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Showing posts with the label Employee Compensation Taxation

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 …

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 employersForm 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 t…

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.
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 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, orOption 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 $60…

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 Insuranc…

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.

Church Pays for Camp Fee - Is it Taxable?

Question:

Our church pays 100% of registration fees for our pastor staff's children to attend youth camp in the summer. The children of the staff do not have to complete an application to get the full registration scholarship. Staff children are responsible for paying their transportation fee. Would the cost of the camp registration be considered a taxable fringe benefit to the pastor? 

Answer:

Tax-free fringe benefits are so classified based on statutory authority. To our knowledge, there is no statutory authority on this benefit based to be nontaxable.

While the benefit is certainly generous and most likely appreciated by the staff families, the policy's current state leads to taxable income.

If staff members are receiving this benefit similar to other families of the church, however, it may be possible for them to enjoy tax-free assistance. For example, the church could establish a scholarship fund to sponsor children and teens of the church or local community to attend summer c…

Line Items of Church Budget

We (MinistryCPA) were recently asked our opinion on the setup of a church's budget.

Question:

A church wants to know if their budget should individually list the compensation of each staff person instead of combining employee salaries/wage for each type of employee that the church employs. For example, the church budget has a line for the pastor, youth minister, church secretary, etc., but then the budget combines all the part-time employees, such as nursery and accompanists. There have been discussions concerning the privacy of the employees, so how detailed should each line item be?

Answer:

In our experience, churches use a wide array of practices when it comes to budget and personnel. One extreme is including each employee's pay--even a breakdown of the compensation package. The opposite extreme is one number on the budget for the total of all the compensation, including benefits, of all the employees. 

We like the approach of developing a budget on a per-program basis. For exa…

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, r…

When a Minister Earns Non-Minister Wages

Question

A church has recently hired a minister who will also work 5-10 hours each week as the church's custodian. Are all of the minister's wages exempt from FICA? Are there any issues the church should consider when issuing the minister his W-2? 

Answer

The church must understand that the minister is exempt from FICA taxes only for wages he earns performing ministerial duties. 

A review of the definition of a minister is helpful. The Internal Revenue Service's Minister Audit Technique Guide states the following:

Treas. Reg. 1.1402(c)-5(b)(2) provides that service performed by a minister in the exercise of the ministry includes:
Ministration of sacerdotal functions;Conduct of religious worship;Control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body consulting a church or denomination.If the minister performs other duties for the church tha…

New Standard Mileage Rates Now Available; Business Rate to Rise in 2015

Yesterday, the Internal Revenue Service issued the 2015 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car, van, pickup or panel truck will be:
57.5 cents per mile for business miles driven, up from 56 cents in 2014 23 cents per mile driven for medical or moving purposes, down half a cent from 2014  14 cents per mile driven in service of charitable organizationsThe standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.

Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than t…

Ice Bucket Challenge - Taxable Income?

Question:

A church's minister has an immediate relative who has been suffering from ALS for the past six years. The church sponsored and organized an "Ice Bucket Challenge" for the relative.

Originally, the thought was to raise $3,000-$5,000. The church intends to (1) transfer the funds to the facility that cares for the relative or other ALS charities and (2) report the funds as a bonus compensation to the minister.

However, the church raised close to $30,000; now the tax situation has more serious consequences if the church calls it compensation to the minister. How should the church report these monies?

Answer:

We see three areas that could affect how to report this money:

If the funds are simply going to an organization to support its general operations (not to pay a single patient's costs) or to other ALS charities, the transfer is from one Internal Revenue Code section 501(c)(3) organization to another. There is no tax consequence for the church's ice bucket cha…

Top Ten Q&A Update

We have recently updated our Top Ten Questions that Ministers, Missionaries, and Church Treasurers Ask Tax Preparers

Based on our experience, the Top Ten Questions are frequent questions asked by ministers, missionaries, church treasurers, and others serving in ministry positions as licensed or ordained ministers. Our answers are not intended to be exhaustive. Accordingly, you should consult your own tax professional for assistance in applying our information to your specific situation. 

