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Showing posts from July, 2014

When a Church Incorrectly Withholds FICA from a Minister

Question:

Our church withheld FICA from our pastor's prior paychecks. Is the church required to correct prior payroll reports?

Answer:

Yes, if the church incorrectly withheld FICA from its pastor's paychecks, the church is required to file corrected federal payroll forms, including Forms 941 or 944, and Forms W-2 and W-3. If the employee is to be treated as a minister, the church must follow IRS requirements for ministers, which are different than general employee requirements.

Churches are fully subject to the provisions of Internal Revenue Code sections 1402(c) and 3121(b)(8) and Treasury Regulations under section 1402(c). The Internal Revenue Service's Minister's Audit Techniques Guide explains to IRS auditors, in brief, key ministerial tax matters that they must understand before conducting an audit on a minister's tax return. A quote from the Guide follows:
Although  a minister is considered an employee under the common law rules,  payments for services as a minis…

IRA Considerations for Foreign Missionaries

Question:

As a missionary serving in Africa, I am treated as a 1099-MISC contractor by my U.S. mission agency. My self-employment earnings are approximately $60,000 and are considered 100% foreign-sourced income. Is it true that I may not be able to make contributions to my Traditional IRA or Roth IRA?

Answer:

Your retirement savings options greatly depend on how your tax return is filed. If you have no taxable compensation because 100% of your earned income qualifies for the foreign earned income exclusion (FEIE), you are ineligible to make IRA contributions. Any contributions made to your IRA during the period of your ineligibility are considered excess contributions. The excess contributions are subject to a 6 percent excise tax each year until the contribution is withdrawn per IRS requirements.

If you claim the Foreign Tax Credit (FTC) instead of the FEIE, you may qualify to make usual IRA contributions. You must meet the following requirements in order to make qualifying IRA contrib…

Three Things to be Aware of When Establishing Online Giving Procedures

Question:
What items does our 501(c)(3) organization need to be aware of when establishing online giving procedures?

Answer:
When a 501(c)(3) organization establishes online giving procedures, they should keep the following three points in mind:

1) Charitable contributions through an online merchant system should be recorded as the gross amount, not the net amount, when providing charitable giving receipts. 

For example, Joe Smith decides to donate $100 to ABC Organization, a non-profit organization, through the use of PayPal. PayPal will charge ABC Organization a processing fee of 2.9% ($2.90) for receiving the funds. Although ABC's net amount received is $97.10, Joe Smith should receive record of a deductible donation of $100. 

2) Contribution receipts should clearly meet IRS requirements. 

The following links will lead you to blog posts that relate to IRS requirements for contribution receipts:

Church Official Statements of Annual Giving

MinistryCPA Special Topic: What Does "QuidPr…

MinistryCPA Special Topic: What Does "Quid Pro Quo" Mean?

Quid pro quo is Latin for "something for something," as in "give something to get something." A contribuiton made by a donor in exchange for goods or services is a quid pro quo contribution. If a donation is greater than $75, and the organization gives the donor something in return, the organization must disclose the value of that item or service to the donor.

Donors can only claim a deduction for the amount they contributed above the amount of the goods or services they received. For example, Susie Smith gives $100 to a 501(c)(3) organization, and Susie receives (from the organization) a water park ticket valued at $30. Susie can only claim $70 for her charitable contribution. Even though the part of Susie's payment available for deduction does not exceed $75, a disclosure statement must be filed because Susie's payment (quid pro quo contribution) exceeds $75.

Quid pro quo requirements state that if a donor does not receive goods or services for a contribu…

Possible Financial Effects of the Housing Allowance Ruling

Many of our readers have been paying close attention to the Wisconsin Housing Allowance Case. In November of 2013, Federal Judge Barbara Crabb declared the minister's housing allowance to be unconstitutional; the case is currently under appeal.

To familiarize yourself with the ruling, read our December 4, 2013 and February 14, 2014 blog posts concerning the case. Below, you will find some statistics based on research that we have performed.

What would your 2013 tax return have looked like if the housing allowance was denied?

Between January 1 and April 30, 2014, MinistryCPA prepared 64 returns for ministers who claimed a housing allowance in 2013 and would have experienced negative consequences had it been denied.

The average increase in federal and state income tax would have been $3,499, with a minimum increase in tax costs of $245 and a maximum of $10,531. Assuming our sample is representative of all U.S. ministers (and this is a stretch), the true average for all similarly s…

"Net Income" Rules for a Non-Profit

Question:

Is a non-profit organization (NPO) allowed to make a profit during the year? If yes, is there a limit on the amount of income that can be carried over from year to year?

Answer:

A NPO is allowed to have an excess of revenues over expenditures in a given year or accounting period, and there is no specific cap set by the Internal Revenue Code. Generally, NPOs refer to this condition as a net increase, because it is simply an increase in funds available for use in furthering the organization's exempt purpose. However, NPOs should be aware of the following IRS guidelines regarding sources and uses of funds.

Unrelated Business Income Tax: 
Revenues derived from sources unrelated to the organization's exempt purpose may be subject to unrelated business income tax (UBIT). IRS Publication 598 covers the basics of unrelated business income tax. Also,our January 10, 2011 blog post lays out some specific IRS standards regarding UBIT considerations.

Private Inurement:
Courts have coine…