MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: How does a church correct a previous year's Form 1099-MISC which erroneously listed housing allowance in box 7 "Non-Employee Compensation?" Answer: Unlike the Form W-2, there is no separate form to correct an erroneously distributed Form 1099-MISC. Instead, a Form 1099-MISC should be prepared reporting the correct amounts, and the "Corrected" box should be checked on the top of the form. As for the housing allowance, simply r educe the amount in box 7 by the amount of designated housing allowance, up to and including the full amount originally reported in box 7. Be aware that this may result in a zero being entered in box 7 if the full amount was designated as housing allowance.

Question: How does a church determine a non-clergy employee's withholding? How does a church match an employee's withholding and where do they send the money? Answer: Typically, non-clergy employees and employers incur the following taxes: 7.65% FICA tax - While ministers are not subject to FICA tax and may not be erroneously classified as non-clergy for the sake of withholding and matching, non-clergy employees must have 7.65% withheld from their pay and an additional 7.65% contributed by the church. This is true unless the church has previously opted out of paying its share of FICA tax by virtue of filing Form 8274 and gaining approval from the IRS. This puts the entire 15.3% burden on the employee. Federal and State unemployment taxes - Generally churches are exempt from these taxes; however, some states may require state unemployment taxes be paid even by a church. Federal and State income taxes - Determined based upon withholding tables in IRS Pub 15 an...

Question: A church's pastor resigned a few months ago. Since then he has not been able to find work. The church took a love offering to help him with expenses. Does the church have to take taxes out of this offering since the pastor is no longer part of the church? Would the answer be different if the congregation took up a love offering for someone else in the community? Answer: Benevolent gifts to individuals in the local community (not an employee of the church), are generally disbursed by churches from benevolent funds received by the church to disburse to needy individuals. Since these individuals have not provided nor are expected to provide services in exchange for the gifts, these gifts are non-taxable. For more on benevolent fund giving, type "benevolent fund" in the search window above. Love offerings collected on the behalf of a current or former employee in consideration of past services provided are taxable compensation. Similar to compensation to the...

Question: A teacher in a foreign country was provided with "free" housing and food. Does this teacher need to report this as income for tax purposes? Answer: Publication 525 says the following: "You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. The meals are: 1. Furnished on the business premises of your employer, and 2. Furnished for the convenience of your employer. The lodging is: 1. Furnished on the business premises of your employer, 2. Furnished for the convenience of your employer, and 3. A condition of your employment. (You must accept it in order to be able to properly perform your duties.)" Publication 15 defines convenience of the employer as: "' For the convenience of the employer ' means you have a substantial business reason for providing the meals and lodging other than to provide additional compen...

Question: Can a minister donate to his own ministry? If so, do amounts have to be from income he earned from non-ministry sources? Answer: The Minister Audit Technique Guide provides directions to its agents as they examine minister's tax returns. The Guide offers some helpful insight to ministers as well: "Dues versus Contributions ...Ministers' contributions to the church are not deductible as business expenses. They may argue that they are expected to donate generously to the church as part of their employment. This is not sufficient to convert charitable contributions to business expenses. The distinction is that charitable contributions are given to a qualifying organization (such as a church) for the furtherance of its charitable activities. Dues, on the other hand, are usually paid with the expectation that a financial benefit will result to the individual, as in a realtor's multi-list dues or an electrician's union dues. A minister's salary an...

Question: A minister was billed for his utilities the year after the expense was incurred. Should he deduct the expense in the year he incurred the expense or in the year he paid for the expense? Answer: By default, virtually all individual taxpayers are expected to report their income and deductions on a cash basis. This means that income received during the calendar year is taxable in that tax year. Also, expenses incurred are deductible in the year paid. This is also true of minister's housing expenses as illustrated in the above question.

Question: A church is paying its organist by making a donation to his daughter's trust fund. This is being done because the daughter is disabled and receives public assistance. If the organist makes over a certain amount this assistance will cease. Does this comply with IRS rules? Answer: Our interpretation of the question: Is it appropriate to redirect an employee’s compensation to someone other than the one providing the services, then excluding these amounts from reportable income? The situation described above appears to be a classic example of bartering. Regardless of the form of the compensation (even if attempts are made to characterize the income as benevolent gifts), the one earning the compensation is subject to taxation. If the amount of compensation exceeds IRS filing requirements, either Form W-2 or Form 1099-MISC should be filed depending on the employee or independent contractor status.

Question: A missionary receives a Form 1099-MISC from the service organization which receives funds for him. Recently he became aware of the benefit of clergy housing allowance (HA) after reading our 2009 blog post Housing Allowance and Form 1099-MISC , but still has a few questions: What documents are need to justify this? Would the IRS find it unusual that he did not claim a HA in previous years? Could this be explained in a letter? Answer: Documents are needed to help support consideration of the three-part test applied to minister's housing allowances. Designation of a portion of the minister's income to housing allowance. Written certification of this designation by the service organization should be requested. Having accomplished this, the amount of housing allowance designation must be subtracted from compensation reported on Form 1099-MISC as described in the above referenced blog post. Support for amounts actually spent for housing expenses. A worksheet lis...

Non-cash donations may be just as useful to ministries as cash contributions. Some contributions must be treated with special care however. Take donating a vehicle for example.... The IRS does have some special rules for donating cars. Instructions for Form 8283 Noncash Charitable Contributions   say the following about donating cars: "If you donate a qualified vehicle with a claimed value of more than $500, you cannot claim a deduction unless you attach to your return a copy of the contemporaneous written acknowledgment you received from the donee organization. The donee organization may use Copy B of Form 1098-C as the acknowledgment. An acknowledgment is considered contemporaneous if the donee organization furnishes it to you no later than 30 days after the: Date of the sale, if the vehicle was sold [by the donee organization] in an arm's length transaction to an unrelated party, or Date of the con...

Question: A new minister is wondering what deductions are available to him as a minister. He receives a Form 1099-MISC from his church. Answer: It is important for a pastor to be recognized as an employee of the church in order to take advantage of many ministers' tax advantages. This means that he will receive a Form W-2, instead of the Form 1099-MISC which is intended for non-employee, independent contractors. These employment advantages include: Housing Allowance (HA) – non-taxable to the extent that the HA was used for housing expenses; any HA designation greater than actual expenses will be taxable income (For the three-part test, please follow this link and select 2012 Minister's Housing Allowance Worksheet  http://ministrycpa.com/?q=alldownloads ). Form 4361 exemption (optional) – will not pay Self Employment (SE) taxes on your ministerial income. A minister must make this election within the first two years of becoming a minister however and will have to ...