August 25, 2010

Is Office Space Provided to a Missionary "In-kind" Compensation?

Question:

A church provides office space within its church to a local missionary who is raising his support. The church is one of the missionary's financial supporters. This office space is provided rent-free. The missionary is not an employee of the church, but does serve as a member within the church. Is the missionary responsible for any taxes in regards to this office space?

Answer:

The use is certainly consistent with the church's tax-exempt purposes and ministry emphases. Is is my opinion that the office space as described for use in his mission endeavor is non-taxable. Further, even if it did represent taxable income, the missionary would have an immediate and equal business deduction for rent.

Pastor in Transition to Missionary Receives Help from Former Congregation

Question 1:

Can a pastor who is leaving the church for a position as a full-time foreign missionary (the church will contribute missionary support as the sending church) receive retirement compensation for past services by declaration of the church? What would be the taxability of such an arrangement? Does it matter how long is is paid or whether it is in a lump sum or a monthly obligation?

Answer 1:

Probably the easiest way for the retirement contributions to be made as implied in this question is to have the church send support to the former pastor's account with his mission agency employer. Then the pastor may make elective deferrals into an Internal Revenue Code 403(b) plan. He can likely contribute in excess of $20,000 per year (IRS Publication 571 describes the limits).

Question 2:

Can the church continue to pay for health insurance as a tax-free fringe if the senior pastor is no longer an employee but simply a missionary from the church?

Answer 2:

Similar to my answer for Question 1, the pastor's mission agency employer can provide health coverage using funds supplied by supporting churches, including the pastor's former congregation.

Question 3:

Can the church compensate the outgoing pastor with severance pay before he goes to the field? Would that be taxable like his pastoral salary?

Answer 3:

Yes, the church can provide severance pay, but it will be taxable as any other compensation. To mitigate the tax costs, standard ministerial tax law benefits should be pursued (e.g., housing allowance designation, elective deferrals into IRC 403(b) retirement plan).

August 24, 2010

Missionary "Start-Up"

Background:

A new missionary endeavor has prompted a "missionary start-up" series of questions. His situation is very typical and may be helpful to rehearse with all viewers of this blog.

"The Lord has called me to be a missionary. At this time, I am still working and earning money in the United States. I not ordained at this time.

"After sharing my burden with our local church, a mission agency was created by our local church to help facilitate the funding for my family's’ mission needs. The only step that was taken to create the mission agency was to open an account at our church’s bank in the name of [the] Agency. We also opened a sub-account under the agency in my own personal name. [The church's agency] received a Tax ID number for this account. [Since 2009, contributions] have been accumulating in the two accounts.

"No money was taken or used from either account until August of [2010] when I took a survey trip. During my trip, I incurred expenses for taxi services, hotels, eating, obtaining a passport, and purchasing plane tickets. This money was taken from the sub-account in my personal name, most of which had been transferred from the “missions agency” account."

Question 1:

Were we required to report the income that was given in 2009 to the government in last years’ taxes?

Answer 1:

No, as long as the church agency maintains complete control of the funds and their disbursement, you have no income until you are compensated for your personal services. In fact, to avoid potential confusion, if asked for my personal counsel I would likely advise you to close the personal sub-account under the church agency Tax ID. When the agency distributes personal living expense money to you, it should pay it to you for deposit into your own personal family account. At that point, these earnings must be reported to you and the IRS at year end on Form 1099-MISC or Form W-2 (depending on your employment or independent contractor status with the church agency).

Question 2:

How do we claim income in 2010?

Answer 2:

As you have described it so far, you have no taxable income in 2010. It appears that the monies disbursed to you were in reimbursement for business expenses, not for compensation of your personal services. The church agency should maintain copies of substantiation of your business expenses to document that all of the disbursements were business travel costs.

Question 3:

Does the fact that the church [has not pursued formal incorporation] mean that the church cannot consider me [its] employee, legally speaking?

Answer 3:

This should not make a difference. To my understanding and experience, virtually all state statutes recognize churches as corporations regardless of their formal status.

Commentary:

There are many other issues this new missionary will need to consider. A careful reading of past entries in this blog could probably be a good start. They include choices regarding ordination/licensure, employee vs. independent contractor status, financial management arrangements with the church agency, self-employment tax, and many other issues.
 

August 23, 2010

Taxability of In-kind Payments by Church for Intern

Question:

An intern at a church receives as part of his compensation a direct payment by the church to reduce his school debt. If the church pays off his loans will that be considered income for tax purposes?

Answer:

The loan payments will be taxable as standard wages. If he is or should be treated as a licensed minister then he will have no withholding. However, he will be obligated for both income and self-employment tax. A housing allowance could reduce his income tax to the extent he pays for his own housing. Of course, he could also consider "opting out."

If he is not a minister (not recognized by the church as called to the gospel Ministry and eligible to marry, bury and baptize) then both the cash and loan payments are subject to FICA withholding and matching by the church. His compensation will be classified as any other non-ministerial employee (e.g., administrative assistant, facilities manager). He would not qualify for a housing allowance since only ministers do.

Church Support of a Missionary with No Mission Agency

Question:

A church provides direct support to a missionary -- both through the church budget and from additional contributions received designated to his ministry. What reporting requirements does the church have?

Answer:

Since the church disburses directly to the missionary, it should issue Form 1099-MISC. If it wishes, the church can establish arrangements, for example, to reimburse documented business expenses and to designate a portion of the support toward housing. Absent these provisions, the entire amount should be reported annually on Form 1099-MISC.

August 19, 2010

Timing of Taxability of Missionary Support Handled by an Agency

Question:

A mission agency inquires as to the amount included on Form 1099-MISC filed each year. The office believes that the should be the total of all of the support that came in for the missionary during the year. Most of its missionaries zero out their accounts each month (i.e., what comes in to the agency's account each month goes out to the missionary immediately).


A missionary asks the agency to deposit a set amount each month into his/her personal account and to leave the rest in the hands of the agency. A clarification is needed as to whether the amount received by the agency or the amount disbursed to the missionary is the proper amount to record on Form 1099-MISC.

Answer:

The answer to this question relates to a tax concept called "constructive receipt." If a mission is simply acting as a clearing house for contributions and missionaries have unlimited and unsupervised access to funds held on their behalf, then all funds are taxable to the missionary as they are received by the mission. In these cases, all contributions received by the missionary are immediately reported as taxable income since he or she had unrestricted access to them. They were constructively received even if not deposited into a personal bank account.

However, to my understanding, most mission agencies take an active role in serving both the donors and the missionaries. Donors understand that such agencies receive contributions on the behalf of their missionaries and provide oversight in disbursements to them. Missionaries must submit budgets for their personal living expenses. They must document business expenses for appropriate reimbursement out of funds received by the agency from donors.

If donors designate contributions to special projects on a missionary's post, then the agency ensures compliance with the designation.

In these cases, a missionary is taxed only as he or she receives funds from the mission for personal living expenses.

Benevolent Fund Disbursements to Employees

Question:

An employee of a church was given a gift from the church benevolent fund to assist with curing a personal financial problem. Should the church withhold the taxes on this benevolence from the employee's pay check, or simply issue a W-2 to the employee, or do nothing?

Answer:

It is wise to be careful when distributing gifts to employees from the church's benevolent fund. As one might imagine, supplementing an employee's low pay with, presumably, non-taxable gifts from the benevolent fund could be tempting.

Nevertheless, most churches do distribute benevolent fund gifts to members and non-members in the community who have emergency financial needs. These funds have been collected from donors who wish to be generous with those in need; they are not motivated to disguise compensation. Accordingly, I believe that one-times gifts such as the one described above should be classified as benevolent gifts that are non-taxable and non-reportable on Form W-2 or any other form.

On the other hand, if a church congregation encourages benevolent fund contributes to help supplement an employee's low pay and, subsequently, disburses these funds to him/her, then these payments should be reported as taxable income to the employee.