March 26, 2014

"Erroneous" Form 1099-MISC Issuance

Question:

A minister receives a Form 1099-MISC from a church for which he provided no services during the year. His current church issues him a W-2. Is the Form 1099-MISC income taxable? If yes, how should he report this on his tax return?

Answer:

It is apparent that the church in the question above distributed money to someone, otherwise no Form 1099-MISC would have been issued! There are three likely explanations for a situation of this nature:

The first possibility is actually a fairly common situation. It could be that the church that issued the Form 1099-MISC has identified him as a "missionary" and has chosen to support him financially even though he provides no services directly to that congregation. In this situation, the Form 1099-MISC income is taxable as support.

Another alternative possibility is that he received Form 1099-MISC income that he was required by contractual arrangement to pass along to his employer who is already fully compensating him. In this case, he should report the Form 1099-MISC income on Schedule C; he should then deduct an identical amount as a ministerial expense, providing the name and Employer Identification Number of the employer to whom the income was forwarded.

Finally, it may be that an erroneous Form 1099-MISC has been issued. It is not wise, no matter the situation, to ignore the matter. An individual who believes that he has received a tax document in error should request a corrected form. He may wish to consult a tax professional to ensure proper reporting and avoid undue IRS scrutiny.

March 19, 2014

Unreimbursed Minister's Expenses

Question:

A church has an accountable plan in place to reimburse its minister for business expenses. Unfortunately, the church often does not have the funds available to reimburse its minister at the end of the year. How can it address this issue?

Answer:

The easy answer for the church is to simply reimburse as much as possible; the minister could then deduct any unreimbursed expenses on Form 2106 for federal tax purposes. However, there are two difficulties for the minister in this scenario:
  • Unreimbursed business expenses for an employee can only be deducted on Form 2106, which flows through to Schedule A. Schedule A deductions only benefit a taxpayer who itemizes rather than taking advantage of the standard deduction.
  • Also, unreimbursed business expenses are only deductible to the extent they exceed 2% of the taxpayer's adjusted gross income (AGI). For instance, a taxpayer with $50,000 of wages and no other deductions would have an AGI of $50,000, and could only deduct on Schedule A unreimbursed employee business expenses over $1,000 (2% of $50,000).
A better alternative would be for the church to reconsider the minister's compensation package. To provide an attractive salary but no reimbursement for expenses is not as satisfactory as providing reimbursement for expenses, then considering adequate compensation. For example, a church that pays its minister $20,000 but reimburses none of his $2,000 in business expenses is essentially paying him $18,000, while he is taxed on $20,000 if he is not able to itemize. However, if the church builds $2,000 for reimbursement into his compensation and pays him $18,000 in salary, he will only be taxed on $18,000, as he should be.