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Showing posts from October, 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.

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 t…

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 reimbursemen…

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 t…

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 empl…

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. Th…

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 b…

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 …

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 maintai…

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: tenant/minister receives taxable income for the fair market value of the services he provides, andtenant/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: http://ministrycpa.blogspot.com/2016/09/services-to-church-in-lieu-of-rent-of.html

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, andOnly 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, r…