Ministerial Taxation

Transcription

1 Ministerial Taxation

2 Minister s Taxation & Reporting Ministers qualify for four special tax rules: Housing allowance exclusion Self-employed status for social security taxation Exemption from withholding requirements Ability to elect out of the social security system - To be eligible for these special rules, the individual must qualify as a minister.

3 Minister s Taxation & Reporting A minister is There are five tests that must be met in order to qualify: Ordained, commissioned or licensed Administration of the sacraments Conducts religious worship Management responsibilities in the Church Considered to be a religious leader by the Church

4 Gimme Shelter Some things to consider in regard to your church s housing allowance processes.

5 Gimme Shelter

6 Gimme Shelter

7 Gimme Shelter

8 Gimme Shelter

9 Gimme Shelter

10 Minister s Taxation & Reporting Housing Allowance Special Rule #1 The Minister s housing allowance generally is excluded from income in computing federal income taxes. However, it is included in computing the minister s self-employment taxes. There are usually two kinds of housing allowances

11 Minister s Taxation & Reporting Special Rule #1 Church provided housing - The excluded amount is the fair rental value of the parsonage plus other costs paid by the Church Minister provided housing the excluded amount is the lesser of - The amount actually spent on qualified housing costs The amount actually designated by the Church The fair rental value of the house (including expenses and furnishings) Reasonable compensation

12 Minister s Taxation & Reporting Special Rule #1 To qualify, the housing allowance must be: Officially designated by the Church Designated in advance Tips in establishing housing allowances: Set the allowance high Set an allowance for minister s living in a Church-owned parsonage

13 Minister s Taxation & Reporting Special Rule #2 Employee vs. Self-employed According to the IRS and the Tax Courts, Ministers are dual status employees Employees for federal income taxes Self-employed for social security purposes In almost all cases, a minister should receive a W-2. There should be no amounts in the social security and Medicare boxes Housing allowance can be included in Box 14 - Other

14 Minister s Taxation & Reporting Special Rule #3 Withholding Ministers are exempt from federal withholding Ministers should make quarterly ES payments Ministers can voluntarily elect to have taxes withheld

15 Minister s Taxation & Reporting Special Rule #4 Electing Out of Social Security Accomplished by filing form 4361 The minister must certify that he or she is opposed to receiving social security payments on religious grounds The form must be filed by the due date of the second year in which the minister had ministerial income of $400 or more

16 Reasonable Compensation

17 Reasonable Compensation Church employees may receive reasonable compensation for their efforts Excessive compensation can result in private inurement: Could jeopardize the church s tax exemption Could result in the imposition of intermediate sanction penalties by the IRS

18 Reasonable Compensation Intermediate sanctions consist of: Penalty of 25% of the excessive pay given the employee. An additional 200% penalty if the excess compensation is not remedied. (Money paid back) The IRS is permitted to add a 20% tax on the church board, elders, etc. who participated in the excessive payments.

19 Reasonable Compensation Intermediate sanctions can be avoided if: An authorized, independent compensation committee sets the compensation terms. The committee obtains and relies on appropriate comparative data. The committee sufficiently documents the basis for the compensation determination.

20 Reasonable Compensation Important reminder: Business expenses not substantiated by the employee and not reported as income on the employees W-2 may be deemed automatic excess benefit payments.

21 Expense Reimbursement Plans

22 Expense Reimbursement Plans Expenses reimbursed to an employee without requiring substantiation MUST be included in the employee s W-2 as income To avoid this situation an accountable reimbursement plan should be implemented.

23 Expense Reimbursement Plans An Accountable Reimbursement Plan Is: A written arrangement between an employee and the employer Requires employee to return any excess advances to the employer within 120 days after the expense is paid or incurred. Requires the employee to substantiate bona fide business expenditures to the employer within 60 days of payment Not allow advances more than 30 days in advance of event Church must have the right to reject any expenditures deemed to be inappropriate

24 Expense Reimbursement Plans A Non-Accountable Plan: No written reimbursement or expense account arrangement between an employee and the employer All payments to the employee are reported as taxable income to the employee

25 Expense Reimbursement Plans Our Recommendation... Adopt an Accountable Plan! Benefits: Avoids the non-accountable expense reimbursement from being included in the taxable income of the employees Avoids the possibility that the employee will not be able to deduct any of his business expense due to the amount of the standard deduction Avoids the reduction for Schedule A expenses caused by the 2 % floor Avoids the statutory 50% reduction for deductible meal and entertainment expenses Avoids the reduction of expenses caused by the Deason allocation rule (applicable to ministerial employees)

26 Deason Rule Illustration Salary $25,000 Housing allowance $25,000 Deductible business expenses: $ 5,000 AGI $25,000

27 Expense Reimbursement Plans Common Objections: Car and expenses allowances are considered part of Salary Package Employees do not want to keep detailed records Budgeted amount is not payable unless incurred and substantiated

28 Expense Reimbursement Plans Auto Mileage What has to be substantiated for business use of automobiles? Date of business use Destination and number of miles Business purpose of the trip 2011 IRS mileage rate Jan through June - $0.51 July through Dec $ IRS mileage rate - $0.555

29 Expense Reimbursement Plans Deductible vs. Non-deductible Mileage Always Deductible Always Deductible Prospect s Home Never Deductible Parsonage Church Always Deductible Never Deductible (if a regular stop) Hospital Always Deductible

30 Common Areas of Non-compliance Improperly prepared W-2 forms Housing allowance included in wages box FICA and Medicare taxes withheld on ministers 1099 used rather than a W-2

31 Minister s Taxation & Reporting

32 Minister s Taxation & Reporting

33 Minister s Taxation & Reporting

34 Common Areas of Non-compliance Housing allowance rules not followed No formal housing resolutions Housing allowance established on a retroactive basis Housing allowance given to non-qualified individuals Incorrect amount excluded from the minister s tax return

35 Common Areas of Non-compliance Reimbursed business expenses No accountable reimbursement plan Expense allowances under a non-accountable plan not included as income