Church and Christian Ministry Compensation Concepts

1. Church and Christian Ministry CompensationConcepts B y Corey A. Pfaffe, CPA, PhD, Spring 2012

2. 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

3. 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

4. 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

5. Typical Minister’s Annual Form W-2 Assumptions $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

6. Typical Minister’s Annual Form W-2 Assumptions $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

7. 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

8. Housing Allowance • Principal residence • Three-part test • Actual expenses • Designated amount • Fair rental value, plus actual cost of utilities • Partial reduction of deductible expenses

9. Retirement Plan Options • Internal Revenue Code Section 403(b) plans • Traditional Individual Retirement Accounts (IRAs) • Roth IRAs (and Roth 403(b) plans)

10. Health Benefits for Ministers • Health insurance • Health Reimbursement Arrangements (HRAs) • Health Savings Accounts (HSAs)

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

12. Opting Out of Social Security • 15.3% (13.3% in 2011+) SECA; not 7.65% (5.65% in 2011+) FICA • Requirements • Caution!

13. For more information... • Non-profit organization accounting principles • Compensation practices • Benevolent activities • Contributions issues • Foreign missions support • Ministerial tax planning http://www.ministrycpa.blogspot.com/

14. Visit us at www.ministrycpa.com for more presentations or to connect with a tax professional. Visit our Q&A blog at www.ministrycpa.blogspot.com 611 O’Connell Street Watertown, WI 53094 (920) 261-7012 Member: American and Wisconsin Institutes of Certified Public Accountants