Bus. Admin: Ministers Tax Issues Course #E913

Transcription

1 Bus. Admin: Ministers Tax Issues Course #E913 Presented by: Stephanie Buduhan, CPA PSK LLP 2018 Shelby Systems, Inc. Other brand and product names are trademarks or registered trademarks of the respective holders.

2 Essential Resources 2

3 Essential Resources 3

4 Essential Resources IRS Publication

5 Essential Resources IRS Publication 517 5

6 Ministerial Taxation 6

7 Minister s Taxation & Reporting Ministers qualify for four special tax rules: 7

8 4 Special Tax Treatments 1 - Housing allowance exclusion 2 - Self-employed status for social security taxation 3 - Exemption from withholding requirements 4 - Ability to elect out of the social security system 8

9 To be eligible for these special rules, the individual must qualify as a minister. 9

10 Two Tests in Determining Minister Status The credentials test: A minister must be ordained, commissioned or licensed 10

11 Two Tests in Determining Minister Status The performance test: Administration of the sacraments Conducting of religious worship Management responsibilities in the church Considered to be a religious leader by the church 11

12 The Minister Housing Allowance 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. 12

13 The Minister Housing Allowance There are two kinds of housing allowances 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 utilities and furnishings) 13

14 The Minister Housing Allowance Qualified Housing Costs: Down payment Mortgage payments Rent payments Real Estate Taxes Insurance Utilities Furniture and appliances Repairs and maintenance supplies Lawn care Homeowner association dues Cable TV 14

15 Housing allowance is under attack again! A District Court in the Western District of Wisconsin has ruled the housing allowance unconstitutional. 15

16 The Dual Tax Status of Ministers Employee AND 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 16

17 Ministers are exempt from income tax withholding Ministers should make quarterly ES payments Ministers can voluntarily elect to have taxes withheld. Use the Form W-4 but withhold extra for selfemployment tax (total compensation, including housing, multiplied by 15% and divided by the number of paychecks) 17

18 Ministers can opt out of the Social Security system 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 18

19 Ministers can opt out of the Social Security system A minister who opts out not only forfeits SS retirement payments but also Medicare benefits The election is irreversible! Once out, always out 19

20 Minister Compensation 20

21 Taxable compensation included in Box 1, Form W-2 Salary (non-housing) Nonaccountable expense reimbursements Special occasion gifts from the church Social Security supplement Bargain purchase of church property Cont. 21

22 Taxable compensation included in Box 1, Form W-2 Payment by church of minister s personal expenses Love offerings and special occasion gifts Premiums on group life insurance greater than $50,000 Unrestricted minister s discretionary fund Personal use of church assets Cont. 22

23 Taxable compensation included in Box 1, Form W-2 Wedding and funeral fees Reimbursements for spouse travel Gift cards Employer provided moving expenses (new in 2018!) 23

24 Minister s Taxation & Reporting 24

25 Minister s Taxation & Reporting 25

26 Reasonable Compensation 26

27 Reasonable Compensation Church employees may receive reasonable compensation for their efforts Excessive compensation can result in private inurement which could: Jeopardize the church s tax exemption Result in the imposition of intermediate sanction penalties by the IRS 27

28 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. 28

29 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. 29

30 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. 30

31 Expense Reimbursement Plans 31

32 IRS announces new mileage rates: Business mileage increases from 53.5 cents to 54.5 cents per mile for Medical mileage increases from 17 cents to 18 cents per mile. Volunteer mileage rate remains the same at 14 cents per mile. 32

33 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. 33

34 Expense Reimbursement Plans An Accountable Reimbursement Plan is: a written arrangement between an employee and employer that: Requires the employee to substantiate bona fide business expenditures to the employer within 60 days of payment Does not allow advances more than 30 days in advance of event Requires the employee to return any excess advances to the employer within 120 days after the expense is paid or incurred. The church must have the right to reject any expenditures deemed to be inappropriate 34

35 Expense Reimbursement Plans A Non-Accountable Plan Is: A plan with 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 35

36 Expense Reimbursement Plans The best course is to have an accountable plan because: Expense reimbursements do not have to be included in the taxable income of the employees. Miscellaneous itemized deductions have been suspended beginning in 2018 (part of Tax Cuts and Jobs Act) Unreimbursed business expenses can no longer be included with itemized deductions 36

37 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 37

38 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 38

39 Q&A Session and Group Discussion 39

40 Ministerial Taxation Thank You PSK LLP

41 Stephanie Buduhan CPA, PSK LLP 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.