Maximizing Tax Benefits for Ministers

1. Maximizing Tax Benefits for Ministers Churches of Strength Conference Chatham Baptist Church February 25, 2012 by: Sylvan Knobloch

2. What is New in 2012? • IRS website www.irs.gov • Child tax credit • Marriage penalty relief • Education Saving Accounts, Education Assistance, American Opportunity Tax Credit American Opportunity Credit helps with offsetting education cost • Deduction for state and local taxes • Payroll tax holiday • 2012 Mileage rate .555 • Second Parsonage Allowance [Phillip A Driscoll vs Commissioner] Ministers can receive a second home exclusion for parsonage allowance. [his vacation home].

3. Who is a minister? • Ordained, licensed or commissioned • Administer ordinances of church • Conduct religious services • Management responsibilities of church • A religious leader Minister’sDual Status For Federal income taxes ministers are employees • Ministers must receive a W-2. • Can be self-employed – revivals, etc. For Social Security they are self-employed • Must pay Social Security taxes • Unless filed 4361 Page 12 important note.

4. How to pay your taxes • Pay quarterly Social Security payments for 2012, due • April 17 • June 15 • September 17 • January 15, 2013 • Ministers who report their income taxes as employees [W-2] can request that their church voluntarily withhold income taxes from their wages. • Complete W-4; on line 6 request an additional amount of income tax be withheld – to cover you SS quarterly payments page 13.

5. Minister’s Housing Allowance • Adopt initial procedure • Receive written request • Provide written response • Approve in advance • Housing allowance cannot be designated retroactively. • I have sample housing allowance resolutions and worksheets available. (If you need help crafting this resolution please call 217-391-3133)

6. Determining the amount • Church does not designate amount of housing allowance. • Minister designates amount and church approves theidenticalamount. • If IRS audits minister (lowest of the three): • The amount actually used to provide a home • The amount officially designated as a housing allowance • The fair rental value of the home including furnishings, appurtenances, plus utilities

7. Establishing Housing Allowance • Ministers who own or rent their own home do not pay federal income taxes on the amount of their compensation that their employing church designates in advance as a housing allowance, however, how do we determine Housing Allowance? • The amount actually used to provide a home • The amount officially designated as a housing allowance • The fair rental value of the home, including furnishing, & utilities. • If audited the IRS will allow the lowest of these three. • If a minister, is only paid a housing allowance then he will not receive a W2.

8. Minister- Provided Housing • The excludable portion of a housing allowance is not taxable for federal income tax purposes, (It is deducted from Line 1 on W2). The entire housing allowance is taxable for Social Security (SECA) purpose (reported on Schedule SE).

9. Employer- Provided Housing • The Fair Rental Value of the housing plus utilities (if paid by employer) is: • Excludable for federal income tax purposes • Includible for social security (SECA) purposes • A housing allowance may be provided to a minister living in employer-provided housing. It is a designation of the cash salary. The housing allowance may cover certain housing expenses paid by the minister.

10. Housing expenses include: Mortgage payments Rent Real estate taxes Property insurance Utilities Furnishings Structural repairs and remodeling Yard maintenance and improvements Maintenance items Homeowners association dues

11. Accountable Reimbursement Plans Accountable plans must meet 3 criteria of IRS: Expense must have business connection You must adequately account for the expense to your employer within a reasonable period of time. You must return any excess advance submit receipts within a reasonable period of time. • An accountable reimbursement plan provides advance or reimbursements of an employee’s ministry expenditures incurred in the performance of their duties. • I have a sample resolution for church to approve an accountable reimbursement plan. Page 35

12. Accountable plan • Reimbursements of business expenses under such an arrangement are not reported as taxable income on the minister’s Form W-2 or Form 1040, and there are no deductions claimed. In effect the minister is reporting to the church rather than to IRS. • You will report on Schedule A and C expenses not included as accountable expenses.

