Issues of Concern to Ministers. Ministerial Issues Who is a Minister? Administers the sacraments Conducts religious worship Management responsibility.
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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
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