MinistryCPA - Corey A. Pfaffe, CPA, LLC

New ministers frequently have several questions as they enter a new field that has significantly different rules than the standard employee of a business has. We have assembled a list of some of the most important questions that a new minister should investigate when starting their new job.  1. How can I live within my means? You need a budget. Enjoying a long-term ministry in Christian service requires an ability to live within your means. Lots of tools are available: Christian authors with “how to” instructions and online apps, to name a couple. Try You Need a Budget (www.ynab.com), if you need an idea. 2. What does it mean to be a dual status employee? A minister, per IRS regulations, is both an employee and self-employed—dual status. As an employee, a minister is eligible for all fringe benefits offered to non-minister employees — health coverage, retirement plans and so on. The exception lies in social security and Medicare tax. Non-minister employees must have 7.65% of thei...

This is another posting in the MinistryCPA Top 10 series: Understanding what to offer a pastor as part of his compensation package can be a difficult task. There are a number of different factors to consider. Variables such as compensation, insurance, housing allowance, taxes, and retirement all play into compensation. We have compiled a list of factors that a church should consider when designing a compensation package for the pastor. Every church situation is unique, and each church should analyze what it can actually afford. 1. How does the church determine an appropriate compensation rate? Determining an appropriate compensation level can be a difficult task in a small ministry. There are a few factors that can be used to help determine a fair compensation for the pastor. The first factor that should be taken into consideration is the needs of the pastor. If the church wants a pastor to work full time, then it must consider what he needs to be paid to support himself and his fami...

Question: A mom and dad established a Internal Revenue Code section 529 college fund for their son, but he has decided to join the military instead. What are the penalties if the parents decide to pull the money out of the 529 college fund to give to him for uses other than college tuition? Does the family pay taxes only on the interest that was made or is the entire distribution treated as taxable income? Answer: Before we dive into answering the question it is important to understand that there are two types of 529 plans and that all fifty states and Washington D.C. use at least one of these two plans. The Securities Exchange Commission  (SEC) defines both types. First, there are prepaid tuition plans which allow individuals to purchase credits at colleges/universities for future tuition at its current rate. These plans typically do not include room and board. The second type, which falls in line with our question, is an education savings plan. Under this plan, an individ...

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 a...

The IRS lays out very specific and stringent regulations for organizations that offer tuition reduction plans to their employees (e.g., Publications 15B ,  525 , 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,  ...

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, the Wall Street Journal in April 2014 covered increased scrutiny of unpaid interns. According to t he 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...

Question: As an executive at a mission agency, I am working on a doctorate. In 2013, I incurred $1,200 of qualified education expenses (tuition, fees, and books). My employer paid these education expenses directly as part of an educational assistance program. Can I claim any kind of education credit or deduction for these expenses? Answer: Unfortunately, no. According to IRS Publication 970 , " You cannot use any of the tax-free education expenses paid for by your employer as the basis for any deduction or credit, including the American opportunity credit and lifetime learning credit." Generally, "Qualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution" ( irs.gov ). Qualified expenses paid by an individual may be eligible for tax deductions or credits.

Question: Can a church rent a property to use for its church parsonage? If so, can anyone live in the property as long as they're not paying rent to the church for living in the parsonage? Answer: According to the IRS’s Minister Audit Technique Guide: “IRC § 107 provides an exclusion from gross income for a “parsonage allowance,” housing specifically provided as part of the compensation for the services performed as a minister of the gospel. The term “parsonage allowance” includes church provided parsonages, rental allowances with which the minister may rent a home and housing allowances with which the minister may purchase a home.” The church provides either the parsonage or the rental allowances to cover the cost of housing for the minister. If an individual other than the minister had his rent paid for by the church, it may be considered compensation for that individual and, if so, would need to be reported as such. Possible scenarios:      Chur...

Question: Are Internal Revenue Code 403(b) distributions (to a minister over the age of 59 ½) that are designated as housing allowance in excess of housings costs subject to self-employment tax, or are they only subject to income tax as regular income? Answer: If a minister owns a home, the amount excluded from the minister’s gross income as a housing allowance is limited to the least of the following: (a) the amount actually used to provide a home, (b) the amount officially designated as a housing allowance, or c) the fair rental value of the home. As with virtually all retirement plan distributions, no self-employment tax is due on 403(b) distributions. The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. Mariya Bondarenko of Minnesota gets credit for this one.

Question: May a church pay for variable universal life insurance for the pastor and his wife without showing it as income? Answer: Right "out of the horse's mouth" -- IRS Executive Compensation - Fringe Benefits Audit Techniques Guide (02-2005 ): "Group term life insurance premiums paid to insure the lives of a spouse or dependent of an executive are included in the gross income of the executive (Treasury Regulation §1.61-21(b)(1)) . Employers attempt to classify such payments as a deminimis fringe benefit; however, the Government takes a very narrow view of this provision ( PLR 200033011)." IRS Publication 15-B , Employer's Tax Guide to Fringe Benefits, explains that only group, term life insurance policies may enjoy these benefits and then only the first $50,000 of death benefit. Clearly, the above scenario strikes out in two respects: 1) it's not group term life insurance, and 2) the spouse is covered.

Question: A church sets up a fund to pay a former pastor's nursing home, housing and other expenses. He and his wife are current members of the church. Is the church required to issue him a Form 1099-MISC (or Form W-2)? Is there a limit as to how much he can receive? Answer: Situations such as this are common. Typically, the church has been unable to compensate the former minister as well as it would have wished and now intends to provide some current support to address this undercompensation. Such payments to the minister or on his behalf are taxable as compensation. The church can designate a portion to housing allowance and the minister may elect Internal Revenue Code section 403(b) elective deferrals which may reduce the tax bite. There is no limit to the amount other than possible Social Security retirement limitations on those who have not reached full retirement age (between age 65 and 67 or so). Another possible motivation for these payments produces an entirely d...

An auto allowance advanced by a church to its pastor is subject to very exacting accountable plan rules. See my explanation on my website at MinistryCPA.org under Minister and Ministry Tax, Top 10 Questions #4. The church must receive timely evidence of the pastor's business mileage when it offers advances. Generally, I recommend that a church reimburse its pastor for business use of his personal automobile (at the current IRS rate) only after documentation is received. Under accountable plan rules, when auto allowance advances exceed the allowable deduction (qualified miles times the current IRS rate) the pastor is required to refund the excess advance to the church. Otherwise, the arrangement is disqualified and the entire annual allowance should be included in Box 1 of the pastor's Form W-2. Simply including the excess amount in Box 1 is not in compliance with provisions of the Internal Revenue Code.