MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: A minister was ordained in 2007, but had no income until 2008. Must the minister wait for two years until tax time for 2009 (before April 15, 2010) to apply for exemption from social security? Answer: The application can be filed immediately, but must be filed before a minister's first two years of ministry expire. Years when less than $400 is earned are excluded from the time limit calculation. Form 4361--Application for Exemption From Self-Employment Tax for Use By Ministers--requires disclosure of the first two years of ministry income. One who waits until the final year should file an amended return to receive a refund of self-employment tax paid in year one. Ministers who anticipate filing for exemption may forego making estimated tax payments of the standard SE tax, but run the risk of failing to receive exemption approval and, then, owing a large tax plus penalties for underpayment of estimated tax.

Question: Is it true that the pastor's housing allowance has to be $1000.00 a month? Is there a minimum? Answer: There is no minimum, but the Internal Revenue Code does establish a maximum. 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. A housing allowance is also available to a minister living in a parsonage to the extent he uses the allowance for his personally paid out-of-pocket costs not paid by the church. 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: the amount actually used to provide a home, the amount officially designated as a housing allowance, or the fair rental value of the home. The minister’s church or other qualified organization must designate the housing allowance pur...

Question: My husband is a church planter and receives support from various churches throughout the US. Some of these churches we have visited and some we have not. Some have sent onetime gifts while others send us support monthly. In some cases, we have received several gifts from a church on sporadic occasions. I am at my wits end with this only because many other church planters and pastors have advised me differently. What some consider income, others do not. What some consider gifts, others do not. The internet seems filled with many who believe all is taxable and an equal number who are willing to fight that none of it is taxable unless he performed services directly for the church giving the gift. We have not received any 1099s. Some of the support is received through our sponsoring church. Should they be doing one 1099 for the money they receive and pass onto us, or should we get separate 1099s from every church that sends us support? Do you have any guidance or direction for ...

Question: A question has been posed regarding gifts to ministers, a topic I addressed in detail in a December 15, 2008, posting. A tax preparer has counselled a church that gifts from individuals to individuals are non-deductible (to the donor) and non-taxable (to the recipient). Does this condition also apply to gifts from an employer to an employee? Specifically, when a church congregation (the employer) collects donations to give to its pastor (the employee) are these gifts treated in the same manner as individual-to-individual gifts? Here's the conditions behind the current question: "the church solicits them from the congregation and asks to have checks made to cash or to give cash to the church and then it is divided up to the pastor, youth pastor, etc." Answer: Fortunately, the pipe wrench I bought my wife for Christmas at Ace Hardware is not taxable to her. Unfortunately, I cannot take a tax deduction for it. (Just kidding -- really!) The same is true wh...

Question: Can a minister take a housing allowance on a second home? Answer: The housing allowance is available only for a minister's principal residence.

Question: When a church contributes a nonelective contribution (see definition in  IRS Publication 571 ) each month to a pastor's 403(b) account that is not tied to the salary and is not Roth related, how is it reported on a W-2? Answer: As long as the contributions are made in accordance with a qualified plan (the investment firm can tell you whether the plan is set up to receive employer contributions of this nature), then there is no Form W-2 disclosure other than to check the "Retirement" box indicating that he has an employer plan.

Question: Can a pastor receive a housing allowance if he is paid as a self-employed individual? Answer: This question can be answered simply or with a lot of complex ramifications--surprise, it's the Internal Revenue Code we're talking about! I'll try the simple approach. Some churches erroneously issue the pastor a Form 1099-MISC (for non-employee compensation) rather than Form W-2. This does not preclude the church from designating a portion of the pastor's compensation as housing allowance (income tax free). It should, however, apprise him of that amount so that he can confirm that he is eligible to exclude the entire allowance from income. Further, the housing allowance remains subject to Schedule SE self-employment tax.

Question: A pastor was ordained in 2003 by his former church of a different denomination. He submitted a Form 4361 application in 2007 which was denied because he had waited to apply after the two year timeline. He is being re-ordained at a church which is a different denomination and is asking if he can re-apply and resubmit another Form 4361. In your opinion, would the IRS reconsider its ruling because of the denomination change? Answer: It's only my opinion, but I do not believe the IRS will change its position. The pastor could resubmit a new Form 4361 but the service will likely deny the application because Box/Line 5 of the Form will report years of ministry earnings for which the election has expired even though the Box/Line 3 ordination date is more recent (within the two year window of opportunity).

Question: When, if ever, does a minister stop paying self-employment (SE) taxes? Specifically, when a minister retires and draws a retirement from a denominational system does he still continue to pay estimated taxes each year to the IRS? Answer: The answer depends on the type of retirement payment. Amounts paid to a minister under a deferred compensation plan continue to be taxed for both income and SE tax purposes, regardless of age. Distributions from Qualified Retirement Plans (e.g., 403(b) plans and pension plans (defined benefit and defined contribution) are not SE taxable. A retired minister must contact the plan administrator to determine the nature of the plan. However, retirement plan distributions not taxed for SE purposes are generally reported on Form 1099R, while SE taxable distributions are typically reported to the minister on either Form W-2 or Form 1099-MISC. While SE taxes may not be due on Form 1099R distributions, estimated tax payments may still be necessa...

Question: Why should a church issue Form W-2 (for employee compensation) versus filing Form 1099-MISC (for non-employee compensation)? Answer: 1. IRS Publication 517 provides instructions for determination of a minister’s status as an employee versus a non-employee (typically called an “independent contractor”). Under the sections Ministers: Defined and Ministers: Employment Status for Other Tax Purposes , direction is provided. The Publication also references Publication 15-A and Form SS-8 for further assistance. Having served ministers now for past 25+ years as a CPA specializing in ministerial tax, I have observed only a few situations in which I believe a minister should be classified as a non-employee. The exceptions generally relate to itinerant evangelists and independent missionaries. 2. Even more importantly, as an employee a minister can enjoy several tax-free benefits not available to a non-employee: a. health care insurance benefits b. Health Reimbursement Arrange...

I received the following questions from a father whose daughter serves on a foreign mission field. These are great (and common) questions that may benefit others who reference this blog. Questions : Sue (not her real name) receives support from multiple sources: 1) gifts channeled through a 501(c) missions organization ("Agency"), 2) gifts channeled through her local church, and 3) gifts sent directly to her by family members and others. How are these gifts treated for tax purposes? Answers: 1. The amounts transferred from family members to Sue are non-taxable (to her), non-deductible (to family members) gifts. This is also true of other gifts received directly from individuals to whom she provides no services. 2. Support from her home church as its missionary are considered taxable compensation. Assuming that she is not an employee of the church (a safe assumption), the amounts are reportable on Schedule C as self-employment income. She likely has “business” expens...