December 28, 2016

Qualified Small Employer HRAs

On December 13, 2016, President Obama signed the 21st Century Cures Act, allowing qualified small employers to offer Health Reimbursement Arrangements (HRA) that follow certain terms.

After the Affordable Care Act was passed, the IRS originally determined that an HRA was not a qualified group health plan. The Cures Act overrules this decision. HRAs are again an option for qualifying small employers.

To be eligible, the small employer must have fewer than 50 employees and must not offer a group health plan to any of its employees.

The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) must be subject to the following terms.
  • No salary reduction contributions may be made (i.e., 100% employer-funded).
  • Employer must receive proof of employee’s minimum essential coverage.
  • Reimbursements must be for qualifying medical expenses.
  • Reimbursements for any year cannot exceed $4,950 (or $10,000 for family coverage), which will be adjusted annually for inflation.
  • Employer must offer the same terms to all eligible employees.
  • Employees receiving a monthly premium assistance credit (under Code Sec. 36B) are not eligible employees.
  • Employer must follow additional requirements as outlined in the Act, if applicable.
Beginning with the 2017 calendar year, the employer will report (in January 2018) the benefit amount of the QSEHRA on employees’ Forms W-2. The IRS will likely issue additional guidance in the coming months.

When an employer provides a monthly QSEHRA, the employee is not eligible for the premium assistance tax credit because this would be “double-dipping” tax-free benefits. Despite this limitation, there are many employers who can use the QSEHRA as a tax-free medical benefit.

The complete (and very wordy) 21st Century Cures Act can be found here. Section 18001 of the Act discusses the QSEHRA.

December 19, 2016

Revised Form I-9 Released

The U.S. Citizenship and Immigration Services released a revised Form I-9. All new hires after January 21, 2017, must complete the revised Form I-9. All prior released versions of Form I-9 will be invalid for new hires.

Employers are required to have a completed hard copy of Form I-9 on file for each employee. Current employees do not need to re-complete the revised form.

More information on Form I-9 can be found on the USCIS website.

Filing Date Change for Forms W-2

Question:

A non-profit organization recently asked if there is a change in the payroll reporting deadline for 2016. If yes, when do the Forms W-2 need to be filed?

Answer:

Yes, there is a change in the deadline for filing Forms W-2, W-3, and 1099-MISC. All forms must be submitted by January 31, 2017, for tax year 2016. The Forms W-2 and W-3 must be submitted to the Social Security Administration (SSA), and the Forms 1099-MISC must be submitted to the IRS.
  • Form W-2, Wage and Tax Statement for employees 
  • Form W-3, Wage and Tax Statement for employers
  • Form 1099-MISC for reporting non-employee compensation to individuals or qualifying businesses (e.g., contractors, speakers, landlords, love offering recipients) 
These changes to the Internal Revenue Code were a part of the PATH ActProtecting Americans from Tax Hikes, Section 201, enacted on December 18, 2015. The IRS’s reminder provides more detailed information.

The January 31 deadline has long applied to employers furnishing copies of these forms to their employees and that date remains unchanged.

December 15, 2016

2017 Standard Mileage Rates

The IRS issued 2017 standard mileage rates. These rates begin on January 1, 2017. The rates apply to the use of a car, van, pickup or panel truck.
  • 53.5 cents per mile for business miles driven (down from 54 cents for 2016)
  • 17 cents per mile driven for medical or moving purposes (down from 19 cents for 2016)
  • 14 cents per mile driven in service of charitable organizations (no change from 2016)
More information is available on the IRS’s webpage.

December 01, 2016

New Due Date for Missionary FBARs

Notice:

Individuals holding or acting as signatories on certain foreign bank accounts must file annual disclosures with the IRS. This includes a number of missionary clients of MinistryCPA. As of the 2017 filing season (year ended December 31, 2016), FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) will be due on April 15.

According to Act Sec. 2006(b)(11) of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015,

"The due date of FinCEN Report 114 (relating to Report of Foreign Bank and Financial Accounts) shall be April 15 with a maximum extension for a 6-month period ending on October 15 and with provision for an extension under rules similar to the rules in Treas. Reg. section 1.6081–5. For any taxpayer required to file such Form for the first time, any penalty for failure to timely request for, or file, an extension, may be waived by the Secretary."

November 29, 2016

Earned Income Credit for Foreign Missionaries

Question:

A missionary couple (and their children) lives overseas for over half the year, while maintaining a home in the U.S.  Both are US citizens.  Do they qualify for the Earned Income Credit?

Answer: 

First, there are three potential credits that could be affected by residency status.
  • Earned Income Credit (EIC) (refundable) - See IRS Publication 596
  • Child Tax Credit (non-refundable) - Up to $1,000 per qualifying child
  • Additional Child Tax Credit (refundable) - This credit is for certain individuals who get less than the full amount of the child tax credit.
If the taxpayer did not live with his child in the United States for at least six months of the tax year, he cannot claim the EIC.

But a taxpayer may be able to claim the Child Tax Credit or the Additional Child Tax Credit even though he did not live in the United States at least six months of the current tax year.

It is often advantageous for a foreign missionary to claim a Foreign Earned Income Exclusion using Form 2555, thereby excluding some or all of his earned income from taxation. IRS Publication 596 and Publication 972 state that the Additional Child Tax Credit cannot be claimed if one files Form 2555 or Form 2555-EZ. 

For a missionary paying foreign taxes in a foreign country, he may reduce or eliminate his income tax by claiming the Foreign Tax Credit instead of the Foreign Earned Income Exclusion. With the combination of a minister's housing allowance, education credits, and the Form 1116 Foreign Tax Credit, a missionary may qualify for the Additional Child Tax Credit and be able to reduce or eliminate his income tax.



November 16, 2016

Camp Worker and Overtime

Question:

One of a camp’s fulltime maintenance men is paid $600 per week ($31,200 per year). Some weeks he puts in less than 40 hours. But during camping season, he easily works 60 to 70 hours a week. Is the camp required to pay him overtime?

Answer:

As a general rule, the camp is not required to pay overtime if the employee meets two requirements.
  1. The employee meets the salary test and is paid on a salary basis of at least $913 per week (or $47,476 per year),* and 
  2. The employee meets the duties test of the executive, administrative, professional, or other exemption.**
Because the maintenance man is paid $600 per week, he does not meet the salary test (No. 1 above). The camp is then required to do one of two options:
  • Option A. Increase the employee’s weekly salary, or
  • Option B. Reclassify the employee to a nonexempt employee, which means the employee will be paid on an hourly basis. 
Option A is the simplest. The camp can just increase the maintenance man’s weekly salary from $600 to $913 per week. Because the employee’s compensation would increase by $16,276 ($47,476 - $31,200), this would likely create havoc on the nonprofit’s budget.

As a result, Option B should be implemented. This means that the employee will be paid on an hourly basis. The camp should require the employee to record all his hours worked each day. As an example, the camp could pay the employee $10 per hour. If the employee works 30 hours in one week, the employee would receive gross wages of $300 ($10 X 30 hours) for that week. But if the employee works 70 hours, the employee receives time-and-a-half of $15 ($10 X 1.5) for anything more than 40 hours. Hence, the employee is paid $850 in total gross wages for the week.***

Option B would also create significant budget concerns depending on the employee’s regular hourly rate. If this is the case, the employer could limit the weekly hours of the maintenance man and hire an additional employee.

Because each employment situation varies, we suggest the camp seek appropriate legal counsel. In addition, state minimum wage and overtime laws need to be taken into consideration.

*The Department of Labor announced the final rule updating the overtime regulations on May 18, 2016, with an effective date of December 1, 2016. The DOL final rule is the result of President Obama’s executive order in 2014.
**See the DOL’s Fact Sheet #17A for more information on exemptions, although the fact sheet has not yet been updated to reflect the $913 per week salary requirement.
***$400 ($10 X 40 hours) + $450 ($15 X 30 hours) = $850

November 01, 2016

Heath Care Sharing Ministries and the SE Insurance Deduction

Question:

Can payments made to a health care sharing ministry (e.g., Samaritan Ministries, Christian Healthcare Ministries) which are exempt from the Affordable Care Act be deducted from income as a self-employed (SE) insurance deduction?

Answer:

First, to be technical, "health care sharing ministries" (IRS exemption D) provide participants an exception from Shared Responsibility Payments (ACA penalties), but don't connote other tax benefits.

Second, a health care share ministry does not qualify as health insurance. One does not pay what the IRS considers to be premiums, but instead shares the health expenses of others. And according to IRS Pub 535, in order for self-employed individuals to qualify for a SE insurance deductions they must be to pay premiums for qualifying health insurance. 


Form 944 or 941 Filing for Churches

Question: 

A new church filed for an employer identification number (EIN) recently. It received notification from the IRS about the EIN, stating that the church must file Form 944 by the following January deadline. The church has no non-ministerial staff members. Since income tax withholding is elective by ministers and none of the pastors has elected to request non-mandatory withholding is the church required to file Form 944 annually?

Also, 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 Technique Guide explains in further detail a minister's treatments for social security, Medicare tax, Federal Insurance Compensation Act taxes, and income tax withholding. 

Form 941 or 944 must be filed when non-ministerial employees are compensated or 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 who have less than $1,000 of withholding taxes to report during the year (only if granted permission by the IRS through correspondence). Once the employer has more than $1,000 to report, the employer must file the quarterly Form 941.
  • Regardless, if the church has non-ministerial employees or has non-mandatory withholding from its minister(s) it must file either Form 941 or, if approved, Form 944.
Here is an excerpt from the Instructions for Form 944: 

Who Must File Form 944?

In general, if the IRS has notified you to file Form 944, you must file Form 944 instead of Forms 941, 941-SS, or 941-PR to report the following amounts.
  • Wages you have paid 
  • Tips your employees have received 
  • Federal income tax you withheld 
  • Both the employer's and the employee's share of social security and Medicare taxes 
  • Additional Medicare Tax withheld from employees 
  • Current year's adjustments to social security and Medicare taxes for fractions of cents, sick pay, tips, and group-term life insurance. 

Church Remodeling Payments Reported on Form 1099-MISC

Question:

A church remodeled one of its buildings. One of the members coordinated the remodel, and the church paid individuals directly for their labor. According to the Internal Revenue Service's Form 1099-MISC instructions, one of the criteria is: "You made the payment for services in the course of your trade or business."  Since construction and remodeling is not the church's trade or business are the payments to these individuals reportable on Form 1099-MISC?

