MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: If a minister is "tax exempt" by being approved on the IRS tax form 4361, does that mean he doesn't pay Federal, State or Social Security? Answer: No, Form 4361 only exempts a minister's self-employment income from SE tax normally reported and calculated on Schedule SE, Form 1040.

Question: From my 403(b) retirement plan can I rollover an amount to a Traditional IRA, then roll that over to a Roth IRA to avoid paying self employment taxes? Answer: First, timely rollovers from an Internal Revenue Code section 403(b) plan to a Traditional IRA are non-taxable both for income and self-employment (SE) tax purposes. In fact, distributions from qualified retirement plans are not subject to SE tax. Income tax can be postponed by rolling over 403(b) distributions to a Traditional IRA. But subsequent distributions from a Traditional IRA rolled over to a Roth are not tax-free. However, there may be reason to avoid rolling over a lump-sum distribution from a 403(b) plan into a Traditinal IRA. Please reference the following posting and others within this blog related to housing allowance designations. http://ministrycpa.blogspot.com/2008/02/ministers-retirement-distributions.html

Question: Can a pastor pay extra on his mortgage principal and use it to count toward his housing allowance? Answer: Yes, but. A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. The IRS lists only food and servants as prohibitions to allowance housing expenses. 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 (IRS Publication 1828; Clergy Housing Allowance Clarification Act of 2002; IRS Regulation Section 1.107-1). Because of the third limitation listed here, many ministers gain little or no benefit by accelerating their mortgage payments. For example, an additional $5,000 principal payment adds to the amount actually used to provide a ho...

Question: A church led by a "volunteer" pastor wishes to give him a monetary gift for Christmas. Will the church need to issue a Form 1099-MISC? Is the answer different depending on the amount? Answer: The payment will be considered as compensation for services rendered--the church is acting corporately in compensating a minister who serves it. However, there are some options. First, the amount can be designated (prior to payment) as housing allowance. This removes the federal income tax consequence to the extent of his actual housing expenses (and the fair rental value of his home). Second, while the compensation is subject to the 15.3 percent self-employment (SE) tax, to the extent the minister has unreimbursed ministry expenses, he can reduce his SE income. If his net self-employment income is less than $400, he will owe no SE tax. With so little income, it is unlikely that the IRS would classify him as a Form W-2 employee. Therefore, if the non-housing allowan...

Question: Some members and non-members of a church direct funds to a ministry overseas, partly because they want to get a tax deduction by giving it through the church versus giving to the overseas ministry directly. The church has elected to include the foreign ministry in its missions budget, albeit with a much smaller amount than what is being designated by other people. Does this pose any problems that the church should be aware of? Answer: With the church as the organization overseeing the support of the overseas work (it obviously endorses it by virtue of its own giving), it's almost certainly better to contribute in this manner than by individual donors trying to make wire transfers (I suppose) to a foreign ministry. In my experience, the typical concern the church must have is that it does not become a conduit for the otherwise non-charitable obligations of individuals who are not really donors. Let me illustrate. Imagine that a parent is obligated to pay on the c...

Question: A church's janitor is paid a fixed sum each month. He works without direction (although direction could be given) and on his own schedule (within limits, of course). The church provides supplies. Is he an employee or contractor? The same individual also does the church's lawn care for which he is paid each time that he performs the service. He provides his own equipment. The schedule for the service is "when it needs it" and as such is not necessarily regular, especially in the winter. Is he an employee or a contractor? Answer: Each church's situation is unique. That's why the general guidelines and links that I provided in my September 21, 2011, blog posting can be helpful. Church Employee or Independent Contractor

Question: A pastor works a full time job and thus does not take a salary from the church. Since he owns his own home, can he take a tax deduction for housing allowance and travel expenses from his ministry even though his income is actually from another job? Answer: Unfortunately, a housing allowance is only based on a designation of compensation paid by the church. No housing allowance is permitted in his case. Essentially, the minister is a volunteer. This does mean that his mileage on behalf of the church is deductible as an itemized deduction (at the charitable rate) and his out-of-pocket costs as a volunteer may be written off (Schedule A).

Question: A church has a member preparing to go to the mission field. Before she leaves she is required to be debt-free, including college loans of $35,000. If friends give money to the church with the understanding that the funds may be used for the purpose of repayment, are the gifts deductible since they are given to the church? Answer: It is a very common experience that missionaries supported by a church have friends in the congregation. These contributions are tax-deductible as long as the church has established a fund and communicated its interest to support the missionary's endeavors. Typically, a church will forward these funds to the missionary's mission agency since it provides oversight in his or her financial matters. Churches that issue this compensation directly to the missionary must comply with the reporting requirements of the Internal Revenue Code--using Form W-9 to obtain the missionary's name, address, and identifying number and using Form 1099-MI...

Question: At times, a church gives out monetary "thank you" gifts to volunteers regularly involved with ministry. It has considered this to be a "benevolence." Since there is a "service" done, though with no monetary reward in mind, is this still benevolence, or should this be considered a Form 1099-MISC item? Also, if this is done on a regular basis, would this now be considered more of an employer/employee item? Answer: These gifts should be considered taxable income. If the "volunteers" are independent contractors, then Form 1099-MISC should be issued to each individual paid $600 or more. Employees should be issued Form W-2 with applicable withholdings. IRS Publication 3079--Tax Exempt Organizations and Gaming--addresses some of these issues with an example. While I personally am opposed to gaming activities, the IRS position on volunteers can be seen by reviewing portions of the publication. "Example: ABC Organization operates ...

Question: Is it allowable for a minister to use funds from his professional expense reimbursement plan to pay for the registration of his wife at a Christian conference? Can the minister and his wife be classified as a “ministry team” and therefore allow such an expense? Answer: IRS Publication 463 indicates that an employer cannot deduct payments (or reimbursements, including those through an accountable plan) for a spouse accompanying an employee "on a business trip or to a business convention," unless that spouse is also 1) its employee, 2) has a bona fide business purpose for the travel, and 3) would otherwise be allowed to deduct the travel expenses." These rules also apply to tax-exempt employers (e.g. churches) even though they are unconcerned about losing deductions since they pay no income tax in the first place (Federal Tax Regulation 1.132-5 (t)(2). However, this does not necessary give the whole picture. Internal Revenue Bulletin No. 1996-26, Re...