March 25, 2011

Deductions Against Missionary SE Income

Question:

A missionary in Australia for several years receives donations from a U.S. church. He was not aware that these donations were being reported on a Form-1099, and also thought that he did not have to file a tax return since he wasn't "earning" income. He is now subject to several years of SE taxes based on the 1099s. What are some allowable deductions/expenses against this income? He paid his own housing, traveled to other countries such as Thailand and Indonesia doing mission work, returned to the U.S. to report to his home church and solicit donations, etc.

Answer:

He can deduct what are classified as business expenses against this income. He should use Schedule C of Form 1040 to report his income and deductions. Typical expenses for a missionary include 1) car expenses at the standard mileage rate both in Australia and in the U.S. during furlough trips to churches, 2) air travel to and from the U.S. and to other countries, 3) ministry supplies (e.g. books, literature, office supplies), 4) postage, 5) meals and lodging while away from his tax home overnight on business, and 6) other line items listed on Schedule C.

Housing expenses for his family in Australia are not classified as business expenses.

Based on the question, it appears that the missionary may not have had the benefit of a mission agency to advise him regarding these matters. I believe that this is one of the many benefits for both missionaries and churches to use these agencies.

March 21, 2011

Church Withholding of FICA Taxes

Question:

Businesses withhold and match 7.65% of employees' pay for their social security and Medicare taxes. Can a church pay an employee’s 7.65% or not?

Answer:

We must segregate ministerial and non-ministerial employees in this consideration. Churches must withhold and match FICA for non-ministerial employees unless they have filed Form 8274-Certification by Churches ... Electing Exemption From Employer Social Security and Medicare Taxes. Then the church employee is responsible to pay the full 15.3% himself or herself on Schedule SE, Section B, line 5a.

Churches may not withhold and match FICA for ministerial employees. I encourage churches to help their pastors with these costs but they cannot treat them as non-ministerial. It can actually hurt the pastor’s tax situation. Let me illustrate.

1. If a church wishes to “help” – a) calculate a 7.65% bonus to add to his pay by multiplying his cash compensation + housing allowance X 7.65%, b) then withhold an identical amount as federal income tax withholding. When he files his return and calculates his 15.3% self-employment tax (entered on Form 1040, line 56 from Schedule SE), he will have an extra large amount entered on line 61 as federal income tax withholding to offset his total SE + income tax. Of course, the “bonus” is also taxable income.

2. How can a church’s erroneous classification of its pastor as a non-ministerial employee “hurt”? – when a pastor calculates his 15.3% SE tax on Schedule SE, he can reduce the self-employment income amount by employee business expenses and 403(b) retirement contributions. This reduces his SE tax rather than having it withheld as FICA tax before these items are subtracted.

3. Further, by classifying a minister as a non-minister he becomes ineligible for a housing allowance and SE tax-reducing 403(b) contributions.

Numerous entries in this blog document these statements and examples.

Church Payment on Minister's Student Loan

Question:

A church collected a love offering for its youth minister and paid the full amount received directly on his student loans. The money never went directly to the minister but to the bank/lender. Is the love offering amount that was paid to the bank considered income and, therefore, taxable for the minister? If so, is that amount to be reported on Form W-2?

Answer:

This type of compensation does not enjoy a statutory classification as a non-taxable fringe benefit. It is taxable to the youth minister and reportable on Form W-2.

Hopefully, this action occurred early in 2011 so that the minister may consider tax planning alternatives to reduce his tax. He may also need to make estimated tax payments.

Reducing SE Tax -- Ministry Expenses

Question:

I have placed a number of miles on my vehicle and have purchased many items for my ministry (theology books, theology journals, etc.) that I was not reimbursed by the church for this year. Can I count these as a business expense in some way and lower my SE tax?

Answer:

Yes, in this case, a minister should prepare Form 2106 to determine the amount of deduction. Then the calculation for self-employment income on Schedule SE will be as follows:
ADD: Cash compensation from church
ADD: Housing allowance (or fair rental value of parsonage)
SUBTRACT: Form 2106 expenses

When carrying ministry expenses to Schedule A, ministers must be careful to reduce allowable Form 2106 expenses by a percentage determined by dividing their non-taxable compensation by their total compensation.

March 07, 2011

Year-end Tax Forms to Summer Interns

Question:

Should the church send a Form 1099-MISC to interns who worked for the summer?

Answer:

If the interns received more than $600, then Forms 1099-MISC must be issued. Apparently, the interns were treated as independent contractors. They will be subject to self-employment tax for social security and Medicare.

Most churches determine that interns are short-term employees subject to standard FICA tax withholding and matching by the church. In these cases, Forms W-2 are issued and the interns owe no additional social security or Medicare tax.

State Unemployment Tax Act Applied to Churches?

Question:

Does a church have to pay unemployment taxes for its Pastor, Youth Leader (not ordained), church secretary or custodian, all who are our church members? If we do not have to pay this tax, do I still need to register with the Dept of Workforce Development Division of Unemployment Insurance, or just ignore them?

Answer:

In Wisconsin, and perhaps all states (I cannot confirm this), churches are exempt from SUTA tax. Obviously, correspondence received from a state agency merits a response.