasonable if your employees receive their advance within 30 days of the time that they incur the expenses, adequately account for the expenses within 60 days after the expenses were paid or incurred, and return any amounts in excess of expenses within 120 days after the expenses were paid or incurred. Also, it is considered reasonable if you give your employees a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding amounts and they do so within 120 days."
APPLICATION TO MINISTERS AND CHURCHES: Can expenses or reimbursements be carried over from one year to the next? Well, I suppose they can. For example, at each month-end a church advances its pastor $100 for his professional expenses ($1,200 per year). The pastor uses this money in January, documents it to the church in February, and returns any excess advance in April. This seems to meet the requirements.
The PROBLEM with the question posed above relates to who is funding the professional expense reimbursement plan. These plans are designed (and permitted by the Internal Revenue Code) to use an employer's funds to reimburse employees for their job expenses. When an employee manipulates his own pay (with the cooperation of his employer) on an annual basis to gain tax-free treatment of the reimbursements, then the types of scenarios address here can arise. After all, it's the minister's money that may need to be returned to the church when this was certainly never the intent. Professional expense reimbursement plans do not work like 403(b) plans with annual elective deferrals or cafeteria plans with employee elections.
My SUGGESTION: When a minister first begins employment with the local church, the initial compensation package may allocate an appropriate portion to the church's budget for professional expenses. The minister and congregation will want to estimate on the low side since excess funds must remain with the church (or be reimbursed back to it). In subsequent years, the church should first increase this budget to more closely align with the minister's actual expenses. After this budget is set, it may consider any raise in taxable compensation or other employee benefits. This process removes the very awkward situation described above.
Thursday, November 19
From the IRS, November 17, 2009:
"New legislation, the Worker, Homeownership and Business Assistance Act of 2009, which was signed into law on Nov. 6, 2009, extends and expands the first-time homebuyer credit allowed by previous Acts. The new law:
-- Extends deadlines for purchasing and closing on a home.
-- Authorizes the credit for long-time homeowners buying a replacement principal residence.
-- Raises the income limitations for homeowners claiming the credit.
"Under the new law, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010. For qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 return.
"For the first time, long-time homeowners who buy a replacement principal residence may also claim a homebuyer credit of up to $6,500 (up to $3,250 for a married individual filing separately). They must have lived in the same principal residence for any five-consecutive year period during the eight-year period that ended on the date the replacement home is purchased.
"People with higher incomes can now qualify for the credit. The new law raises the income limits for homes purchased after Nov. 6, 2009. The credit phases out for individual taxpayers with modified adjusted gross income (MAGI) between $125,000 and $145,000 or between $225,000 and $245,000 for joint filers. The existing MAGI phase-outs of $75,000 to $95,000 or $150,000 to $170,000 for joint filers still apply to purchases on or before Nov. 6, 2009."
1. The up-to-$8,000 credit for first time homebuyers set to expire November 30, 2009, has been extended. A "buyer must have a contract in place before May 1, 2010, and the deal must close before July 1, 2010" ("The Lowdown on Home-Buyer Tax Credits," By Laura Saunders, The Wall Street Journal, 11/12/09).
2. "Taxpayers who have lived in one residence for five consecutive years of the past eight can now qualify for a tax credit of as much as 10% of the purchase price, up to a maximum $6,500, of a new principal residence" (Saunders).
Check out the sources I've listed for much more information.
Sunday, November 8
A church compensates its minister who does not request optional income tax withholding. Then, it issues Form 1099-MISC (non-employee compensation form).
He deposits the maximum allowable contribution to a Roth IRA. Can he also establish a tax deductible Simplified Employee Pension (SEP) retirement account which is eligible for a higher maximum contribution?
My January 27, 2008, blog posting--Ministers’ Retirement Options--reviews some of the alternatives available to ministers.
In the question above, I recommend that the church consider filing Form W-2 (employee compensation form). Unless the minister is an itinerant preacher, it is likely that he should be properly classified as an employee. This means that the church could establish a 403(b) plan and the minister could make elective deferrals to reduce both his income and SE tax. Unlike 403(b) plan contributions, Roth contributions reduce neither Form 1040 taxable income nor Schedule SE self-employment income.
Further, the contribution limits for 403(b) plans are significantly higher than those for Roth IRAs.
Thursday, November 5
If a church establishes a Health Reimbursement Arrangement (HRA), can it define the plan to include only its ministerial staff and not its other full-time employees?
Several resources are valuable in this determination:
- IRS Publication 969
- IRS Publication 15-B, Chapters 1 and 2
- Internal Revenue Code (IRC) Section 105 (available at http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000105----000-.html)
IRC Section 105 describes nondiscriminatory requirements for HRA and other accident and health benefit plans. Plans may be able to exclude five classes of employees. Three are generally applicable to churches (Section 105(h)(3)(B)):
- employees who have not completed 3 years of service
- employees who have not attained age 25
- part-time or seasonal employees
So the definition of highly compensated individuals becomes all important. You should read Section 105 for yourself, but as I read it, for most churches, these individuals include the five highest paid employees or the highest paid 25 percent of all employees, if that number is more than five.
The consequence of providing HRA benefits on a discriminatory basis? Generally, full taxability of any benefits. Again, Section 105 has a small "out" for taxability of part of the benefits that will not likely help most churches.
Tuesday, November 3
A minister filed IRS Form 4361 but never received written confirmation of its acceptance. Later, the IRS audited his return and assessed the unpaid self-employment tax. What can he do now?
According to the Minister Audit Technique Guide, a guide prepared by the IRS for its auditors but available to the public at the address I cite here:
"To determine if a minister is exempt from self-employment tax, request that he or she furnish a copy of the approved Form 4361 if it is not attached to the return. If the taxpayer cannot provide a copy, order a transcript for the year under examination. The ADP and IDRS Information handbook shows where the ministers' self-employment exemption codes are located on the transcripts and what the codes mean. Transcripts will not show exemption status prior to 1988.
"If the transcript does not show a MIN SE indicator and the taxpayer still claims that he or she is exempt from self-employment tax, the Taxpayer Relations Branch at the Service Center where the Form 4361 was filed can research this information and provide the taxpayer with a copy. The Social Security Administration in Baltimore also can provide the information on exemption for an individual."
The normal procedure for filing Form 4361 is (abridged):
1. minister files Form 4361 in triplicate (several attachments are also required)
2. the IRS communicates with the minister for written confirmation of his conscientious objection (other information may also be requested)
3. an IRS representative returns a signed original to the minister
4. the minister runs a photocopy and gives one to his tax preparer :^)
Since it is now likely that his two-year window of opportunity to opt out is expired, absent this proof (i.e., an IRS-signed Form 4361), the minister has few options other than to pursue the advice above.