Answer: 

Yes the payments are reportable on Form 1099-MISC. According to Form 1099-MISC instructions entitled "What is nonemployee compensation?
If the following four conditions are met, you must generally report a payment as nonemployee compensation.
  • You made the payment to someone who is not your employee. 
  • You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations). 
  • You made the payment to an individual, partnership, estate, or, in some cases, a corporation. 
  • You made payments to the payee of at least $600 during the year."
In response to the specific question posed by the one requesting assistance here, the statement in the Form 1099-MISC instructions, "You made the payment for services in the course of your trade or business” is referring to a previous statement in the instructions: “[Nonemployee Compensation] includes fees, commissions, prizes and awards for services performed as a nonemployee, other forms of compensation for services performed for your trade or business by an individual who is not your employee.” While remodeling is not the trade or business of the church, the church is included among those organization subject to Form 1099-MISC filing.

See another MinistryCPA post discussing Employee vs. Independent Contractor


October 21, 2016

2017 Social Security Changes

On October 18, 2016, the Social Security Administration announced the following 2017 Social Security Changes.
  • Monthly Social Security benefits will increase by a 0.3 percent cost-of-living adjustment. The adjustment begins with benefits paid in January 2017.
  • Maximum earnings subject to Social Security tax increased from $118,500 (2016) to $127,200 (2017). If you earn $127,200 or more annually, you will pay an additional $539.40 each year if an employee or $1,078.80 each year if self-employed.
  • The amount of earnings required for a quarter of coverage (also referred to as a Social Security credit) increased from $1,260 (2016) to $1,300 (2017).
The SSA’s 2017 Social Security Changes Fact Sheet can be found here.

October 20, 2016

Sizable Gift to Seminary Student

Question:

A church pays a monthly amount to a seminary student as support while he is school. He performs no services, and this money is truly a gift with no oversight of the use of the funds. The yearly amount exceeds $25,000. Is the student able to exclude this gift from taxable income? 

Answer:

The church leadership is wise to be careful in the situation described here. If the payments are compensation for services present or future they will result taxable income.

An example is given in IRS Publication 970, "You are a candidate for a degree at a medical school. You receive a scholarship for your medical education and training. The terms of your scholarship require you to perform future services. A substantial penalty applies if you don't comply. The entire amount of your grant is taxable as payment for services in the year it is received."


If a scholarship program is established with nondiscriminatory and non-compensatory parameters, then the disbursement represents a truly nontaxable scholarship. The recipient will be required to report taxable income to the extent that the scholarship and other nontaxable support exceed qualified education expenses. 

According to IRS Publication 970, "A scholarship or fellowship grant is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution. A scholarship or fellowship grant is tax free only to the extent:
  •  It doesn't exceed your qualified education expenses;
  •  It isn't designated or earmarked for other purposes (such as room and board), and doesn't require (by its terms) that it can't be used for qualified education expenses; and 
  • It doesn't represent payment for teaching, research, or other services required as a condition for receiving the scholarship."
Qualified Education Expenses include (IRS Publication 970): 
  • Tuition,
  • Books, supplies, and equipment,
  • Fees paid to the institution, and
  • Student activity fees. 
Education Expenses that do not qualify:
  • Room and Board,
  • Insurance,
  • Medical expenses (including student health fees),
  • Transportation, and 
  • Similar personal, living or family expenses.
We should also note here that non-taxable scholarships may reduce or eliminate the student's eligibility for federal tax credits. 

October 18, 2016

Employee Mission Trip Funded by Employing Church

Question: 

If an employee of the church is provided funds to go on a church mission trip are the funds considered a taxable benefit?

Answer:

These funds may qualify as a non-taxable, reimbursed business expense. In order for an expense to qualify as a business expense, it must be ordinary and necessary according to IRS Publication 535. Pub 535 states, “An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.” As a church employee, one may be expect to assist in fulfilling the mission of the church, including participation in mission trips.

Proper documentation of expenses is required to enjoy this non-taxable classification (MinistryCPA past blog post).

If the trip was not required as a condition of employment by the church, then the employee may be able to take a tax deduction for the trip based on its charitable nature.

For further information on charitable trips and related reimbursements see the following MinistryCPA Blog post: 



Missionaries Receiving Support Directly From Individuals

Question:

A missionary receives all of his income from donations through his home church and specific individuals. Is all of his income taxable? Is he self-employed?

Answer:

Monies received by a missionary in support of his work are taxable. Even though all of his income comes from "donations", the income is compensation for the services that he is performing as a missionary. 

According to IRS Minister Audit Technique Guide, “Contributions made to or for the support of individual missionaries to further the objectives of their missions are includible in gross income (Rev. Rul. 68-67, 1968-1 C.B. 38)”. The Minister Audit Technique Guide also gives an example of a court case that discusses this topic, "In the Charles E Banks and Rose M Banks v. Commissioner, T.C. Memo. 1991-641, case a structured and organized transfer of cash from members of the church took place on four special days of each year. Prior to making the transfers, members of the Church met amongst themselves to discuss the transfers. The amounts of the transfers were significant. Several members testified in Court. Their testimony indicated 'the primary reason for the transfers at issue was not detached and disinterested generosity, but rather, the church members' desire to reward petitioner for her services as a pastor and their desire that she remain in that capacity.' The Court ruled the transfers were compensation for services hence included in gross income." 

The "specific individuals" referenced in the question above should be contributing their support through a church or other Internal Revenue Code section 501(c)(3) organization such as a mission agency. These organizations are "in the business" of engaging missionaries to perform gospel work in their appointed location and duly report their support as taxable compensation.

Only contributions made to a church or recognized not-for-profit organization are tax deductible by donors. Gifts by individuals to other individuals for whom no services are provided are non-taxable gifts to the recipients.

