Church Tax Issues II: The Church as an Employer E921

Transcription

1 Church Tax Issues II: The Church as an Employer E921 Presented by: Stephanie Buduhan PSK 2018 Shelby Systems, Inc. Other brand and product names are trademarks or registered trademarks of the respective holders.

2 NEW - Qualified Small Employer Health Reimbursement Arrangements Available to employers with fewer than 50 employees that do not sponsor a group plan Maximum contributions for $5,050 for self coverage, $10,250 for family coverage ($4,950 & $10,000 for 2017) Must be exclusively employer funded No employee salary deferrals. 2

3 New - Overtime Rules Put on Permanent Hold New rules were to go into effect on December 1 st 2016 Federal judge blocked the implementation through a temporary injunction The injunction has been made permanent by the Federal Court 3

4 New - Form I-9 As of January 2017, employers must use a revised form I-9 No changes to the storage and retention rules 4

5 New - Withholding Tables As of February 2018, new withholding tables are required (in light of the Tax Cuts and Jobs Act) A new Form W-4 has also been made available Required for new employees but you aren t required to have existing employee complete a new one 5

6 New Tax Cuts and Jobs Act Moving expenses can no longer be paid (directly or indirectly) tax free Miscellaneous itemized deductions were suspended (employees can no longer deduct unreimbursed business expenses) Business meals remain reimbursable if there is an accountable reimbursement plan 6

7 Required Documents Minister Non-Minister Independent Employees Employees Contractors Volunteers Form 1-9 New Hire Report Form W-2 Form 1-9 Form W-4 New Hire Report Form 1099 MISC Form W-9 Nothing FICA & Income Tax WH Form W-2 7

8 Ministerial Taxation: The Church s Role 8

9 Make sure your minister is a minister! Must first pass the credentials test: Ordained, Licensed or, Commissioned If the minister has no credentials, he/she does not qualify as a minister regardless of what his/her duties in the church may be!!! 9

10 Make sure your minister qualifies as a minister! Must also pass the performance test: Administers the sacraments Considered a religious leader by the church Conducts religious worship Has management responsibility in the church 10

11 Best Practices Obtain a copy of each of your minister s ordination certificates. Develop comprehensive job descriptions for each minister. 11

12 If qualifications are met, a minister is subject to four special tax treatments Housing allowance that is excludable from federal income taxes Dual tax status: employee for federal income taxes, self-employed in regard to Social Security taxes Exempt from federal withholding requirements Ability to opt out of Social Security (FICA and SECA) 12

13 The Minister Housing Allowance 13

14 A minister s housing allowance MUST: Be officially designated by the church The designation must be made PRIOR to payment of the allowance. 14

15 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 15

16 Best Practices Provide housing allowance worksheets well in advance of the beginning of the year. Worksheets should be reviewed for reasonableness by the appropriate church committee/team. Document a formal resolution of church action approving the housing allowance. Include a clause that the agreement will remain in effect until changed by either party. 16

17 Dual Tax Status of the Minister 17

18 Dual Tax Status of the Minister Ministers are dual status employees: Employees for federal income taxes Self-employed for Social Security purposes 18

19 Dual Tax Status of the Minister In almost ALL cases, a minister should receive a W-2 from the church. But, a minister s W-2 will look much different than a nonminister employee: There may not be any amount in the FIT withholding box There will not be any amounts in the FICA or Medicare boxes Housing allowance may be included in Box 14 - Other 19

20 Minister s Taxation & Reporting 20

21 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 21

22 Best Practices It is the church s responsibility to report payroll activity in compliance with these four treatments. These rules must be uniformly applied to all employees hired as ministers NO EXCEPTIONS! Best guidance can be found in IRS Publications 517 and

23 Ministers are exempt from payroll withholding 23

24 Minister s Exemption from Withholding Because they are automatically exempt from withholding, ministers submit their tax liabilities through quarterly estimated payments using form 1040ES. However, ministers can voluntarily elect to have taxes withheld. 24

25 Best Practices To avoid unnecessary penalties and interest, churches should encourage ministers to have their taxes withheld. Important! Follow these steps: Help the minister compute the total tax liability (FIT & SE taxes) Divide this amount by the number of pay periods. Withhold this amount each pay period as Federal Income Taxes withheld! 25

26 Best Practices IMPORTANT! When reporting quarterly withholding on the form 941, DO NOT include minister salaries on the FICA earnings or Medicare earnings lines! 26

