Skip to main content

Church as Mission Agency

Question:

Our church is acting as the mission agency for an individual sent from the church. We will receive funds and clearly indicate that the church has complete authority over the funds in order to protect their tax-deductibility. My understanding is that in order for the church to send the money on to the missionary, we can do one of the following:
1. Pay the missionary reimbursements for allowable business expenses requiring documentation; other support sent to the missionary will be taxable as self-employed ministry income.
2. Make the missionary an employee of the church, paying the individual through payroll and therefore take taxes out of the support before paying the missionary.
3. Pay the missionary without requiring documentation as a self-employed individual and issue Form 1099-MISC.

Are any/all of these correct ways to handle this?

Answer:

Knowledge of complex tax laws provides one of many reasons that mission agencies are most often more prepared than a local church to serve a missionary and his or her sending churches. Nevertheless, churches do commonly attempt to provide this help so I will attempt to outline the options.

It is my experience that most well-established mission agencies classify their missionaries as employees. Mission agencies do provide considerable oversight (control as the Internal Revenue Code defines it). Missionaries often find that supporting churches welcome this oversight in order to aid the missionary in his or her ministry and to practice good stewardship over their own resources.

Whether taxes are withheld from these employees depends on their status as ministers or non-ministers. Just as a minister of a church is, by law, exempt from withholding and responsible for his own self-employment and income tax, so too is a missionary who is a licensed or ordained minister of the gospel. If the individual sent by the church is not a minister (e.g. a school teacher, office worker, or medical provider), then, as any other employee of the church, FICA taxes and federal and state income taxes are withheld.

As employees, the missionaries may document business expenses to the church for tax-free reimbursement. As long as substantiation requirements are met, these amounts will not be reportable as taxable income on Form W-2. Also, as employees, these missionaries are eligible for many of the same employee benefits that are discussed throughout this blog.

As for the self-employment route, if it's easily and cheaper for the local church to provide no accountability as to how the funds are spent and the church simply wishes to act as a conduit for other churches' (and its own) support, then Form 1099-MISC can be issued for the full amount of the support. The church could set up a reimbursement and documentation arrangement but as a self-employed minister there will be virtually no difference in his taxable income. Further, he is not eligible for many employee benefits described in the Internal Revenue Code (e.g., 403(b) plans, HRAs, employee insurance plans).

Comments

  1. Thank you SO much for taking the time to respond! This was immensely helpful!
    Blessings!!

    ReplyDelete
  2. In regards to the question about Form 1099 Misc. Should all money given to the missionary, love offering and ministy expense be counted on the 1099 Misc form? or just the love offering portion?

    ReplyDelete
  3. Reimbursed ministry expenses that were properly documented to the church or mission agency are not reportable on Form 1099-MISC.

    ReplyDelete
  4. After all these years, you're still teaching me. Thanks! This is exactly the situation we are in currently and we were asking this question just recently.

    www.plantpittsburgh.com

    ReplyDelete

Post a Comment

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.