Ministers by definition of the Internal Revenue Code are self-employed for purposes of the federal self-employment tax. Missionaries solely supported through mission agencies typically are provided either Form 1099-MISC (if the agency classifies its missionaries as independent contractors) or Form W-2 (if the agency classifies its missionaries as employees). In both cases, agencies typically do not withhold taxes since ministerial earnings are exempt from mandatory withholding. Some agencies, however, do provide for elective withholding of federal and state income taxes (but not FICA taxes) for the convenience of their clients who would otherwise be required to make estimated tax payments. 

See an earlier post regarding this complex topic:


October 13, 2016

Love Offering as Disguised Compensation

Question:

As a member of my church's audit team, I have been told many times by the financial secretary that our church takes a love offering for persons serving our church. The love offering is not counted; it is just given to the person. For this reason, no record is maintained for issuing Form 1099s. Is this  procedure in compliance with IRS rules for issuing Form 1099s when payments are $600 or more in a calendar year?

Answer:

First, the offerings should be accounted for because it appears that the collections are received and distributed as compensation for work that is done for the church. When independent contractors receive more than $600 in a tax year, they must be issued a Form-1099 MISC. Of course, this will require that the offerings be counted and that information be collected from the recipient in order to facilitate filing the proper forms (typically, Form W-9 is used for this purpose).

Second, if these individuals are working for the church, they may very well be employees of the church and not independent contractors. As employees of the church, they should be receiving Form W-2's, and the church should be paying the employer's half of payroll taxes (in the case of non-ministerial employees). The church may also find it necessary to "gross up" the amount distributed in order to properly reflect the employee share of FICA taxes. For example, a $300 cash compensation amount represents a net check for gross pay of $324.85, with $24.85 of FICA tax withholding.


Foreign Moving Expenses for a Missionary

Question:

A husband and wife moved overseas in order to begin work with an orphanage. Can they take the moving expenses deduction?
 
Answer:

According to IRS Publication 521, "To deduct expenses for a move outside the United States, you must move to the area of a new place of work outside the United States and its possessions. [First,] you must meet the [general] requirements under Who Can Deduct Moving Expenses." 

"Who Can Deduct Moving Expenses" Requirements
  • First is the distance test. The publication states, “Your move will meet the distance test if your new main job location is at least 50 miles farther from your former home than your old main job location was from your former home” (see Publication 521 for specific examples). 
  • Second is the time test. The general rule is that one must work at the new job location for 39 weeks of the first 12 months (see publication for specific rules for employees vs. self-employed individuals). 
  • Third is the relation to work test. The rule is that "your move must be closely related, both in time and in place, to the start of work at your new job location" (IRS Publication 521).
Next, if the three above requirements are met the missionary maybe able to deduct moving expenses to a job location outside the U.S., but only against income that is not already excluded under the Foreign Earned Income Exclusion. According to IRS Publication 54, "When your new place of work is in a foreign country, your moving expenses are directly connected with the income earned in that foreign country. If you exclude all or part of the income that you earn at the new location under the foreign earned income exclusion or the foreign housing exclusion, you cannot deduct the part of your moving expenses."

October 11, 2016

Housing Allowance for Missionaries Without Agency Affiliation

Question:

Are missionaries who raise their own support without affiliation with an agency able to designate a housing allowance and, therefore, exclude it from taxable income?

Answer:

First, in order to qualify for a housing allowance, one has to be properly classified as a minister (see 2015 blog post relating to this topic).

Second, the housing allowance designation needs to be prospectively designated by a 501(c)(3) organization. 

According to the IRS Ministers Audit Technique Guide
“The exclusion under Internal Revenue Code §107 only applies if the employing church [including a mission agency] designates the amount of the parsonage allowance in advance of the tax year. The designation may appear in the minister's employment contract, the church minutes, the church budget, or any other document indicating official action. Treas. Reg. §1.107-1(b).”

The IRS Publication 1828 also states, "The minister’s church or other qualified organization must designate the housing allowance by official action taken in advance of the payment." Missionaries without affiliation with an agency are considered the employees or independent contractors of individual congregations which have authority to designate housing allowances. Accordingly, the churches supporting a missionary who has no agency affiliation may designate housing allowances.

Third, the excludable amount is subject to a three-part test. The lesser of a) the amount actually used to provide a home, (b) the amount officially designated as a housing allowance [in aggregate by the missionary's supporting churches], or (c) the fair rental value of the home is the excludable amount. 

See past MinistryCPA posts regarding this topic: 


Correct Reporting of Minister's Retirement Contributions and Expense Reimbursements

Question: 

Two questions regarding issuing a minister’s year-end earnings reports (i.e., Form W-2 or, in rare situations, Form 1099-MISC):
1.) Should the amount of retirement that the church pays monthly on the behalf of its pastor be included?
2.) Should mileage reimbursements be included?

Answer:

Regarding the proper IRS Form for reporting salaries and wages, please see the following Ministry CPA blog post.

When reporting other types of compensation a pastor receives, the preparer should follow the Form W-2 instructions. For example, in Box 12, the IRS provides several codes relating to various types of retirement benefits.

Churches may contribute to several types of retirement plans on behalf of their employees. Internal Revenue Code section 403(b) plans permit employer "non-elective" and matching contributions. Matching contributions involve elective deferrals by the employee, either pre-tax (403(b) plans) or after-tax (403(b) Roth plans). Form W-2 instructions provide Box 12 codes for these type of plans. The instructions also offer guidance regarding a Retirement Plan check box on Form W-2.

Some churches wish to contribute directly to employees' Individual Retirement Accounts. Unless established through plans such as a Simple IRA or SEP-IRA (see IRS Publication 560), employer contributions directly to employee IRA accounts are fully taxable income reported in Box 1 of Form W-2 with no other reference to retirement plan contributions cited on the form.

