February 26, 2015

In-home Meal and Entertainment Expenses

Question:

A church pastor is wondering how to deduct meal and entertainment expenses when he and his wife host gatherings at their house. Is there a set amount he can deduct for each meal served? Or does he need to deduct the actual costs? 

Answer:

Meal and entertainment expenses are deductible or reimbursable (by the employer) if they are ordinary and necessary and are either directly related to or associated with the pastor's responsibilities. If the pastor is reimbursed by the church, he cannot claim the expenses as a deduction.

Since it is difficult to precisely document the cost of meals served in the home, a reasonable cost per meal is generally allowable. Here is a quote from page 67 of Worth's Income Tax Guide for Ministers, 2012 Edition

A reasonable amount per meal, depending on your actual circumstances and services practices, might vary between $8.00 to $11.00 per meal. Those afternoon meetings with refreshments, or after evening service snacks for the youth group, etc., might vary between $2.50 to $3.50 per snack.

We have generally found that Worth's per meal suggestions are greater than most pastors can justify. Her snack range is more typical. On a pastor's tax return, 50% of the costs of meals while entertaining is deductible.

February 16, 2015

403(b) Employer Contributions - Subject to FICA Tax?

Question:

Are 403(b) retirement plan contributions made on behalf of the minister by the church subject to FICA tax? (The amount contributed was not deducted from the minister's salary; it was made by the church as an employee benefit.)

Answer:

Simply put, employer contributions are not subject to FICA tax.

However, this is a good opportunity to review elective deferrals. Elective deferrals are monies chosen by employees to be deducted from their paychecks and contributed to the employer-sponsored retirement plan. 

Non-minister employees who choose elective deferrals do not reduce the amount of FICA wages that need to be reported. In other words, the elective deferrals are subject to FICA tax. 

Ministerial employees are not subject to FICA tax in the first place (read our March 21, 2011 blog post for more info). Therefore, any monies the minister defers to the employer-sponsored retirement plan are not subject to FICA tax. 

For a review on the 403(b) contribution limits for 2014-2015, read our November 24, 2014 blog post


February 12, 2015

Church Plan: 401(k) or 403(b)?

Question:

According to Revenue Rulings 58-359 and 63-156, retirement distributions to a pastor may be designated as housing allowance if they come from a church plan. Does a 401(k) plan sponsored by the church qualify as a church plan?

Answer:

Normally, non-profit organizations set up 403(b) retirement plans for its employees while for-profit organizations establish 401(k) retirement plans. For churches, one of the benefits of implementing a 403(b) plan is that the retirement distributions to a pastor can be designated as a housing allowance (tax-free compensation). Here are a couple of blog posts that we have written on the matter:

403(b) Retirement Distributed as Housing Allowance
Housing Designation of 403(b) Plan Retirement Distributions
  
According to The Minister Audit Techniques Guide, "...the retired minister may exclude from net earnings from self-employment any retirement benefits received from a church plan (our emphasis). Rev. Rul. 58-359, 1958-2 C.B. 422." 

So that leads to the the above question: Does a 401(k) plan qualify as a church plan?

Precedence tells us that 403(b) plans are the standard for most church plans. However, according to The Tax Magazine on December 1, 2011, a 403(b) or a 401(k) plan may be classified as church plans as long as other requirements of the above revenue rulings are satisfied. 

As always, churches should reach out to a tax professional when determining what type of retirement plan to set up for its employees.