Church and Christian Ministry Compensation Concepts

Church and Christian Ministry Compensation

Concepts

B y Corey A. Pfaffe, CPA, PhD, Spring 2012

Employee or Independent Contractor

• Who is an employee and who is not?• You can ask the IRS, if you wish• Typical church employees

– pastors– office and facilities staff

• Typical church independent contractors– janitorial and snow removal service

companies– accounting/bookkeeping service firms

According to the IRS, who is a minister? And, what difference

does it make?• A minister is an individual who is a

“duly ordained, commissioned, or licensed minister of a church” [and other 501(c)(3) religious organizations] who performs services “in the exercise of his ministry.”

• Dual Status

It makes a big difference to be both an employee and a self-employed

person!• Eligible for all employee benefit

provisions of the Internal Revenue Code, the most common are:– Health care plans– Retirement plans

• 7.65% (5.65% in 2011+) FICA tax withholding replaced with personal responsibility for 15.3% (13.3% in 2011+) SE tax

• Federal and state income tax withholding optional

• Form 1040-ES

Assumptions

Typical Minister’s Annual Form W-2

$35,000 Cash salary 30,000 Housing allowance designation (6,000) Minister’s 403(b) plan elective deferral (5,000) Pastor’s optional federal and state income tax withholding$54,000 Net amount paid to minister

Assumptions

Typical Minister’s Annual Form W-2

$35,000 Cash salary 30,000 Housing allowance designation (6,000) Minister’s 403(b) plan elective deferral (5,000) Pastor’s optional federal and state income tax withholding$54,000 Net amount paid to minister

Typical Minister’s Annual Form W-2

$35,000 Cash salary 30,000 Housing allowance designation (6,000) Minister’s 403(b) plan elective deferral (5,000) Pastor’s optional federal & state tax withholding$54,000 Net amount paid to minister

• Accountable plan for professional expense reimbursements• Health insurance premiums and other qualified health benefits• Employer contributions to 403(b) plan

Irrelevant items

Housing Allowance

• Principal residence• Three-part test

– Actual expenses– Designated amount– Fair rental value, plus actual cost of

utilities• Partial reduction of deductible

expenses

Retirement Plan Options• Internal Revenue Code Section 403(b)

plans• Traditional Individual Retirement

Accounts (IRAs)• Roth IRAs (and

Roth 403(b) plans)

Health Benefits for Ministers

• Health insurance• Health Reimbursement Arrangements

(HRAs)• Health Savings Accounts (HSAs)

Professional Expenses

• Travel—car (@ $.555/mile), airplane• Lodging and meals• Materials• Entertainment

Opting Out of Social Security

• 15.3% (13.3% in 2011+) SECA; not 7.65% (5.65% in 2011+) FICA

• Requirements• Caution!

For more information...

• Non-profit organization accounting principles

• Compensation practices• Benevolent activities• Contributions issues• Foreign missions support• Ministerial tax planning

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