Per the 2016 Form W-2 instructions mileage reimbursement does not normally have to be reported on a Form W-2. The mileage reimbursement only needs to be reported if the amount reimbursed “exceeds the amount treated as substantiated under IRS rules" or is not made based on accountable plan rules (see MinistryCPA blog post ).

See past MinistryCPA posts regarding this topic: 

October 04, 2016

Ministers Performing Both Ministerial and Non-ministerial Duties

Question:

An ordained minister perform typical ministerial duties. He also assists with bookkeeping and other administrative functions, but these functions are not his primary role. He raises his own support, which is given to the organization as designated/restricted funds for his needs. While the organization has leadership and a board which determines direction and vision, his hours are not specifically set and the manner/method of work is unspecified by the organization.

1.) Is he an employee or an independent contractor?

2.) If he is an employee, can the organization pay half of his social security and Medicare (FICA tax)? 

Answer:

Both employee ministers and independent contractor ministers pay their own self-employment tax. According to IRS Publication 517 ministers have the responsibility to pay self-employment tax. Publication 517 states, “These services [of a minister] include: 
  • Performing sacerdotal functions,
  •  Conducting religious worship, and 
  • Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination."
The Publication continues: "You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities.”

In the case above, the minister is likely considered an employee minister according to these standards, and, therefore he would receive a Form W-2 (MinistryCPA Blog Post).

Regarding, his non-ministerial duties of bookkeeping, it is subject to FICA tax which is withheld from an employee at the rate of 7.65% and matched by the employer/church. He remains responsible for SE tax on his ministerial employee compensation. 

We find that this situation is common to ministers. For example, churches that have schools often find their ministers performing non-ministerial, FICA tax-subject duties (e.g., coaching an athletic team).

See previous post concerning the subject of a dual status employee:
http://ministrycpa.blogspot.com/2012/10/review-of-form-w-2-reporting-for.html

Housing Allowance when Bartering for Rent Payments

Question:

If a minister rents his principal residence, but he performs services (mowing the lawn, repairing the roof, etc.) in lieu of rent, can he still qualify the rent amount for a housing allowance tax benefit?

Answer:

Of course, bartering income is taxable. The Internal Revenue Code interprets that above situation as follows:
  1. tenant/minister receives taxable income for the fair market value of the services he provides, and
  2. tenant/minster pays landlord for renal of residence.
The minister in this case reports taxable income for services provided in lieu of rent. It is also likely subject to self-employment tax. He may then claim as qualifying housing allowance expense equal to the amount he "pays" for rent of his personal residence. Essentially, there is no difference than if the minister and his landlord simply traded checks.

See a past MinistryCPA post regarding this topic:

Compensation as a "Volunteer"

Question:

An individual receives donations from various individuals through an organization that sponsors his  volunteer service abroad. He also receives a monthly "gift" from the organization for volunteering.

Do either of these income streams require the issuance of Form 1099-MISC? 

Answer: 

For the donations receive in connection with the volunteer work, the Form 1099-MISC does not need to be issued by the sponsoring organization if all of the funds are spent for expenses related to the volunteer work and documented accordingly to that organization. 

According Internal Revenue Service Publication 526, qualifying expenses must be those:
  • Directly connected with the services provided, and
  • Only incurred because of the services you gave.
Travel expenses of volunteers:
  • Travel expenses necessarily incurred while you are away from home performing services for a charitable organization only if there is no significant element of personal pleasure, recreation, or vacation in the travel,
  • Air, rail, and bus transportation, 
  • Out of ­pocket expenses for your car (although most volunteers simply use the charitable mileage rate of $.14 per mile (2016)), 
  • Taxi fares or other costs of transportation between the airport or station and your hotel,
  •  Lodging costs, and 
  • The cost of meals.
Qualifying expenses do not include:
  • The value of the service you provided
  • Personal, living, or family expenses.
If the monthly “gift” actually exceeds qualifying expenses, then it represents compensation for services performed. It should be reported either on an independent contractor's Form 1099-MISC if it exceeds $600 in the tax year or on an employee's Form W-2.

See past MinistryCPA post regarding charitable travel:

September 27, 2016

A Roth 403(b) Contribution Cannot Lower Self-Employment Taxes

Question: 

A previous MinistryCPA blog post mentioned that, "In addition, unlike other retirement plan choices (Traditional and Roth IRAs, and for-profit company 401(k) plans), a minister is not subject to the 15.3 percent federal self-employment tax on amounts deferred into 403(b) accounts (IRS Revenue Rulings 68-395 and 78-6)."

Does this exclusion apply to ministers with elective deferrals to Roth 403(b) plans similar to the treatment available when contributing to pre-tax 403(b) plans?

I can see how this works easily for pre-tax 403(b) plans since Form W-2, Box 1 (total compensation) does not include the contributions as income. Accordingly, Schedule SE self-employment tax based on Box 1 is not assessed.

Answer:

We know of no IRS Revenue Rulings or authoritative IRS publications that would permit the reduction of SE tax through Roth 403(b) contributions.

Compare a traditional 403(b) contribution with a Roth 403(b) contribution displayed on Form W-2. Assumptions: $50,000 total compensation with $10,000 designated as housing allowance and $2,000 as elective deferrals (either traditional or Roth 403(b) plans).

Form W-2 with a traditional 403(b) contribution:



Form W-2 with a Roth 403(b) contribution:


Ministers often prefer Roth contributions for their non-taxable distribution benefit. Once retired, they can enjoy significant tax reductions. One alternative strategy may yet allow a minister tax-free distributions from his pre-tax 403(b) plan. When he retires, he may ask his congregation to designate his 403(b) withdrawals as housing allowance.

Please see the following posts for further explanation:








403(b) Contribution Calculations Exclude Housing Allowance

Question:

Should 403(b) contributions and the subsequent match be based on the pastor's total income from the church (including housing allowance) or just from the salary minus housing allowance?

Answer:

According to Richard R. Hammar, J.D., LL.M., CPA, in his book 2015 Church & Clergy Tax Guide, “Section 107 of the tax code specifies that a minister’s housing allowance (or the annual rental value of a parsonage) is not included in the minister’s gross income for income tax reporting purposes. Therefore, it would appear that the definition of includible compensation for purposes of computing the limit on annual additions to a 403(b) plan would not include the portion of a minister’s housing allowance that is excludable from gross income." 

Hammar's Church Law and Tax Report is an excellent resource that many ministries should consider as annual subscribers.


September 20, 2016

Coffee Shop as an "Integrated Auxiliary" of a Church

Question:

A church helped start a coffee shop which is a separate entity from the church. The primary goal of the coffee shop is to donate the profits to the church. Individuals have donated equipment to the church to establish the business. Can the donors claim charitable contribution deductions for the equipment?

Answer: 

Donors of non-cash gifts maybe be entitled to write-offs and should refer to IRS Publication 526 for further details regarding possible deductions.

The question brings up greater concerns than whether the donors can deduct contributions. For example:
  • Who takes responsibility for any legal compliance or liability concerns?
  • Does the ministry hold a Seller's Permit from the State in which it operates?
  • Is the ministry complying with all IRS and State employment laws for withholding taxes and other regulations?
  • Who is responsible for income taxes on profit, if it happens to fall under the classification as Unrelated Business Income?
Internal Revenue Service Publication 526 includes auxiliaries in the list of qualified organizations to receive deductible contributions. But according to IRS Publication 1828 in order for the coffee shop to be named as a integrated auxiliary it must meet these requirements: 
  • be described both as an IRC Section 501(c)(3) charitable organization and as a public charity under IRC Sections 509(a)(1), (2) or (3);
  • be affiliated with a church or convention or association of churches; 
  • and receive financial support primarily from internal church sources as opposed to public or governmental sources.
As an example, Publication 1828 notes that "Men’s and women’s organizations, seminaries, mission societies and youth groups that satisfy the first two requirements above are considered integrated auxiliaries whether or not they meet the internal support requirements."

The church leadership should pursue the assistance of professionals to help navigate these matters.

For more detailed information regarding integrated auxiliaries, see Code of Regulations, 26 CFR Section 1.6033-2(h).

Minister's Excluded Housing Allowance Income Subject to SE Tax

Question:

A pastor is receiving a $20,000 renting (housing) allowance per year, and he is currently paying Self-Employment (SE) tax on it. Is there a way to exclude this compensation from SE income status?

Answer:

He will not be able to exclude this amount from SE income. IRS Publication 517 states, "To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income: 1. ... 4. The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you."

Further, the IRS Minister's Audit Technique Guide offers IRS agents the following guidance:
"Computing Self-Employment Tax
  1. Salaries and fees for services, including offerings and honoraria received for marriages, funerals, baptisms, etc.. Include gifts which are considered income as discussed under the section on income.
  2. Any housing allowance or utility allowances.
  3. Fair Rental Value (FRV) of a parsonage, if provided, including the cost of utilities and furnishings provided.
  4. Any amounts received for business expenses treated as paid under a nonaccountable plan, such as an auto allowance.
  5. Income tax or self-employment tax obligation of the minister which is paid by the Church.

If an exemption from self-employment tax is not applied for, or is not granted, self-employment tax must be computed on ministerial earnings. To compute self-employment tax, allowable trade or business expenses are subtracted from gross ministerial earnings, then the appropriate rate is applied."

MinistryCPA.org provides a sample Housing Allowance Worksheet that may be helpful.

Services to a Church in Lieu of Rent of Church Parsonage: Bartering

Question:

A church member rents the church parsonage for $1,000 per month. But in lieu of paying rent, he performs services for the church.
1.) Should the church report his earnings on a Form W-2?
2.) Is the church's tax-exempt status affected by the renting of the parsonage to a non-staff member?

Answer: 

The renter must include the $1,000 dollars per month as taxable income, and the church should issue him a Form 1099-MISC if he is an independent contractor or Form W-2 if he is an employee (likely also subject to FICA tax).

The major issue is not that the church will lose its overall tax-exempt status, but that it may lose the real estate tax-free status of the parsonage being rented to a non-staff member. The situation here relates to bartering for services actually performed as a part-time employee of the church, so the concern may be unwarranted.

For information regarding the effect on tax exempt status follow the link below:


September 08, 2016

Expenses of Selling Home as Qualifying Housing Allowance Expenditures

Question:

Are expenditures related to the sale of a home considered to be qualifying housing allowance disbursements?

Answer:

The Internal Revenue Code lists only food and servants as specific exceptions to otherwise qualifying housing allowance expenditures. The amounts must be incurred relative to the minister’s principal residence and for costs directly related to providing a home. According to Internal Revenue Regulation §1.107-1, Rental Value of Parsonages, only food and servants are specifically excluded.

