MinistryCPA - Corey A. Pfaffe, CPA, LLC

Q uestion: An associate pastor is treated as an employee of a church that exercises very substantial control over the daily activities of his work. Must he be considered self-employed even though he has no liberty that is typical of an independent contractor?  Answer: Because an associate pastor is a minister of the church, he is considered an employee of the church in every area of employment except for purposes of social security and Medicare (FICA tax), and federal and state withholding. Federal and state withholding is elective by the pastor/employee, but FICA tax is not. The church will report his earnings on Form W-2, but it will not pay the typical employer's portion of FICA. He is responsible for self-employment tax (see Minister Audit Techniques Guide ). For this reason, pastors are called dual status employees. See this post for further clarification:  http://ministrycpa.blogspot.com/2012/10/review-of-form-w-2-reporting-for.html

Question:   A minister who has filed Form 4361 exempting himself from SE Tax is unsure of his eligibility to claim the Form 1040 SE Health Insurance Deduction. Is he able to claim the Line 29 deduction? Answer:   First, whether a minister has filed Form 4361 is irrelevant to eligibility to claim the deduction. The presence or absence of Schedule SE within his tax return for the purposes of calculating self-employment tax is not the determinant of eligibility. Rather Schedule C which reports the income of an independent contractor business is the reference point for determining the amount of a SE health insurance deduction. A minister whose sole income is from his church as a common-law employee may sometimes erroneously report his employment income on Schedule C. He may have been led astray by his congregation's simultaneous error of issuing him Form 1099-MISC which is intended for independent contractors instead of the required Form W-2 for employees. However...

Question: A church group went on a two-week mission trip, and a few of the members stayed an additional two weeks for personal time. Will the members who stayed the two additional weeks be able to deduct expenses from the trip? Answer: IRS Pub 526 covers the topic of Charitable Contributions and, more specifically, travel expenses associated with charitable trips. The publication states that travel expenses will be deductible “if there is no significant element of personal pleasure, recreation, or vacation in the travel.” The publication also states, “The deduction for travel expenses won't be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you don't have any duties, you can't dedu...

Question: A church renting its parsonage to a non-staff member: 1.) Must a special account be established for funds received from rental of a church parsonage? 2.) Can these funds be used for church expenses not related to the property without affecting the church's tax-exempt status? Answer: We will address some significant concerns with the actions of the church; but first, in order to answer the questions above, the subject of Unrelated Business Income Tax (UBIT) must be considered .  According to IRS Publication 598 , " Rents from real property ... are excluded in computing unrelated business taxable income. " The IRS cites exceptions to this rule. One exception is if the rental is debt-financed, the organization may owe UBIT.  Now to answer the questions submitted: 1.) The church does not need to establish a separate account. It will not owe UBIT unless specialized debt-financing is employed which is beyond the scope of this blog post.   2.) T...

Question: If a church solicits a benevolent offering for a specific family is the benevolent gift taxable to the recipient? Are the contributions tax deductible by the donors? For example, a church family experiences an uninsured fire, and fellow members respond in generosity. Answer: Gifts are excludable from taxable income if they are not compensation for services performed. A gift “proceeds from a ‘detached and disinterested generosity,’ ... ‘out of affection, respect, admiration, charity or like impulses’” (Commissioner v. Duberstein, 363 U.S. 278, 285 (1960)). But if the payments received come from a “the constraining force of any moral or legal duty” the income cannot be considered a gift ( Commissioner v. Duberstein, 363 U.S. 278, 285 (1960)) . Therefore truly benevolent gifts are not taxable to the recipient.  The tax deductibility of a gift by a donor to a fund collected on behalf of a family is dependent on the fact and circumstances of each case. The deductib...

Question: A pastor has taken the responsibility of preparing his own Form 1099-MISC reporting his earnings from the church congregation he serves. Is this not the responsibility of the church itself? Answer: First, since a minister is a dual status employee (see  http://ministrycpa.blogspot.com/2012/10/review-of-form-w-2-reporting-for.html  for information concerning dual status), he is an employee in every respect except for withholding, and therefore he should be issued a Form W-2.  Second, the church is responsible for what is reported on the Form W-2 and should be preparing it. The church also has the responsibility of correctly identifying his taxable and nontaxable income. Accordingly the pastor should definitely not prepare his own information return.

Q uestion: A church compensated a guest missionary for leading a summer camp event. Must the church issue a Form 1099-MISC to the missionary, his mission agency, or comply with some other directive? Answer: If the mission agency with which the missionary is associated receives the funds directly from the church on behalf of the missionary, then it is responsible to issue him the appropriate information return (Form W-2 or Form 1099-MISC). In this case the church does not need to issue the missionary an information return. However, if the compensation is paid directly to the missionary and exceeds $600 on an annual base then the church is responsible to issue Form 1099-MISC to the missionary as an independent contractor. Funds disbursed directly from one 501(c)(3) organization (the church) to another 501(c)(3) organization (the mission agency) are not subject to information return filing.  For further information on the subject see -  http://ministrycpa.blogspot.c...

Question: Can a church provide monthly support to a pastor who is no longer actively in the ministry without jeopardizing its tax-exempt status? If so, should a Form-1099 MISC be issued?  Answer: F irst, this action would not jeopardize tax-exemption status. The action of supporting a retired minister is within the boundaries of exempt purposes.  Second, the post retirement support is compensation. The c ompensation should be reported on a Form 1099-MISC unless he is still considered to be an employee who should therefore receive Form W-2. This is the "bad news." However, let's revisit a blog post we provided in 2009.   http://ministrycpa.blogspot.com/2009/10/retired-minister-continued-support-from.html "A retired minister may receive part of his or her pension benefits as a designated parsonage allowance based on past services. Trustees of a minister’s retirement plan may designate a portion of each pension distribution as a parsonage allowance e...