13. What is included: • Travel for ministry away from home (lodging, meals and travel) • Entertainment Hospitality Expense – ministry connection is required (who, what, where, why, when) Meals at home: $8-11/person Snacks at home: $2.50-3.50/person • Training expenses • Educational Expenses – must follow IRS guidelines • Subscriptions Expenses • Cell Phone Expenses – if required by church for convenience of church • Moving expense on the Accountable plan

14. Non-accountable • Remember, non-accountable reimbursements relate to any payment made to an employee that is not properly documented in accordance with IRS guidelines. For example, a church gives their pastor $200/month for expenses but does not require documentation. The amount is considered taxable and is reported on W-2 line 1 and if not included will be classified as Automatic Excess Benefit. • Salary Reduction Agreement for minister’s expenses are considered salary as well and not excluded from W-2 line 1. An arrangement that repays you for business expenses by reducing the amount reported as your wages, salary or other pay will be treated as a non-accountable plan and reported on W-2, including an SRA that requires you to submit expenses. • To claim expenses they must exceed 2% of adjusted gross income. Some ministers have insufficient itemized expenses to use Schedule A. • Caution – Deason rule may apply if audited.

15. Non-Taxable Employer Fringe Benefits • Flexible Spending Arrangement [FSA, Cafeteria or Section 125], Health Reimbursement Arrangement [HRA, Section 105] or Health Savings Account. • These amounts should be established in advance by the personnel/budget committee. • Establishing correct language is very important in developing such a policy. Ask an attorney or CPA to assist in drafting a qualified FSA and/or HRA policy procedure. • Funded by SRA for reimbursement of employees’ medical expenses. • Caution: Reimbursing an employee for the extra medical expenses typically not covered by an insurance policy without an established FSA or HRA, results in taxable income to the employee. Page 35

16. Complying with Federal Payroll Tax Reporting • Obtain an Employer Identification Number (EIN) from IRS Form SS-4. Call 1-800-829-4933 www.irs.gov search EIN. • Determine whether each church worker is an employee or self-employed. • Keypoint:Churches should always treat a worker as an employee, since substantial penalties can be assessed against a church for treating a worker as self-employed when they are classified by IRS as an employee. Only W-2 employees can participate in retirement plans. • Have a Social Security Number for each employee. • Each employee should complete a W-4. • Compute each employee’s taxable wages. • Determine the amount of tax to withhold from employee wages.

17. Complying with Federal Payroll Tax Reporting • Withhold SS and FICA taxes from non-minister employees’ wages. • The church must deposit the taxes it withholds. Church accumulates three kinds of federal payroll taxes: • Income taxes • The employees’ share of SS and FICA withheld from wages • The employer’s share of SS and FICA withheld from taxes • The non-ministerial employees’ share of SS and FICA [Hired contract workers complete a W-9.] • All employers subject to income tax withholding must file a 941 quarterly. • Prepare Forms W-2 [1/31] , W-3, 1099, 1096 as appropriate. • Prepare a 1099 for every self-employed person receiving more than $600.00/year.

18. New Hiring Considerations • I-9 Form: Employment Eligibility Verification • W-4 Form: Employee’s Withholding Allowance Certificate – Ministers may voluntarily complete a withholding agreement. • W-5: Earned Income Credit Form • State Withholding Form • Mandatory New Hire Reporting Form. Since 1977 all employers including churches are required to report all newly hired or returning employees to their respective state within 20 days of hiring. • Social Security Number – never accept a ITIN instead of a SSN. • Employee Federal Tax reporting • Call attention to retention policy p 70. Page 41-46

19. Resources Questions? • Edited by Randy Tompkins, Church Financial Guidebook: resources for ministers, church treasures, financial secretaries and church financial committee, Published by the Stewardship Development Association 2012 • Richard R Hammar, 2012 Church & Clergy Tax Guide by Published by Christianity Today. • Richard R Hammar, 2012 Tax Return Preparation and Federal Reporting Guide, Published by GuideStone, 2012 • Busby, Dan; Drunen, John Van, Zondervan 2012 Minister’s tax and Financial Guide Published by Zondervan • Worth, B.J Worth’s Income Tax Guide for Ministers published by Evangel Publishing House Nappanee, IN

20. If you have questions please call Church Health and Staff Development Director, Sylvan Knobloch at 217-391-3133 Or email sylvanknobloch@ibsa.org