27 Opting out of Social Security 27

28 Opting out of Social Security A minister may opt out of the Social Security system completely resulting in no FICA or SECA taxes by filing Form 4361 The minister must certify that he or she is opposed to receiving social security payments for RELIGIOUS REASONS. Form must be filed by the due date of the second year in which the minister had ministerial income of $400 or more. 28

29 Best Practices Churches should fully explain that in addition to retirement benefits a minister would be forfeiting Medicare and survivor benefits as well. Church should also assist the minister in crafting a valid opposition statement to the SS program based on religious convictions. Economics have nothing to do with this decision! 29

30 Payroll Filing Requirements Form 941, Quarterly Payroll Tax Form Required if federal income or Social Security taxes are withheld from employee pay Not required if no withholding Due on the last day of the succeeding month after quarter end. (April 30 th, July 31 st, October 31 st, and January 31 st ) 30

31 Payroll Filing Requirements 31

32 Payroll Filing Requirements Depositing of withheld payroll taxes If the total withheld is less than $2,500, funds may be paid with the Form 941 If the total withheld is greater than $2,500 but less than $50,000, funds must be deposited electronically by the 15 th day of each month for payroll paid in the preceding month Larger churches with withholding in excess of $50,000 annually are subject to more frequent depositing requirements Failure to comply with the depositing requirements can result in significant penalties 32

33 Payroll Filing Requirements Annual payroll tax forms Form W-2s must be given to each employee by January 31 st Form W-3, a transmittal form, must accompany a copy of all W-2s and submitted to the Social Security Administration by January 31 st 33

34 Payroll Filing Requirements Unemployment taxes Churches are currently exempt from unemployment taxes 34

35 Common Areas of Non-compliance Giving monetary gifts to volunteers Giving gift cards to employees and not including the value in the employee W-2 35

36 Employee vs. Contractor Determination 36

37 Employee vs. Contractor Determination The myth Many churches (and businesses) think how a person is treated is an option the employee/contractor chooses... NOT TRUE! The facts surrounding the relationship between a church and an employee/contractor dictate if a W-2 or a 1099 is issued. 37

38 Employee vs. Contractor Determination Why do Churches choose to be in Noncompliance? They don t know the rules! (Not a good excuse) Non-compliance eases the paperwork burden (A bad excuse) Avoids social security taxes (An awful excuse!) 38

39 Employee vs. Contractor Determination What can happen if a church does not comply? If payroll taxes not paid Church is responsible for 100% of uncollected payroll taxes 100% penalty applied for not collecting and remitting the payroll taxes Intermediate sanctions can be assessed against responsible parties up to $10,000 (Pastor, Bus. Adm., Fin. Comm. Members, etc.) 39

40 Employee vs. Contractor Determination So, how do you determine status? Remember the cardinal rule: It is all about control. The more control your church exercises over an individual, the more likely the relationship is an employer/employee arrangement. 40

41 Employee vs. Contractor Determination How do you determine status? IRS Publication 15-A Employer s Supplemental Tax Guide provides an eleven point test. 41

42 Employee vs. Contractor Determination 1. Instructions the business gives the worker. An employee is generally subject to the business instructions about when, where, and how to work. 2. Training the business gives the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods. 42

43 Employee vs. Contractor Determination 3. The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services they perform for their business. 43

44 Employee vs. Contractor Determination 4. The extent of the worker s investment. 5. The extent to which the worker makes his or her services available to the relevant market. 44

45 Employee vs. Contractor Determination 6. How the business pays the worker. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job. 7.The extent to which a worker can realize a profit or incur a loss. 45

46 Employee vs. Contractor Determination 8. Written contracts describing the relationship the parties intended to create. 9. Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. 46

47 Employee vs. Contractor Determination 10. The permanency of the relationship. If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship. 47

48 Employee vs. Contractor Determination 11. The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. 48

49 Employee vs. Contractor Determination Two common areas of non-compliance by churches: Paying facilities employees for after-hours projects. (Weddings, etc.) Musicians. The trend is to treat all musicians as employees 49

50 Common Areas of Non-compliance Contractor vs. Employee rules not followed No formal determination of contractor/employee status 1099 forms not filed for recipients of $600 or more Employees who perform after hours work treated as contractors for the extra work 50

51 Tax Considerations of Churches Thank You PSK LLP

52 Stephanie Buduhan Stephanie is Audit Manager at PSK LLP, a full service CPA firm in Arlington, TX. She is a CPA with 10 years experience performing financial statement audits with a focus on helping nonprofits. Stephanie enjoys serving as board member and chair on several nonprofit councils and committees. She also enjoys time at home with her family.