New ministers frequently have several questions as they enter a new field that has significantly different rules than the standard employee of a business has. We have assembled a list of some of the most important questions that a new minister should investigate when starting their new job.
1. How can I live within my means? You need a budget. Enjoying a long-term ministry in Christian service requires an ability to live within your means. Lots of tools are available: Christian authors with “how to” instructions and online apps, to name a couple. Try You Need a Budget (www.ynab.com), if you need an idea.
2. What does it mean to be a dual status employee? A minister, per IRS regulations, is both an employee and self-employed—dual status. As an employee, a minister is eligible for all fringe benefits offered to non-minister employees — health coverage, retirement plans and so on. The exception lies in social security and Medicare tax. Non-minister employees must have 7.65% of their wages withheld to pay for one half of their social security and Medicare taxes (it’s called FICA tax). Their employers forward this withholding to the IRS along with a matching 7.65% — a total of 15.3%. As a minister employee serving church and other ministry employers you must pay your own social security and Medicare taxes—all of it, 15.3% (it’s called SECA tax).
3. How do I know whether I’m a minister or a non-minister employee? This is typically a more important question than one might think. Ministers must pay all of their own SECA tax, but they are also eligible for other very favorable benefits. For example, ministers can exclude from income tax the value of free housing while living in a parsonage. Even if they are purchasing or renting their own home, a portion of their cash compensation can be designated as an income tax free housing allowance. (More about that later.) And retirement benefits for ministers offer significant advantages that are not available to non-ministers. (Again, more about that later.) Okay, here’s the answer: ministers are employed “in the exercise of their ministry.” IRS Treasury Regulations offer examples: 1) services performed by duly ordained, licensed or commissioned individuals; 2) individuals conducting sacerdotal functions like baptisms, communion, marriages, and funerals; and 3) leadership of religious organizations under the authority of a church or denomination. Often, it’s a matter of semantics, but important ones—many churches distinguish between assistant pastors and youth pastors on one hand versus assistants to the pastor and youth directors on the other hand. The former are typically classified as ministers and the latter as non-ministers. Non-ministers do not regularly perform sacerdotal functions.
4. What should I do for a housing allowance? Good! You’ve heard about it. For a long time, ministers have been able to live in a church parsonage without paying income tax on the benefit (except for state income tax purposes in Pennsylvania). But you do owe the 15.3% SECA tax on its fair rental value, just not income tax. The same is true if you are purchasing or renting your own home. The amount of cash income you can exclude in those cases is the lowest of three amounts: 1) The amount of your cash compensation that your employer designates as housing (in lieu of providing you a parsonage to live in), 2) the amount you actually spend for housing, just not food or servants (it’s a very old rule), and 3) the fair rental value of your home, plus the cost of your utilities. It almost all cases, we recommend that you “guess high.” You never know what surprises might come in terms of your housing expenses. And if you don’t spend as much as was designated by your employer, then you add the unused portion back to your income on Form 1040. It’s rare, but young families with children and low income can “overcook” their housing allowance designation requests. Get advice in these situations.
5. Can I “opt out” of paying SECA tax on my ministerial income? Maybe. But it’s rarely a good idea. To apply for exemption, ministers within their first two years of employment file federal Form 4361. It involves agreeing with a conscientious objection that for purposes of your ministerial income (and only your ministerial income) you are opposed to the government taking responsibility for your financial protection “in the event of death, disability, old age, or retirement” when you believe it is the responsibility of your church or Christian ministry to provide for these needs. Read the Form to see if you agree with this interpretation. Of course, if you “opt out” then you must carefully invest the savings of not paying the 15.3% SECA tax. If you earn at least 40 quarters of non-ministry employment you will still qualify for Medicare insurance at age 65 (under current law) and earn a small social security retirement benefit (learn more at www.ssa.gov). But you must plan to use some of your ministry pay to replace the government’s public insurance — including life and disability coverage.
