February 25, 2014

Minister Employed by Church in Non-ministerial Position

Question:

Our ministry recently re-hired a former minister for a non-ministerial position. Because this minister had previously "opted out" of Social Security, we have a Form 4361 on file. Should we begin withholding FICA taxes, as we would for a normal employee? Or, should we continue to exclude this employee from FICA withholdings?

Answer:

According to IRS Publication 517, (1) ministers are exempt from all required withholding, including FICA taxes, although they may owe self-employment taxes, and (2) only ministers performing "sacerdotal duties" are eligible for exemption from self-employment taxes by virtue of filing Form 4361. See this previous post (Ministers Employed in Parachurch Organizations) for a condensed description of sacerdotal functions.

Therefore, a minister who has previously opted out will remain subject to FICA tax withholding on non-ministerial income. Further, his non-ministerial income is ineligible for housing allowance benefits. Essentially, the ministry should ignore his Form 4361 and withhold FICA taxes as it would for a normal employee.

Monthly Support as Benevolence

Question:

A older member of our church, a retired children's ministry worker for another organization, is living on a small monthly Social Security benefit. As a church, we have decided to provide her with a monthly love gift. Can we treat this recurring gift in the same way as ordinary benevolent gifts (as nontaxable income)? Are we required to provide her with a Form 1099-MISC?

Answer:

The key consideration here is her relationship to her current church: did she ever provide services to this church in the past? If so, the IRS will likely view this benevolence as payment for past under-compensation, and it will be taxable. If, however, the church has no obligation to make up for lack of compensation for past services, and the motive is truly benevolent, this should be treated as standard benevolence; no Form 1099-MISC should be issued.

Please follow the links below for other guidelines relating to benevolence.

Benevolence Fund Receipts and Disbursements

Benevolence Not Reportable on Form 1099-MISC

February 21, 2014

Updating Your Organization's Responsible Party

Important news for ministries and small businesses:

As of January 1, 2014, any person assigned an employer identification number (EIN) by the IRS will be required to report a change in "responsible party" using Form 8822-B. For churches and small businesses not registered with the Securities and Exchange Commission, the responsible party is "the person who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets." 

Most churches and businesses presumably have not filed updated information with the IRS since obtaining an original EIN, so those entities will be required to file Form 8822-B by March 1, 2014. IRS information regarding penalties and extended deadlines has been vague. We would recommend that ministries and business owners review their original EIN filings (Form SS-4) and file Form 8822-B based on any changes in responsible party since the original SS-4 filing. Going forward, any change in responsible party should be reported to the IRS on Form 8822-B within 60 days of the change.

Housing Allowance for Independent Contractor

A question related to a previous post:

As an ordained minister, I spent 20 years working for a parachurch organization which designated a housing allowance for me. in 2012, my full-time position was eliminated, but I have continued to consult as an independent contractor for the organization. I received Form 1099-MISC rather than a W-2 for my 2013 compensation. Am I still eligible to claim a housing allowance? If so, what documentation will I need?

Answer:

Housing allowance rules are identical for independent contractors and W-2 employees, so your eligibility for a housing allowance remains the same. However, the organization must designate a portion of your ministerial compensation as housing allowance in order for you to be able to claim any amount, based on the following three-part test from the IRS

You can report as housing allowance the lesser of three amounts:
  • Actual housing expenses, plus utilities
  • Fair rental value of the property, plus utilities
  • Amount of cash compensation designated as housing allowance by your employer
If no designation has been made, you cannot claim a housing allowance exclusion. Also, the designation must be made prior to the payment of compensation; it cannot be a retroactive designation.

February 14, 2014

No Deduction for Donated Services

Question:

The owner of a local hotel donates a gift certificate to a 501(c)(3) organization for a one-night stay, which it then sells at a fundraising auction. The room is valued at $200, and the auction patron pays $100 for the gift certificate. Is the hotel owner entitled to a charitable contribution deduction; if so, for what amount? 

Answer:

The IRS is clear on this question; according to Publication 526, "You cannot deduct the value of your time or services." Therefore, the hotel owner cannot claim a deduction for the value of his donated services. He does receive two tax benefits, however: he is not required to recognize income which he did not receive for the room, and he can still deduct the utilities and cleaning costs as business expenses.

Housing Allowance Ruling Update

A recent development in the Wisconsin Housing Allowance Case:

The Justice Department filed the expected appeal in late January of Judge Barbara Crabb's November ruling against the minister's housing allowance. For more on the specifics of her decision, see our blog post on the ruling. The appeal before the Seventh Circuit Court of Appeals in Chicago may take a year. If the appellate court upholds the ruling, only ministers in Wisconsin, Illinois, and Indiana will be affected, unless the IRS chooses to apply the decision nationally.

February 07, 2014

No Tax Credit for Reimbursed Education Expenses

Question:

As an executive at a mission agency, I am working on a doctorate. In 2013, I incurred $1,200 of qualified education expenses (tuition, fees, and books). My employer paid these education expenses directly as part of an educational assistance program. Can I claim any kind of education credit or deduction for these expenses?

Answer:

Unfortunately, no. According to IRS Publication 970, "You cannot use any of the tax-free education expenses paid for by your employer as the basis for any deduction or credit, including the American opportunity credit and lifetime learning credit."

Generally, "Qualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution" (irs.gov). Qualified expenses paid by an individual may be eligible for tax deductions or credits.

February 01, 2014

Minister's Housing Allowance Worksheet

A useful tool for ministers and ministries:

Please follow the link below for the Minister's Housing Allowance Worksheet on our website. This tool does not replace the services of a CPA, but should streamline the process of computing a minister's housing allowance for tax purposes.

MinistryCPA.org