March 06, 2015

Line Items of Church Budget


We (MinistryCPA) were recently asked our opinion on the setup of a church's budget.

Question:

A church wants to know if their budget should individually list the compensation of each staff person instead of combining employee salaries/wage for each type of employee that the church employs. For example, the church budget has a line for the pastor, youth minister, church secretary, etc., but then the budget combines all the part-time employees, such as nursery and accompanists. There have been discussions concerning the privacy of the employees, so how detailed should each line item be?

Answer:

In our experience, churches use a wide array of practices when it comes to budget and personnel. One extreme is including each employee's pay--even a breakdown of the compensation package. The opposite extreme is one number on the budget for the total of all the compensation, including benefits, of all the employees. 

We like the approach of developing a budget on a per-program basis. For example, a church could include the compensation of the youth staff and youth pastor in a budget for Total Youth Programs. Each program would still give a single budget for the compensation of each program.

Although we don't suggest listing out each employee's compensation package in complete detail, in most cases (we believe) members of the church should be given the opportunity to see the compensation breakdown if they desire. 

The Apostle Paul reminded the members of the Corinthian church that God had established "that they which preach the gospel should live of the gospel" (II Corinthians 9:14). Many active members take this as both a corporate and individual responsibility and want to know whether "liveable" compensation is being provided.  

February 26, 2015

In-home Meal and Entertainment Expenses

Question:

A church pastor is wondering how to deduct meal and entertainment expenses when he and his wife host gatherings at their house. Is there a set amount he can deduct for each meal served? Or does he need to deduct the actual costs? 

Answer:

Meal and entertainment expenses are deductible or reimbursable (by the employer) if they are ordinary and necessary and are either directly related to or associated with the pastor's responsibilities. If the pastor is reimbursed by the church, he cannot claim the expenses as a deduction.

Since it is difficult to precisely document the cost of meals served in the home, a reasonable cost per meal is generally allowable. Here is a quote from page 67 of Worth's Income Tax Guide for Ministers, 2012 Edition

A reasonable amount per meal, depending on your actual circumstances and services practices, might vary between $8.00 to $11.00 per meal. Those afternoon meetings with refreshments, or after evening service snacks for the youth group, etc., might vary between $2.50 to $3.50 per snack.

We have generally found that Worth's per meal suggestions are greater than most pastors can justify. Her snack range is more typical. On a pastor's tax return, 50% of the costs of meals while entertaining is deductible.

February 16, 2015

403(b) Employer Contributions - Subject to FICA Tax?

Question:

Are 403(b) retirement plan contributions made on behalf of the minister by the church subject to FICA tax? (The amount contributed was not deducted from the minister's salary; it was made by the church as an employee benefit.)

Answer:

Simply put, employer contributions are not subject to FICA tax.

However, this is a good opportunity to review elective deferrals. Elective deferrals are monies chosen by employees to be deducted from their paychecks and contributed to the employer-sponsored retirement plan. 

Non-minister employees who choose elective deferrals do not reduce the amount of FICA wages that need to be reported. In other words, the elective deferrals are subject to FICA tax. 

Ministerial employees are not subject to FICA tax in the first place (read our March 21, 2011 blog post for more info). Therefore, any monies the minister defers to the employer-sponsored retirement plan are not subject to FICA tax. 

For a review on the 403(b) contribution limits for 2014-2015, read our November 24, 2014 blog post


February 12, 2015

Church Plan: 401(k) or 403(b)?

Question:

According to Revenue Rulings 58-359 and 63-156, retirement distributions to a pastor may be designated as housing allowance if they come from a church plan. Does a 401(k) plan sponsored by the church qualify as a church plan?

Answer:

Normally, non-profit organizations set up 403(b) retirement plans for its employees while for-profit organizations establish 401(k) retirement plans. For churches, one of the benefits of implementing a 403(b) plan is that the retirement distributions to a pastor can be designated as a housing allowance (tax-free compensation). Here are a couple of blog posts that we have written on the matter:

403(b) Retirement Distributed as Housing Allowance
Housing Designation of 403(b) Plan Retirement Distributions
  
According to The Minister Audit Techniques Guide, "...the retired minister may exclude from net earnings from self-employment any retirement benefits received from a church plan (our emphasis). Rev. Rul. 58-359, 1958-2 C.B. 422." 

So that leads to the the above question: Does a 401(k) plan qualify as a church plan?

Precedence tells us that 403(b) plans are the standard for most church plans. However, according to The Tax Magazine on December 1, 2011, a 403(b) or a 401(k) plan may be classified as church plans as long as other requirements of the above revenue rulings are satisfied. 

As always, churches should reach out to a tax professional when determining what type of retirement plan to set up for its employees. 

January 29, 2015

Review: Form 1099 Payments to 501(c)(3) Organizations

Question:

A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC?

Answer:

We have written similar blog posts on this topic in the past (listed below), but we figured it was a good time for a review. 

Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The 2015 Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC. 

The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC:
  • Rent paid to an individual (non-corporation)
  • Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers)
  • Support sent directly to missionaries
Here are some similar blog posts that we have written in the past:

Form 1099 for Payments to Other Ministries
Form 1099 for Non-profit?
Form 1099-MISC Rental Payment Reminders
Churches Issuing Form 1099-MISC to Landlords