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Answers to Important Year-End Questions: Part 1

By Raul Rivera

For the next several Tuesdays I will answer important questions that many of you have asked in recent days, questions which all have an impact on end-of-year reporting. 

If the church receives a love offering for the pastor and the people make their checks payable directly to him as a gift, is it taxable?

Yes.  Section 102(a) states that "Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance."  Therefore, if the congregation decides to band together to give the pastor a love offering (gift), then why is it taxable?  It is because section 102(c)(1), titled "Employee Gifts", states that one cannot exclude from gross income "any amount transferred by or for an employer to, or for the benefit of, an employee."  In the case where during a worship service the congregation takes up a love offering as a gift for their pastor, it is taxable because even though the checks were made payable directly to the pastor, the congregation is doing it for the employer.  Under section 102(c)(1), the congregation is giving the gift for the employer because it is an event blessed by the church.

Can a church designate 100% of the pastor's salary towards housing allowance?

Yes.  In fact, I always recommend it.  There is nothing in the law that states that the housing allowance designation has to be substantiated before it can be designated.  Regulation states that the housing allowance that is excluded from gross income on the tax return must be whichever is the lowest of the following three scenarios:  the actual costs of providing a home, the rental value of the home, or 100% of the minister's income from the church.  Therefore, if at the beginning of the year, the church designates 100% of the minister's pay from the church as housing allowance, all one has to do at the end of the year is calculate the actual costs and the rental value of the home.  The church then reports on line 14 of the W-2 form the lower of the three.

In a recent article, you recommend that smaller churches not purchase health insurance for their employees.  Why? 

There are three reasons.  The first reason is because the church in our example would save $10,493.00 in insurance premiums.  Secondly, if the pastor gets church provided health insurance, he/she will not be allowed to get an insurance subsidy of $9,008.00 provided by the law.  The third reason, which I did not mention in the article, is that upon signing up, the pastor is able to get an advanced premium tax credit.  This is where the subsidy sends an advance payment directly to your health insurance company instead of you having to wait to get it back in your tax return.  This keeps monthly costs down. 

Our church has two musicians that we pay $50.00 a week to play on our worship team.  Do we issue them a 1099-misc?

No.  You issue form W-2.  Many churches hire musicians to play an instrument on the worship team.  However, most churches incorrectly believe that the income paid to the musician is reported to the IRS on form 1099-misc.  The correct form is a W-2, because under the law, they are employees.  Some churches have said, "If we simply pay them as contractors, then we can issue a 1099-misc."  That is an incorrect assumption that does not change the requirement of the law.  Section 3121(d) limits contractors to work that is "not part of a continuing relationship with the person for whom the services are performed."

If I travel 30 miles to visit a member in the hospital, and I spend all day there, can the church cover the meals?  If I pay for it out of pocket, can I be reimbursed for my meals?

No!  In order for the church to cover your meals or reimburse your meals, you must be outside of your "tax home," (church/home office).  Under regulation, you are considered to be outside of your tax home if your duties require you to spend substantially longer than an ordinary day's work, and you need to spend the night.  Many churches often allow the pastor to use the church debit/credit card to cover his/her meals while he/she is out and about doing church work, such as visiting members or doing other church business.  The church is required to report such transactions to the IRS in box #2 of the W-2 form. 

Have the penalties of section 4958 been increased?

Yes!  Section 4958(a)(2) allows the IRS to impose a penalty directly against the members of the board of directors of the church if they participate in what is called an "excess benefit transaction", such as overpaying the pastor.  Section (d)(2) has doubled the penalty to $20,000.00 each.  Treasury regulation § 53.4958-1(d)(3) states a board member is found responsible for an excess benefit transaction if he/she keeps "silence or inaction where the organization manager is under a duty to speak or act." The law places a strong fiduciary burden on each board member.  Education is the best medicine.

Is it true that the traditional medical reimbursements are no longer legal?

Yes.  Section 105(b) provided that a church could pay a pastor and his/her dependents' medical bills and insurance premiums tax free as a medical reimbursement.  The law has changed to no longer allow such reimbursements unless the church first provides group insurance to the pastor and other staff.  It all but makes the traditional medical reimbursement program moot.

How we learn

Learning happens best when questions are answered.  It is my hope, that as the year comes to a close, you will closely examine your church's/ministry's compliance with the laws of the land.  I invite you to take a close look at our newly posted 2014 conference schedule and register to attend one of our conferences.  I know you will not be disappointed.

 


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