The "Top Ten Q&A" has been our most hit web page since 2010. Providing a helpful resource to many who are involved in ministry, it averages close to 1,000 page views every two weeks. 

If you prefer to download a PDF of our Top Ten Questions, click here


Cell Phone Reimbursement by Church

Question:
One of our pastors recently upgraded his iPhone and submitted for reimbursement through a professional account. Is it proper for the church to refund him fully as a non-taxable reimbursement? 
Answer:
The italicized excerpt below is taken from IRS Publication 15-B. We have added some of our own comments, which are in parenthesis and underlined. 
The value of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a working condition fringe benefit. Personal use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a de minimis (non-taxable) fringe benefit.
Noncompensatory business purposes. You provide a cell phone primarily for noncompensatory business purposes (the cell phone should not be a disguised way to give the pastor more compensation) if there are substantial business reasons for providing the cell phone. …

Donating a Timeshare Vacation to a Pastor

Question:

A member of our congregation owns a timeshare at a resort. He would like to donate a two week stay at the timeshare to our pastor. This situation leads me to ask the following questions: 
1)The donor is requesting a deductible contribution letter. Is it appropriate for us to give him one?
2)Is this situation taxable to our pastor?
Answer:
1)There is little difference between this situation and donating one’s services. Remember, there is no deduction for donating one’s services. Similar to donating one’s services, the tax benefit of what this donor is contemplating is limited to the following: He does not have to report income that he does not receive since he will collect no rent from the pastor.However, we believe it is appropriate to provide a letter thanking the member for making his timeshare available. The letter should not be prepared on church letterhead; instead, it should be prepared and sent from the pastor himself. Further, this is not an action taken by the pastor’s e…

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…

MinistryCPA Special Topic: Qualified Tuition Reduction Plan Guidelines

The IRS lays out very specific and stringent regulations for organizations that offer tuition reduction plans to their employees (e.g., Publications 15B525, and 970). Below is a brief overview of the major guidelines that non-profit organizations should keep in mind when implementing such plans for primary, secondary, and undergraduate higher education.

First, qualified tuition reduction plans are not taxable as compensation to the employee. If an organization meets all of the requirements for a qualified plan, this can be an extremely valuable benefit to employees.

Second, tuition reduction plans must be received from, and used at, an eligible educational institution. According to Publication 970, "An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities." Therefore, a homeschool is ineligible.

Third, qualified tui…

Church Intern Compensation Guidelines

Question:

A church recently began a summer internship program. What guidelines does it need to be aware of when implementing this program?

Answer:

First, the church should consider fair compensation for any interns. Although many internships are unpaid, theWall Street Journalin April 2014 covered increased scrutiny of unpaid interns. According to the Fair Labor Standards Act, unpaid internships should not be for the direct advantage of the employer, should benefit the intern and be educational, and must not displace regular employees. Churches should carefully apply these standards when considering intern compensation.

Second, an intern is not typically an ordained or licensed minister, and should not be treated as a dual-status minister. Generally, interns will be subject to the same federal and state income tax withholding and  FICA withholding and matching rules as normal employees. For more on the dual status of ministers, read this previous blog post.

If the church provides housing al…

Tithing by Virtue of a 10% Cut in Pay?

Question:

A pastor would like to have his tithe deducted from his paycheck by the church as a pre-tax reduction. Because he believes that this would entitle him to a charitable donation deduction and help him avoid paying income and self-employment tax, he feels that this would be a beneficial arrangement. What are your thoughts?

Answer:

While it is true that an employee could agree with his employer for a cut in pay, in fact, we do not believe that the situation described here qualifies. First, constructive receipt rules require taxpayers to report all earnings that are made available to them, regardless of actual physical receipt.

Second, it would likely appear to some in the congregation who do not have full knowledge of the situation that the pastor has simply ceased giving to the church. Based on these considerations, this is certainly not a strategy we would endorse, nor, most likely, would many tax authorities who became aware of the situation.

Additionally, if a church does decide …