This blog posts answers to questions given to us by ministers and others serving in Christian ministries advancing the gospel of Jesus Christ. It also discusses other financial topics that those in gospel ministries face. We trust the information provided can be helpful to you.
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MinistryCPA Special Topic: When Can I Start Receiving Social Security Benefits?
Question: When can I start to receive Social Security benefits? Answer:
The average individual is eligibleto begin receiving partial Social Security benefits as early as age 62. However, the Social Security Administration (SSA) has defined full retirement age (FRA), the age at which an individual is eligible to receive his or her full benefit, according to the table below:
An individual may also elect to delay collecting benefits to age 70 in order to receive increased benefits. (For the purposes of this blog post, we will consider only an "average" individual; widows, widowers, disabled individuals, and others are subject to different guidelines).
An individual who elects to start receiving benefits between age 62 and FRA may be subject to two separate penalties. First, monthly benefits may be reduced by as much as 30 percent for those who claim at 62. Second, earnings may be subject to an earnings test, and benefits will be reduced by $1 for every $2 earned past the cap set by the SSA ($15,120 in 2013). Once FRA has been reached, the benefit will be increased to make up for reductions in SS benefits due to excess earnings above the threshold. However, the reduction for collecting earlier than FRA will continue for as long as benefits are collected.
An individual who begins to receive benefits at or after FRA will not be subject to the earnings test, and will receive his or her full monthly benefit with no penalties. Additionally, individuals who delay the start of benefits past FRA can earn delayed retirement credits (DRC) of 8% per year up to age 70. Depending on the length of the delay, this strategy can result in a monthly benefit approximately 30% above FRA benefits.
Based on life expectancy and savings other than Social Security, each option will provide advantages for different individuals. Those who start collecting benefits early will receive a reduced monthly benefit, but will enjoy the income much earlier than those who wait until FRA or after. Additionally, the reduction in benefits will continue for the life of the recipient. Those who delay past FRA will receive a higher monthly benefit, despite waiting longer for the income.
One easy method of comparison involves break-even points. Those who begin collecting benefits at FRA provide the "baseline" for comparison of the total benefit amount. An individual who begins collecting benefits at age 62 will break even with that total amount at age 77. Essentially, this means that someone who lives beyond age 77 will receive greater total lifetime benefits if they wait to start collecting benefits until FRA. One who begins collecting at age 70, earning a higher monthly benefit, will break even with the baseline total amount at age 81. (The Adviser's Guide to Social Security, 2nd Edition, by Theodore J. Sarenski, CPA, PFS, CFP, and Elaine Floyd, CFP. AICPA, 2013. Page 21)
These general guidelines provide a framework for decisions about when to begin collecting benefits, but each individual's situation is different. Other factors, such as life expectancy, other sources of income, and tax consequences should be taken into account when deciding on the timing of benefits.
Question: A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer: Whether the money is used for church purposes is irrelevant. IRS Publication 598 states: "If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business." Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property. However, a second concern not a
Question: A new church filed for an employer identification number (EIN) recently. It received notification from the IRS about the EIN, stating that the church must file Form 944 by the following January deadline. The church has no non-ministerial staff members. Since income tax withholding is elective by ministers and none of the pastors has elected to request non-mandatory withholding is the church required to file Form 944 annually? Also, a quarterly Form 941 (rather than an annual Form 944) is required of some employers. Which IRS form, if any, should be filed? Answer: According to IRS Section 1402(c) and 3121(c), ministers are not subject to mandatory income tax withholding. Unless one or more ministerial employees request non-mandatory withholding, church employers with only ministerial employees do not need to file Form 941 or Form 944. The IRS Ministers Audit Technique Guide explains in further detail a minister's treatments for social security, Medicare tax, Fed
Question: A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC? Answer: Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The IRS Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC. The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC: Rent paid to an individual (non-corporation) Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers) Support sent directly to missionaries