With every housing allowance the three part test must be considered (see Ministry CPA Blog past post regarding the three-part test). For example, if a minister's fair rental value is less than his actual expenses, he would receive no tax benefit from including expenditures from the sale of his home. This is often the case in the event of the sale of a minister's home.

Mission Board Collecting Donations for Ministers' Mission Trips

Question:

If a mission board is receiving monies for an ordained minister from his friends and family in order to fund his mission trip, are those contributions deductible for the donors? Are the monies received by the ordained minister excluded from taxable income?


Answer:


Donor side: The contributions may be deductible for the donors. According to Richard R. Hammar in this book 2015 Church and Clergy Tax Guide, "IF a donor stipulates that a contribution be spent on a designated individual, no deduction ordinarily is allowed unless the church exercises full administrative control over the donated funds to ensure that they are being spent in furtherance of the church's exempt purposes. To illustrate, contributions to a church or missions agency for the benefit of a particular missionary may be tax deductible if the church or missions agency exercises full administrative and accounting control over the contributions and ensures that they are spent in furtherance of the church's mission" (p. 384-385). Each mission board is responsible to establish policies and procedures to assure that donors of charitable contributions receive documentation consistent with IRS regulations.

Recipient side: The exclusion from taxable income for ministry trip expense reimbursements received by the minister depends on whether he has set up a reimbursement plan with the mission board. According to IRS Publication 463, "A reimbursement or other expense allowance arrangement is a system or plan that an employer uses to pay, substantiate, and recover the expenses, advances, reimbursements, and amounts charged to the employer for employee business expenses." If the minister has documentation for his trip related expenses, the board will reimburse the minister with the funds set aside for him. If he does not keep records of his trip related expenses, the money given to him will be taxable income and the agency will be responsible to issue him the appropriate information return (e.g., Form W-2 or Form 1099-MISC).

Ministers' Charitable Contributions Donated Pretax as Payroll Deductions

Question:

Can a minister make his contributions pretax through payroll?

Answer:

No, charitable donations may not be taken as pretax through payroll. According to the IRS Minister Audit Technique Guide, “Ministers' contributions to the church are not deductible as business expenses. ...They may still be deducted as contributions on Schedule A, but they may not be used as a business expense to reduce self-employment tax.”




July 19, 2016

Self-Employed, but not an Independent Contractor

Question:

An associate pastor is treated as an employee of a church that exercises very substantial control over the daily activities of his work. Must he be considered self-employed even though he has no liberty that is typical of an independent contractor? 

Answer:

Because an associate pastor is a minister of the church, he is considered an employee of the church in every area of employment except for purposes of social security and Medicare (FICA tax), and federal and state withholding. Federal and state withholding is elective by the pastor/employee, but FICA tax is not. The church will report his earnings on Form W-2, but it will not pay the typical employer's portion of FICA. He is responsible for self-employment tax (see Minister Audit Techniques Guide). For this reason, pastors are called dual status employees.

See this post for further clarification: 
http://ministrycpa.blogspot.com/2012/10/review-of-form-w-2-reporting-for.html

Ministers' Potential to Claim the SE Health Insurance Deduction

Question: 

A minister who has filed Form 4361 exempting himself from SE Tax is unsure of his eligibility to claim the Form 1040 SE Health Insurance Deduction. Is he able to claim the Line 29 deduction?

Answer: 

First, whether a minister has filed Form 4361 is irrelevant to eligibility to claim the deduction. The presence or absence of Schedule SE within his tax return for the purposes of calculating self-employment tax is not the determinant of eligibility. Rather Schedule C which reports the income of an independent contractor business is the reference point for determining the amount of a SE health insurance deduction.

A minister whose sole income is from his church as a common-law employee may sometimes erroneously report his employment income on Schedule C. He may have been led astray by his congregation's simultaneous error of issuing him Form 1099-MISC which is intended for independent contractors instead of the required Form W-2 for employees.

However, some ministers are correctly required to report ministerial income on Schedule C. Sufficient independent contractor income from services such as weddings, funerals, speaking engagements outside of his employment, and truly itinerant-type income may very well enable a minister who secures his health insurance based on that income to claim the SE health insurance deduction.

If the individual is truly a self-employed individual, he may be able to claim the SE health insurance deduction on Line 29 of Form 1040 according Internal Revenue Service Publication 517. But before one claims this deduction, he should consider several factors:
·         Are the premiums subsidized by an employer?
·         Was the plan acquired through the Marketplace and enjoying a premium tax credit?
·         Does the deduction exceed net earnings from the business under which the insurance plan was established?

Visit older blog posts concerning this subject:

July 11, 2016

Mission Trips Involving Both Charitable and Personal Time

Question:

A church group went on a two-week mission trip, and a few of the members stayed an additional two weeks for personal time. Will the members who stayed the two additional weeks be able to deduct expenses from the trip?

Answer:

IRS Pub 526 covers the topic of Charitable Contributions and, more specifically, travel expenses associated with charitable trips. The publication states that travel expenses will be deductible “if there is no significant element of personal pleasure, recreation, or vacation in the travel.” The publication also states, “The deduction for travel expenses won't be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you don't have any duties, you can't deduct your travel expenses."

We addressed a very similar matter in a blog post linked below. Ultimately, the answer depends on the facts and circumstances of the specific trip.
http://ministrycpa.blogspot.com/2015/04/can-i-deduct-travel-costs-for-mission.html

Renting a Church Parsonage: Threat to Tax Exempt Status

Question:

A church renting its parsonage to a non-staff member:
1.) Must a special account be established for funds received from rental of a church parsonage?
2.) Can these funds be used for church expenses not related to the property without affecting the church's tax-exempt status?

