MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question:

Should I "opt out" of the Social Security system?

Answer:

First, some background information:

The Internal Revenue Code (IRC) exempts ministers from mandatory federal and state income tax and Medicare and Social Security (FICA) tax withholding by their employers. However, if they do not elect to have income tax withholding, then most ministers must file and pay federal and state estimated tax vouchers.

In any case, the employers of ministers are not permitted to withhold and match the 7.65 percent FICA tax. Instead, the minister (unless he opts out of the Social Security system) is responsible to pay the entire 15.3 percent self-employment tax (SECA). Many ministers elect to have additional federal income tax withheld so that the excess can be applied to their self-employment tax obligation at the time they file their annual Form 1040.

Now, let's consider what opting out of Social Security might mean:

1. A minister may apply to opt out of the Social Security sys…

Question:

How can the church and I work together to sell the parsonage and get my family into a home of our own?

Answer:

The answer varies greatly based on the church’s and minister’s specific situation. However, the following are several issues that likely need to be addressed.

      1. Any property transferred by the church to the minister will be considered taxable compensation at its fair market value (reduced by any payment by the minister to the church).
      2.Because the minister will no longer be living in real estate that is exempt from property taxes, his costs of living will increase accordingly.
      3. An excludable housing allowance is governed by a three-part test. Some ministers may believe that designating as housing allowance a one-time, large bonus from the church, which the pastor intends to use as a significant down payment, will fully qualify as exempt income under the three-part test. However, a large housing allowance designation may not fully eliminate the taxa…

Question:

Our church is looking to apply for 501(c)(3) status. What are the advantages and disadvantages of pursuing formal recognition as a 501(c)(3) organization?

Answer:

To be tax-exempt under Internal Revenue Code § 501(c)(3), organizations (e.g., churches) must be organized and operated exclusively for exempt purposes set forth in the IRC. Additionally, a 501(c)(3) organization must not be organized or operated for the benefit of private interests (referred to as "private inurement").

Churches are automatically classified as IRC § 501(c)(3) entities regardless whether they have been formally recognized by the IRS. Yet, there are reasons to pursue formal recognition. Those that do receive this recognition receive from the IRS a Tax Determination Letter.

Advantages:

1. Church schools that wish to apply for grants will likely need to provide a Tax Determination Letter since foundations do not want to disseminate funds only to find that they were contributed to disqualified c…

The “Families First Act” requires virtually all small employers to extend sick leave to affected employees, but a tax credit will help small business and not-for-profit organization employers pay for it.
Following are the most critical provisions, we believe, for small employers:
·    1. Public Health Emergency Leave (Division C of the Act effective April 2, 2020) – Small employers who have “employees who are unable to work (including telework) due to a need to care for a child under age 18 if school or child care is unavailable due to a public health emergency” are required to: oProvide paid leave “if needed by any employee who has been employed at least 30 calendar days,” oPay them “at a rate no less than two-thirds of the regular rate of pay” for public health emergencies declared by a federal, state or local authority that extend beyond 10 days (“employees may be required to use existing accrued leave during the first 10 days”). ·      2. Paid Sick Leave (Division E of the Act effective…

Question:

Can a church give non-taxable gifts to its pastor(s)?

Answer:

Typically, there are two ways members of a congregation can give gifts to its pastor(s) and staff member(s). One involves corporate action and the other involves personal and individual action.

1. The church can take up a collection for its pastor(s). In this case, the contributions are deductible to the donors, but must be reported by the pastor since they are deemed payments received from an employer as compensation for his services. Any gifts paid by employers to their employees are considered taxable income and must be reported together with other earnings on Forms 941 and W-2.

Additionally, churches should be aware of the Internal Revenue Service's "De Minimis Fringe Benefits" rules. According to IRS Publication 15-B, a de mininis benefit is any property or service provided to an employee that has so little value that accounting for it would be unreasonable or impractical. However, cash and cash …

Question:

I am now committed to a not-for-profit career and finding it very fulfilling. What can I do to better qualify myself?

Answer:

We like what we are seeing in the new Master of Nonprofit Administration offered by Maranatha Baptist University.
What we like about it:
       1.We have personal knowledge of the faculty members' experience in the not-for-profit world.        2.The featured courses hit on the areas we have found not-for-profit leaders hungry for advanced             training. ·Writing grant applications that appeal to foundations looking for partners ·Recruiting, selecting, and supporting quality volunteers        3.Of course, as CPAs, we like the emphasis on wise and conscientious financial stewardship!        4.With the plethora of regulations and legal hazards, we can see that not-for-profit leaders will be          equipped with a solid introduction to legal and regulatory issues.
To find out more, we encourage you to visit Maranatha’s website or contact the Univers…

Question:
How should a church handle benevolent giving and what principles should be followed?

Answer:
Many churches have established a “benevolent” or “others” fund to help meet the special financial needs of its members and community. All members of the congregation are generally encouraged to give to the fund to allow the church to respond through an authorization process observed by church officers. While a fund like this can be of great assistance to individuals in need, there are some principles a church can follow to be wise with these funds and to comply with the Internal Revenue Code.
1. A benevolent gift is not disbursed in exchange for goods or services rendered. Therefore, it is not considered taxable income to the recipient, and no reporting (e.g. Form 1099) is required by the church. A gift of benevolence is a gift with absolutely no expectation of repayment or receipt of services. There may be instances when those in need may ask for a loan rather than a benevolent gift.…

Question:

What ideas can a church consider to control its rising health care costs?

Answer:

Many ministers and their employers are looking for alternative plans to control rising health care costs without neglecting those in need of medical services. Because of the Affordable Care Act (ACA) requirements, many churches have reconsidered the medical benefits it offers to employees. If the church employs a single employee—a solo minister, the ACA has one set of requirements. Generally, there is more flexibility when there is only one employee. But for churches with two or more employees who participate in medical benefits, the ACA has stringent requirements.

We suggest that you consult your tax professional when offering medical benefits. The benefits the church offers may very well be 100 percent taxable to the employee.

For example, be aware that if a church covers the monthly share costs of an employee for a health-sharing plan (e.g., Samaritan Ministries International, Medi-Share, or …

Question:

What reports do churches need to file with the IRS regarding pastors' compensation?


Answer:

Other than for the pastor, a church files the same reports for all employees and is subject to the same withholding rules for standard employees as any other organization. Ministers compensation, however, is exempt from all withholding. The only exemptions churches enjoy compared to other organizations are (1) an exemption from unemployment taxes, and (2) an exemption from FICA (Social Security and Medicare) tax for churches that file Form 8274. IRS Publication 15 can answer church treasurers’ standard questions regarding church payroll.

Reporting a minster’s compensation is often confusing even to treasurers who are familiar with the rules for standard employees. The following is a sample compensation arrangement: