MinistryCPA - Corey A. Pfaffe, CPA, LLC

Q uestion: A missionary couple (and their children) lives overseas for over half the year, while maintaining a home in the U.S.  Both are US citizens.  Do they qualify for the Earned Income Credit? Answer:   First, there are three potential credits that could be affected by residency status. Earned Income Credit (EIC) (refundable) - See  IRS Publication 596 Child Tax Credit (non-refundable) - Up to $1,000 per qualifying child Additional Child Tax Credit (refundable) - This credit is for certain individuals who get less than the full amount of the child tax credit. If the taxpayer did not live with his child in the United States for at least six months of the tax year, he cannot claim the EIC. But a taxpayer may be able to claim the Child Tax Credit or the Additional Child Tax Credit even though he did not live in the United States at least six months of the current tax year. It is often advantageous for a foreign missionary...

Question : One of a camp’s fulltime maintenance men is paid $600 per week ($31,200 per year). Some weeks he puts in less than 40 hours. But during camping season, he easily works 60 to 70 hours a week. Is the camp required to pay him overtime? Answer : As a general rule, the camp is not required to pay overtime if the employee meets two requirements. The employee meets the salary test and is paid on a salary basis of at least $913 per week (or $47,476 per year),* and  The employee meets the duties test of the executive, administrative, professional, or other exemption.** Because the maintenance man is paid $600 per week, he does not meet the salary test (No. 1 above). The camp is then required to do one of two options: Option A. Increase the employee’s weekly salary, or Option B. Reclassify the employee to a nonexempt employee, which means the employee will be paid on an hourly basis.  Option A is the simplest. The camp can just increase the maintenan...

Question: Can payments made to a health care sharing ministry (e.g., Samaritan Ministries, Christian Healthcare Ministries) which are exempt from the Affordable Care Act be deducted from income as a self-employed (SE) insurance deduction? Answer: First, to be technical, "health care sharing ministries" (IRS exemption D) provide participants an exception from Shared Responsibility Payments (ACA penalties), but don't connote other tax benefits. Second, a health care share ministry does not qualify as health insurance. One does not pay what the IRS considers to be premiums, but instead shares the health expenses of others. And according to IRS Pub 535 , in order for self-employed individuals to qualify for a SE insurance deductions they must be to pay premiums for qualifying health insurance. 

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 deta...

Question: A church remodeled one of its buildings. One of the members coordinated the remodel, and the church paid individuals directly for their labor. According to the Internal Revenue Service's Form 1099-MISC instructions, one of the criteria is: "You made the payment for services in the course of your trade or business."  Since construction and remodeling is not the church's trade or business are the payments to these individuals reportable on Form 1099-MISC? Answer:   Yes the payments are reportable on Form 1099-MISC. According to  Form 1099-MISC instructions entitled " What is nonemployee compensation? If the following four conditions are met, you must generally report a payment as nonemployee compensation. You made the payment to someone who is not your employee.  You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations ).  You made the payment...

On October 18, 2016, the Social Security Administration announced the following 2017 Social Security Changes. Monthly Social Security benefits will increase by a 0.3 percent cost-of-living adjustment. The adjustment begins with benefits paid in January 2017. Maximum earnings subject to Social Security tax increased from $118,500 (2016) to $127,200 (2017). If you earn $127,200 or more annually, you will pay an additional $539.40 each year if an employee or $1,078.80 each year if self-employed. The amount of earnings required for a quarter of coverage (also referred to as a Social Security credit) increased from $1,260 (2016) to $1,300 (2017). The SSA’s 2017 Social Security Changes Fact Sheet can be found here .

Question: A church pays a monthly amount to a seminary student as support while he is school. He performs no services, and this money is truly a gift with no oversight of the use of the funds. The yearly amount exceeds $25,000.  Is the student able to exclude this gift from taxable income?  Answer: The church leadership is wise to be careful in the situation described here. If the payments are compensation for services present or future they will result taxable income. An example is given in  IRS Publication 970 , "You are a candidate for a degree at a medical school. You receive a scholarship for your medical education and training. The terms of your scholarship require you to perform future services. A substantial penalty applies if you don't comply. The entire amount of your grant is taxable as payment for services in the year it is received." If a scholarship program is established with nondiscriminatory and non-compensatory parameters, then the disburseme...

Question:   If an employee of the church is provided funds to go on a church mission trip are the funds considered a taxable benefit? Answer: These funds may qualify as a non-taxable, reimbursed business expense. In order for an expense to qualify as a business expense, it must be ordinary and necessary according to IRS Publication 535 . Pub 535 states, “An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.” As a church employee, one may be expect to assist in fulfilling the mission of the church, including participation in mission trips. Proper documentation of expenses is required to enjoy this non-taxable classification ( MinistryCPA past blog post ). If the trip was not required as a condition of employment by the church, then the employee may be able to take a tax deduction for the trip based on its charitable nature. For further information on c...

Question: A missionary receives all of his income from donations through his home church and specific individuals. Is all of his income taxable? Is he self-employed? Answer: M onies received by a missionary in support of his work are taxable. Even though all of his income comes from "donations", the income is compensation for the services that he is performing as a missionary.  According to  IRS Minister Audit Technique Guide , “Contributions made to or for the support of individual missionaries to further the objectives of their missions are includible in gross income (Rev. Rul. 68-67, 1968-1 C.B. 38)”.  The Minister Audit Technique Guide also gives an example of a court case that discusses this topic, "In the Charles E Banks and Rose M Banks v. Commissioner, T.C. Memo. 1991-641, case a structured and organized transfer of cash from members of the church took place on four special days of each year. Prior to making the transfers, members of the Church met a...

Question: As a member of my church's audit team, I have been told many times by the financial secretary that our church takes a love offering for persons serving our church. The love offering is not counted; it is just given to the person. For this reason, no record is maintained for issuing Form 1099s. Is this  procedure in compliance with IRS rules for issuing Form 1099s when payments are $600 or more in a calendar year? Answer: First, the offerings should be accounted for because it appears that the collections are received and distributed as compensation for work that is done for the church. When independent contractors receive more than $600 in a tax year, they must be issued a Form-1099 MISC. Of course, this will require that the offerings be counted and that information be collected from the recipient in order to facilitate filing the proper forms (typically, Form W-9 is used for this purpose). Second, if these individuals are working for the c...