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: