MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: As a pastor, what are my retirement options and what are the advantages/disadvantages of each? Answer: The best retirement plan option for each minister depends on his objectives and his current tax situation. The three most common retirement plan options used by ministers include: (a) Internal Revenue Code 403(b) plans (also called Tax Sheltered Annuities (TSAs)) (b) Traditional Individual Retirement Accounts (IRAs), and (c) Roth IRAs  Ministers often select 403(b) plans when they want to maximize their eligible contributions, or to reduce their self-employment tax burden. For the year 2020, a minister may elect to have his employer withhold (“elective deferral”) up to $19,500 of his compensation and contribute it; instead, to his 403(b) qualified investment account. Ministers who are 50 and older are eligible to increase this amount by another $6,500 to catch-up for earlier years’ smaller deferrals ( IRS Publication 571 ). In addition, unlike...

Your congregation wants to contribute to your retirement? Great! Now, how can/should you handle this? First , let's discuss the options; then we'll consider how the church can get involved. The best retirement plan option for each minister depends on his objectives and his current tax situation. The three most common retirement plan options used by ministers include: (a) IRC 403(b) plans (also called Tax Sheltered Annuities (TSAs)), (b) Traditional Individual Retirement Accounts (IRAs), and (c) Roth IRAs. Ministers often select 403(b) plans when they want to maximize their eligible contributions, or to reduce their self-employment tax burden. For the year 2008, a minister may elect to have his employer withhold ("elective deferral") up to $15,500 of his compensation and contribute it, instead, to his 403(b) qualified investment account. Many ministers are eligible to increase this amount by another $5,000 to catch-up for earlier years' smaller deferrals (IRS ...

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...

Q uestion :   A previous MinistryCPA blog post mentioned that, "In addition, unlike other retirement plan choices (Traditional and Roth IRAs, and for-profit company 401(k) plans), a minister is not subject to the 15.3 percent federal self-employment tax on amounts deferred into 403(b) accounts (IRS Revenue Rulings 68-395 and 78-6)." Does this exclusion apply to ministers with elective deferrals to Roth 403(b) plans similar to the treatment available when contributing to pre-tax 403(b) plans? I can see how this works easily for pre-tax 403(b) plans since Form W-2, Box 1 (total compensation) does not include the contributions as income. Accordingly, Schedule SE self-employment tax based on Box 1 is not assessed. Answer: We know of no IRS Revenue Rulings or authoritative IRS publications that would permit the reduction of SE tax through Roth 403(b) contributions. Compare a traditional 403(b) contribution with a Roth 403(b) contribution displayed on Fo...

Question: If I can make retirement contributions to both a Traditional IRA and to a church plan is there a reason to prefer one over the other? Answer: Yes! Most ministers should likely be choosing a 403(b) church plan. In addition to a Traditional IRA, a minister may choose to claim a contribution to another retirement plan, like a 403(b) church plan. However, before choosing to do so, it is important to understand the benefits and disadvantages of both a Traditional IRA and a 403(b) plan. Contributions to a Traditional Individual Retirement Account are not employer plans that are deducted up front from a minister's pay (reported on Form W-2). Instead, these amounts are truly deducted on his personal tax return. The benefit of the IRA is that it can be funded after December 31 st and still count against one's taxable income. Additionally, an IRA does not require church sponsorship and has lower fees to establish an account. While there are several benefits of ...

This is another posting in the MinistryCPA Top 10 series:  Understanding payroll can be a difficult task in any business. Knowing how to onboard new employees, pay them, file tax documents, and deal with other benefits is a daunting task. We have created a list of some of the top payroll compliance issues that we see here at MinistryCPA. 1.       Employee vs Independent Contractor Understanding the difference between an employee and an independent contractor is essential to the payroll process. If a person is classified as an employee, then the business is responsible for employment taxes such as social security, Medicare, unemployment, and income tax withholding. If the person is classified as an independent contractor, the business is not responsible for any of these taxes.  There are three factors that help a business determine whether an individual is an employee or an independent contractor. These three factors are the degree of behavioral...