6. What are my options for health coverage as a minister? Many churches and Christian organizations have discontinued providing employer-paid group health plans. In lieu of paying out extremely expensive, one-size-fits-all insurance premiums, some have opted to provide taxable stipends and let employees shop for their own coverage. The good news: you can choose your own. The bad news: the stipend may not be enough and securing coverage can be complicated. Health care sharing plan options can be more economical. But they don’t qualify as standard health insurance: health care providers can balk, and the monthly subscriptions are not tax deductible. The Marketplace (www.healthcare.gov) offers alternatives, including advance premium tax credits to help with the monthly costs. Watch out for unpleasant surprises, however, since the tax credits must be reassessed when you file your annual Form 1040 and may result in hefty repayment in-part or in whole. Selecting a high deductible health plan (HDHP) either on the Marketplace or from an insurance broker can be a good alternative, if you and your family are healthy. The HDHP enables you to establish a health savings account (HSA) at a financial institution to use for many out-of-pocket costs, including those not normally covered by standard health insurance (e.g., eye care, dental). Some churches and Christian not-for-profit ministries have adopted health reimbursement arrangements (HRAs). The rules are complicated and beyond the scope of this post but can help in the right situations. Finally, you may qualify for government programs through Medicare (for 65-year-olds) and Medicaid. Many ministers with young and low-income families see their children qualify for state Medicaid coverage.
7. What are my options for retirement savings? Regardless of options, start now! You probably have learned about traditional and Roth IRAs. We have often found them well short of the benefits we will share here regarding Internal Revenue Code section 403(b) plans. These plans must be established by your employer (although you might need to be the initiator). They are funded in two ways—withholding from your paycheck at your option (called “elective deferrals”) and as initiated by the employer (matching or non-elective contributions). These contributions not only save income tax, but they also reduce the income you must report as subject to the 15.3% SECA tax. Further, at retirement with the cooperation of your church or Christian ministry the distributions to you can be tax-free to the extent of your qualified housing expenses. Many ministries also adopt what are often called “FICA alternative” benefits. Since employers of ministers do not withhold and match employees’ 7.65% FICA tax, the savings they enjoy may be paid to their minister employees. While these amounts are additional taxable income to the minister, they are welcome assistance for either payment of SECA taxes or additions to one’s elective deferrals into a 403(b) plan.
8. How can my ministry expenses be covered? Many ministers use their personal autos for ministry purposes. Their employers can reimburse these costs using a standard mileage rate published by the IRS. The per mile rate represents employees’ entire reimbursable cost other than highway tolls and parking tabs. If not covered by use of the ministries’ credit card, other costs can be reimbursed as well—business and travel meals, lodging, office supplies, and professional library purchases among them. Some ministries reimburse travel costs using per-diems published by the IRS. If employee business expenses are not reimbursed, the personal tax deduction benefit to the individual minister is severely limited. Non-taxable reimbursements after documentation is provided to the employer follows IRS rules for accountable plans. Non-taxable cash advances before expenses are incurred can be provided by the employer but only under strict documentation rules. Non-accountable plans are very unfavorable since all cash advances received are simply counted as additional taxable income.
9. Am I prepared to be financially healthy? That’s a loaded question. Consider making a self-assessment by visiting the MinistryCPA website under Resources. Find there a Financial Health Questionnaire. Then act based on what you learn.
10. What do I need to learn about church and Christian ministry finances? Most of your formal training was in theology and meant to equip you for pulpit and one-on-one ministry, not organizational leadership. And there’s a lot to learn. Hopefully, as a 1st time minister you’ll have good mentors both from more experienced ministers and from godly lay people. The Bible has much to say about financial matters. Study for yourself but also learn from others who have been devoted to its practical study. Offerings must be recorded and deposited. Expenses must be authorized and documented. Financial reports must be generated and communicated. Employees must be compensated and evaluated. Properties must be protected and maintained. Plans must be formed and implemented. Policies must be adopted and observed. See! It’s a lot! And many of these skills are not gained by “book learning.” They are learned by watching and following others who have been trained formally and experientially.
Comments
Post a Comment