Skip to main content

Mission Agency Basics--Getting Off on the Right Foot

Question 1:

A new nonprofit missions agency is being established and preparing to send its first missionary. Identical to established agencies, the missionaries will receive support from churches and individual donors who rely on the fiduciary and ministry accountability role of the agency. What is the responsibility of the nonprofit in withholding taxes for its missionaries?

Answer 1:

It's a delight to hear of the establishment of new mission agencies ready to contribute to the spread of the gospel. While there are many issues to tackle, let's review a couple that readers of this blog might expect to hear from a CPA.

1. Other than itinerant ministers, virtually all licensed or ordained ministers are classified as dual status. This means that they're employees in every respect, except for purposes of social security and Medicare tax obligations. For purposes of these two taxes, they are considered self-employed and responsible for their own tax determined on IRS Form 1040, Schedule SE. Because they are employees, the mission agency may establish employee benefits that independent contractors (self-employed) miss out on. Withholding is optional for these ministerial employees. The agency does not and cannot withhold and match the 7.65% FICA tax of most employees. However, at the election of its missionaries many agencies withhold federal and state income taxes to facilitate the timely payment of their taxes. Previous blog entries discuss a lot more about these issues so I encourage readers to use the Search window above to explore specifics.

2. As the mission agency establishes its corporate status and Board of Directors, it should carefully study the requirements to gain recognition from the IRS as a tax-exempt organization. Most founders will need professional help with this process including the 28-page IRS Form 1023--Application for Recognition of Exemption.

Question 2:

Are grants considered taxable or nontaxable income for nonprofits?

Answer 2:

Grants are nontaxable to the recipient mission agency that has received a Determination Letter from the IRS as the result of its Form 1023 application. Further, granting agencies will likely expect confirmation that the mission agency has been granted tax-exempt status.

Comments

Popular posts from this blog

Church Car Purchase for Pastor

Question: A church would like to purchase a car for the pastor's use. What is the best method to accomplish this goal? Should the car be titled in the pastor's name? What will be the tax consequences of this arrangement? Answer: The church has two main alternatives for this purchase:  Title the car in the pastor's name and reimburse him for business expenses Title it in the church's name and treat personal use as taxable compensation There are fewer immediate tax consequences for the latter. Since both are viable options, we will discuss both situations in this post. If the church chooses to give the car to the pastor and register it in his name, he is free to use it for whatever personal use he desires with no tax consequences. However, the fair value of the car is taxable as compensation at the time it is given to the pastor. Internal Revenue Code section 102(c) clearly states that gifts given to employees by their employers are taxable compensation. The...

Can Form 4361 be filed after the deadline?

Question:   Is it possible to opt out of Social Security after the 2-year deadline? Answer:  Unlike other employees, a licensed or ordained minister has the option to opt out of Social Security and Medicare (FICA). If a minister wants to opt out they must file Form 4361 by the tax deadline including extension, in the second year in which they have received ministerial income of $400 or more. This election is final, and the minister cannot opt back into FICA taxes.  At MinistryCPA, we have received questions from ministers who have exceeded the two year deadline and desire to opt-out. There have been several court cases which provide guidance in answering this question. Some have argued that the minister was unaware of the deadline, had mistakenly believed they had filed a timely election, were given incorrect advice by an IRS employee, or their opposition to participate in Social Security and Medicare did not arise until after the 2-year deadline had passed. In each of th...

Form 941 or 944 - Which Should a Church Use for Payroll Reporting?

Question:   Are churches required to file a Form 944 annually to report their employees' earnings and tax-withholdings? A quarterly Form 941 (rather than an annual Form 944) is required of some employers. Which IRS form, if any, should be filed? Answer: According to IRS Section 1402(c) and 3121(c), ministers are not subject to mandatory income tax withholding. Unless one or more ministerial employees request non-mandatory withholding, church employers with only ministerial employees do not need to file Form 941 or Form 944.  The IRS  Ministers Audit Techniques Guide  explains in further detail a minister's treatments for Social Security, Medicare tax, and income tax withholding.   Form 941 or 944 must be filed when non-ministerial employees are compensated or when ministers request withholding. When can a church file the annual Form 944 rather than filing Form 941 each quarter? The IRS may permit the annual filing of Form 944 for employers wh...