MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: What bookkeeping system should our treasurer use to keep the church books? Answer: The bookkeeping system used by a church must be compatible with current and future treasurers’ training and experience. To adopt a system that is overly complex or suitable for only a highly qualified bookkeeper may create grave difficulty when there is turnover in the treasurer’s position. The following are several solutions that small local churches have found useful: 1. Accounting software . Intuit QuickBooks Desktop or Online and Sage (formerly Peachtree) are two general purpose accounting software packages. There are some church/ministry specific systems, such as Shelby Systems . These more specific software options tend to be more costly but also tend to have the features that the others do not.  All these software options offer government reporting, payroll processing, donor management, bank reconciliation tools, use of bank feeds (downloading transactions), budg...

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 S...

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...

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, ca...

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...

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:

Question: Should a church set up a car allowance for its pastor? Answer: Any financial assistance that a minster’s employer can give is appreciated. A car allowance can be especially helpful. Car allowances, however, must be established as “accountable plans.” This means that any advances given by the employer to the minster must be properly substantiated on a timely basis or the Internal Revenue Service requires the minster to refund the unspent, undocumented portion of the allowance. It’s a better idea to offer a professional expense reimbursement under accountable plan rules of the IRS, instead of a car allowance . A reimbursement arrangement covers car expenses, plus other professional expenses. Documentation can then include non-auto costs such as air, travel, lodging, conferences, gifts, books, supplies, and any other legitimate ministry-related expenditure. The minister documents car expenses when he provides a record of the date, business purpose, and number of mi...

Question: As a pastor, what are my retirement options and what are the advantages/disadvantages of each? Answer: The best retirement plan option for each minister depends on his objectives and his current tax situation. The three most common retirement plan options used by ministers include: (a) Internal Revenue Code 403(b) plans (also called Tax Sheltered Annuities (TSAs)) (b) Traditional Individual Retirement Accounts (IRAs), and (c) Roth IRAs  Ministers often select 403(b) plans when they want to maximize their eligible contributions, or to reduce their self-employment tax burden. For the year 2020, a minister may elect to have his employer withhold (“elective deferral”) up to $19,500 of his compensation and contribute it; instead, to his 403(b) qualified investment account. Ministers who are 50 and older are eligible to increase this amount by another $6,500 to catch-up for earlier years’ smaller deferrals ( IRS Publication 571 ). In addition, unlike...

Question: As a pastor, what can I deduct for a housing (parsonage) allowance? Answer: 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 minister living in a parsonage qualifies for a housing allowance to the extent of his own out-of-pocket cost s.  The IRS lists only food and servants as prohibitions to allowable housing expenses. The minister’s church or other qualified organization (e.g. religious school or college with board members accountable to local churches) must designate the housing allowance by official action taken in advance of the payment. If none of the minister's salary has been officially designated as housing allowance, the full salary must be included in gross income.  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 three amounts: (a) the amount actuall...

Question:  As a pastor, am I an employee of the church or am I self-employed? Answer: The answer is "yes" to both. Most ministers are considered employees in every respect except for the purposes of paying self-employment tax (SECA), which includes Medicare and Social Security tax. This means that they are eligible for virtually all employee benefits that are given favorable tax treatment in the Internal Revenue Code. Many of these benefits are unavailable to the typical self-employed individual. Ministers are not permitted to have employee Social Security and Medicare (FICA) withheld and matched by the church. Ministers who have not been granted exemption from SECA tax must pay the entire 15.3% of self-employment tax. Many churches provide additional funds to assist their ministers in the payment of this tax, but this additional compensation, while very helpful, is subject to both income and self-employment tax. Itinerant evangelists are a common example of minist...