Form 941 - Employer's Quarterly Federal Tax Return: This form is used by employers (the church) for reporting to the IRS all wages paid to employees, income taxes and FICA taxes withheld each quarter. Churches must file this form quarterly with the IRS if they have at least one employee other than ordained staff. The amounts reported on a church's W-2 forms at year-end must reconcile with the 941 forms filed during the year. Churches with only one employee, and that employee is ordained, are required to file only a W-2 form. Form W-2 - Wage and Tax Statement: This form is used by employers (the church) to report annual compensation, withheld income and FICA taxes for each employee. Churches must issue this form to each employee on or before January 31. Ordained ministers pay self-employment taxes instead of FICA taxes. Every church should issue a W-2 form to all employees including ministerial staff. The W-2 for ministerial staff should not include housing in box 1 (Wages, tips, other compensation). In fact, housing does not have to be shown on the W-2, nor should any other tax-free benefits such as annuity or insurance be included in box 1. Form 1099-MISC - Miscellaneous Income Returns: Churches use this form to report compensation of $600 or more paid to non-employees for services during any one year. This includes but is not limited to evangelists, guest speakers and self-employed persons who perform miscellaneous services for the church (plumbers, cleaning, lawn maintenance, etc.) who are not incorporated. 1099's are not required to be issued to corporations. Churches must issue this form on or before January 31. It is helpful to obtain Form W-9 (Request for Taxpayer Identification Number and Certification) at the time of payment. Important Tax Information for Ministers Ordained ministers are employees for income tax reporting and fringe benefit purposes and self- employed for Social Security purposes. Ordained ministers are also employees for the purpose of complying with workers' compensation laws. In addition, many ministers who are employees of the local church are self-employed for some purposes. For instance, the pastor will be considered self-employed with regard to guest speaking appearances in other churches and services performed directly for individual members. Definition of Minister for Federal Tax Purposes: A minister, for federal tax purposes, must satisfy all of the following conditions:
• Administer ordinances and sacraments.
• Have management responsibility in a local church or denomination.
• Be considered a religious leader by one's church or denomination.
Housing Allowance for Ordained Ministers: A housing allowance is available to every minister as defined for federal tax purposes. A housing allowance is available even to those who live in church-owned housing with or without utilities paid. The housing allowance should be predetermined by the minister and submitted to the church or appropriate committee for approval prior to the beginning of the tax year. This approval does not imply that the minister must answer to the church or any committee as to the details of spending the housing allowance. The minister answers to the IRS in case of audit. The minister should maintain accurate and complete records of housing expenses. The minister should overestimate housing so as to provide enough monies for unforeseen expenses. At the close of the tax year, the minister must report unspent housing on his tax return as income and must pay appropriate taxes on that unspent portion. All housing allowances and church-furnished housing are subject to self-employment taxes. See Illustrations A and B. Church-furnished housing is alsosubject to fair rental value and should be included with church-paid utilities when reporting remuneration for workers' compensation purposes.
An amendment of the housing allowance may be in order if the minister:
• Experiences an increase/decrease in adjustable mortgage interest rates;
• Desires to make a large "balloon" payment on the mortgage.
The amended housing allowance must be approved in writing by the same body as approved the original housing allowance, and only applies to future expenditures. Professional Expenses and Continuing Education to Improve Job Skills: The reporting of professional expenses (including car allowance and all costs incurred as part of the job) is a tremendous tax break for the staff member, but needs to be handled carefully and in a most advantageous manner. If staff members itemize their professional expenses on their tax return (referred to as a non- accountable plan), the taxpayer stands to lose fifty (50) percent of all meals and entertainment and two (2) percent of their adjusted gross income for deduction purposes. In addition, staff members must be able to itemize rather than claim the standard deductions in order to deduct professional expenses. By accounting for reimbursable business expenses to the church, the pastor and staff can lower their tax liabilities. This is referred to as an accountable reimbursement plan. The expense documentation is furnished to the church, and the church reimburses the staff person for the business expenses. The practice of offering a "pay package" in reference to the compensation plus expense reimbursement and fringe benefits could result in the entire amount the staff person has effective control over being considered taxable. Churches should avoid the term "package." Care must be made in constructing the church budget so the IRS does not consider business expense reimbursement to be a salary reduction. The business expense reimbursement account should be in a separate section of the budget apart from the line items of salary, housing, annuity and insurance. See Illustration C for a sample reimbursement policy. Self-Employment Taxes: Self-employment tax is the result of the Self-Employed Contribution Act (SECA) and refers to the rate that self- employed people pay into Social Security and Medicare. A self-employed person pays 12.4% of earnings up to a maximum amount set by the IRS each year for retirement, death and disability income benefits and 2.9% for Medicare benefits with no maximum. Social Security tax is the result of the Federal Insurance Contributions Act (FICA) and refers to the rate those employees and employers contribute into Social Security. The rate is presently 6.2% for both the employee and employer of earnings up to a maximum amount and 1.45% for Medicare with no maximum. Employers and employees pay Social Security (FICA) and only self-employed individuals pay self-employment tax (SECA). Contact the IRS or your tax preparer to keep current on any changes in rates or maximum amounts of earnings. Ministers have to pay self-employment tax on their ministerial income, unless they have properly followed IRS rules to opt out of Social Security. A minister can opt out of Social Security by meeting strict IRS guidelines required when filing Form 4361. This must be done by the due date of the minister's tax return for the second year in which earnings of at least $400 was incurred, any part of which was from ministerial income. NOTE: When filing Form 4361, the minister must certify opposition to acceptance of public insurance on the basis of religious principles, which includes payments for death, disability, retirement or medical care. In addition the minister must certify that the ordaining body has been informed of such opposition.
Moreover, even if ministers have opted out of Social Security for their ministerial income, they must pay Social Security taxes on income they earn from secular employment. This is particularly important to bi-vocational ministers. A church cannot pay FICA tax for a minister. Ministers are, by law, always treated as self-employed for Social Security purposes. Churches that pay FICA tax for their ministers are violating the law and can cause errors in the Social Security Administration's records, which could create serious difficulties. A church can give its minister(s) an allowance to help offset the expense of SECA tax. However, it is important to note that such an allowance is taxable income, so the allowance will be subject to SECA tax and income tax. The minister must pay SECA tax on housing allowance (cash housing allowance and/or parsonage allowance); however, such allowance is excluded from income for federal income tax purposes. Parsonage allowance should be based upon the fair rental value plus all utilities and should be "low reasonable" not "low ridiculous." Investigate other rental properties in the area, seek the assistance of a local realtor and consider the valuation for property tax purposes in establishing the parsonage allowance. Churches must pay FICA tax for employees (except ministers) unless the church has elected to exempt itself. Churches must file Form 8274 with the IRS to exempt themselves from paying FICA tax on behalf of their employees. NOTE: When filing Form 8274 a church must certify that it is opposed to the payment of Social Security taxes for religious reasons.
The filing deadline for such action relates to the date on which the church must file its first Form 941. Employees of an exempt church must pay SECA tax, which is 15.3% instead of 7.65%.
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