Answer:

We will address some significant concerns with the actions of the church; but first, in order to answer the questions above, the subject of Unrelated Business Income Tax (UBIT) must be consideredAccording to IRS Publication 598, "Rents from real property ... are excluded in computing unrelated business taxable income." The IRS cites exceptions to this rule. One exception is if the rental is debt-financed, the organization may owe UBIT. 

Now to answer the questions submitted:

1.) The church does not need to establish a separate account. It will not owe UBIT unless specialized debt-financing is employed which is beyond the scope of this blog post.  
2.) The church tax-exempt status will not affected by the use of the rental income for expenses not related to the property. HOWEVER, the church may lose its real estate tax exemption for the property because it is not used for a exempt purpose. We recommend the church contact the local tax assessor to determine whether temporary housing of non-church staff may avoid reclassification of the exempt status of the property.


See a past blog post for more information:
http://ministrycpa.blogspot.com/2012/11/church-renting-building-unrelated.html

July 06, 2016

Benevolent Offerings for Specific Families

Question:

If a church solicits a benevolent offering for a specific family is the benevolent gift taxable to the recipient? Are the contributions tax deductible by the donors? For example, a church family experiences an uninsured fire, and fellow members respond in generosity.

Answer:

Gifts are excludable from taxable income if they are not compensation for services performed. A gift “proceeds from a ‘detached and disinterested generosity,’ ... ‘out of affection, respect, admiration, charity or like impulses’” (Commissioner v. Duberstein, 363 U.S. 278, 285 (1960)). But if the payments received come from a “the constraining force of any moral or legal duty” the income cannot be considered a gift (Commissioner v. Duberstein, 363 U.S. 278, 285 (1960)). Therefore truly benevolent gifts are not taxable to the recipient. 

The tax deductibility of a gift by a donor to a fund collected on behalf of a family is dependent on the fact and circumstances of each case. The deductibility lies in the control of the monies and purpose of the organization.  According to Richard R. Hammar in his book 2015 Church and Clergy Tax Guide, “If a donor stipulates that a contribution be spent on a designated individual, no deduction ordinarily is allowed unless the church exercises full administrative control over the donated funds to ensure that they are being spent in furtherance of the church’s exempt purposes” (p. 384-385). 

For other posts related to these issues see:







Church Responsibility to Prepare the Minister's Form W-2

Question:

A pastor has taken the responsibility of preparing his own Form 1099-MISC reporting his earnings from the church congregation he serves. Is this not the responsibility of the church itself?

Answer:

First, since a minister is a dual status employee (see http://ministrycpa.blogspot.com/2012/10/review-of-form-w-2-reporting-for.html for information concerning dual status), he is an employee in every respect except for withholding, and therefore he should be issued a Form W-2. 


Second, the church is responsible for what is reported on the Form W-2 and should be preparing it. The church also has the responsibility of correctly identifying his taxable and nontaxable income. Accordingly the pastor should definitely not prepare his own information return.

Information Returns to Missionaries: Church vs. Agency

Question:

A church compensated a guest missionary for leading a summer camp event. Must the church issue a Form 1099-MISC to the missionary, his mission agency, or comply with some other directive?

Answer:

If the mission agency with which the missionary is associated receives the funds directly from the church on behalf of the missionary, then it is responsible to issue him the appropriate information return (Form W-2 or Form 1099-MISC). In this case the church does not need to issue the missionary an information return. However, if the compensation is paid directly to the missionary and exceeds $600 on an annual base then the church is responsible to issue Form 1099-MISC to the missionary as an independent contractor. Funds disbursed directly from one 501(c)(3) organization (the church) to another 501(c)(3) organization (the mission agency) are not subject to information return filing. 

For further information on the subject see - 

http://ministrycpa.blogspot.com/2008/12/churchs-issuing-form-1099-misc-to.html

Supporting a Retired Pastor

Question:

Can a church provide monthly support to a pastor who is no longer actively in the ministry without jeopardizing its tax-exempt status? If so, should a Form-1099 MISC be issued? 

Answer:

First, this action would not jeopardize tax-exemption status. The action of supporting a retired minister is within the boundaries of exempt purposes. 
Second, the post retirement support is compensation. The compensation should be reported on a Form 1099-MISC unless he is still considered to be an employee who should therefore receive Form W-2.


This is the "bad news." However, let's revisit a blog post we provided in 2009.

 http://ministrycpa.blogspot.com/2009/10/retired-minister-continued-support-from.html


"A retired minister may receive part of his or her pension benefits as a designated parsonage allowance based on past services. Trustees of a minister’s retirement plan may designate a portion of each pension distribution as a parsonage allowance excludible under IRC § 107. (Rev. Rul. 63-156, 1963-2 C.B. 79, and Rev. Rul. 75-22, 1975-1, C.B. 49) 

"The retired minister may exclude from his/her net earnings from self-employment the rental value of the parsonage or the parsonage allowance received after retirement. The entire amount of parsonage allowance received is excludible from net earnings from self employment, even if a portion of it is not excludible for income tax purposes. In addition, the retired minister may exclude from net earnings from self-employment any retirement benefits received from a church plan. Rev. Rul. 58-359, 1958-2 C.B. 422."


The church should consider cooperating with the retiring minister to designate these ongoing payments as housing allowance. It has the potential to reduce his tax bite significantly.

The IRS Minister Audit Technique Guide published in April 2009 may provide some tax planning reminders (and IRS authority to back it up!).