Issues of Concern to Ministers

Ministerial Issues

Who is a Minister?

Administers the sacraments Conducts religious worship Management responsibility in church Considered a religious leader by church Ordained, commissioned or licensed

Ministerial Issues

What is included in a Minister’s taxable compensation? Base salary Personal use of Church provided auto Non accountable exp reimbursements Social Security supplement Special occasion “gifts” from Church Unrestricted Minister’s discretionary fund Bargain purchases of Church property Group term life ins premiums >$50,000

Ministerial Issues

What are non taxable fringe benefits? Parsonage or housing allowance Group term life ins premium <$50,000 Medical insurance premiums 403(b)/401(k) Accountable reimbursement plan Section 125 plan

Ministerial Issues

Special tax & reporting rules

Eligibility for housing allowance Self-employed status - Social Security Exemption from automatic FITW Eligibility to opt out of SE tax “Double Deduction” issue

Ministerial Issues

Dual Tax Status

Common law employee of the Church

Self-employed with respect to Social Security taxes

Ministerial Issues

Federal Income Taxes Ministers are exempt from mandatory

withholding of federal income tax Ministers may elect to have withholding

of their federal income taxes by completing Form W-4

Withholding vs estimated taxes Dollars look like they have been there all

year No late payment penalties due to late

estimates

Ministerial Issues

Form 4361-Application for Exemption from Self Employment Tax Minister must be opposed to public

insurance based on religious beliefs and not for financial reasons

Must file form by the due date including extensions of the 2nd tax year in which the Minister had at least $400 of net earnings from self-employment

Ministerial Issues

What is the “double deduction”? Ministers who own their homes and

who itemize may deduct mortgage interest and real estate taxes on Sch A even though the income is excluded per IRC Section 107.

Ministerial Issues

Housing Allowance

Board approval in advance

When should housing allowance be reviewed during the year

3-point test Board approved Actual housing spent Fair rental value of home fully furnished plus

utilities

Ministerial Issues

Housing Allowance (cont’d) When should a home be purchased? Is housing allowance subject to self-

employment tax? How much compensation can be

designated as housing allowance? High housing allowance? Get an

appraisal for documentation.

Ministerial Issues

What constitutes housing allowance? Rent paid for housing Interest expense included in mortgage Principal portion of home mortgage Real estate taxes on the home Insurance on the home and contents Cost of all furnishings Assessments by government Utilities

Ministerial Issues

What constitutes housing allowance? Telephone line Repairs and maintenance of home Down payment on the home Costs of purchasing the home Cost of maintenance tools/equipment Pest control Routine cleaning Firewood Domestic items

Ministerial Issues

What happens if a Minister does not spend all of his/her housing allowance on housing expenses?

Excess should be reported as income on Minister’s tax return.

Ministerial Issues

Housing allowance example #1 #2

Authorized housing 10,000 30,000Actual housing expenses 12,000 32,000FRV plus utilities 24,000 24,000

#1 limited to amount authorized - $10,000#2 limited to FRV plus utilities - $24,000

Ministerial Issues

Other Housing Allowance Issues

Owning two homes Amending housing allowance Limits on housing allowance Retired ministers

Ministerial Issues

Taxable income

Love offerings

Sabbatical income

Discretionary funds

Ministerial Issues

What is an “accountable” plan? EE reports to Church rather than to IRS Reimbursements are not income to EE EE cannot claim any deduction on Form 1040 Plan must meet four requirements

Only business exp reimbursement Must provide adequate documentation

Not more than 60 days after exp incurred Excess reimbursement returned

Not more than 120 days after paid Church cannot reduce EE’s salary

Ministerial Issues

Advantages of an accountable reimbursement plan Avoids including the reimbursement in the

taxable income of the employee Avoids the possibility that the employee will be

unable to deduct expenses because of the standard deduction

Avoids the expense reduction caused by the Deason allocation rule

Avoids the statutory 50% reduction for M/E Avoids 2% of AGI floor on Schedule A

Ministerial Issues

Deason Rule-1964 (Dalan Decision 1992) Unreimbursed business expenses Limited by housing allowance over total

compensation Example

Total income 40,000 Housing allowance 10,000 Nontaxable % 25% Unreimbursed bus exp 4,000 Nondeductible bus exp 1,000

Ministerial Issues

Self employment tax Example

Salary 30,000 Housing allowance 10,000 Unreimbursed bus exp (4,000) SE taxable income 36,000

Ministerial Issues

What is the most important asset of Watermark Community Church? Exempt status

How do you protect this status? Follow the rules/laws Document everything Remember Church’s fiduciary responsibility

Ministerial Issues

Summary Monitor FITW/estimated tax payments Review H/A throughout the year Plan major purchases Use Church’s accountable plan Safeguard Church’s exempt status

Ministerial Issues

Contact information

Julie Fry, CPA Salmon Sims Thomas & Associates PLLC 12720 Hillcrest Road, Suite 900 Dallas, TX 75230 972.392.1143