Correcting a Form 1099-MISC

Question:

How does a church correct a previous year's Form 1099-MISC which erroneously listed housing allowance in box 7 "Non-Employee Compensation?"

Answer:

Unlike the Form W-2, there is no separate form to correct an erroneously distributed Form 1099-MISC. Instead, a Form 1099-MISC should be prepared reporting the correct amounts, and the "Corrected" box should be checked on the top of the form.

As for the housing allowance, simply reduce the amount in box 7 by the amount of designated housing allowance, up to and including the full amount originally reported in box 7. Be aware that this may result in a zero being entered in box 7 if the full amount was designated as housing allowance.

Review: Church Employee Withholding

Question:

How does a church determine a non-clergy employee's withholding? How does a church match an employee's withholding and where do they send the money?

Answer:

Typically, non-clergy employees and employers incur the following taxes:

• 7.65% FICA tax - While ministers are not subject to FICA tax and may not be erroneously classified as non-clergy for the sake of withholding and matching, non-clergy employees must have 7.65% withheld from their pay and an additional 7.65% contributed by the church. This is true unless the church has previously opted out of paying its share of FICA tax by virtue of filing Form 8274 and gaining approval from the IRS. This puts the entire 15.3% burden on the employee.

• Federal and State unemployment taxes - Generally churches are exempt from these taxes; however, some states may require state unemployment taxes be paid even by a church.

• Federal and State income taxes - Determined based upon withholding tables in IRS Pub 15 and allowances communicated by employees on Form W-4. Church employers must collect Form W-4 from each non-clergy employee.

Churches use IRS Form 941 to report on a quarterly basis the wages paid to employees and any Federal withholding. Instructions for filing Form 941 can be found here.

Alternatively, churches may file annually IRS Form 944 (this does requires pre-approval). Instructions for filing Form 944 can be found here.

In accordance with Publication 15, churches must submit payments for any federal income tax withheld and both the employer and employee social security and Medicare taxes. In addition, most states have similar income tax withholding requirements.

Taxability of Love Offering to Former Pastor

Question:

A church's pastor resigned a few months ago. Since then he has not been able to find work. The church took a love offering to help him with expenses. Does the church have to take taxes out of this offering since the pastor is no longer part of the church? Would the answer be different if the congregation took up a love offering for someone else in the community?

Answer:

Benevolent gifts to individuals in the local community (not an employee of the church), are generally disbursed by churches from benevolent funds received by the church to disburse to needy individuals. Since these individuals have not provided nor are expected to provide services in exchange for the gifts, these gifts are non-taxable. For more on benevolent fund giving, type "benevolent fund" in the search window above.

Love offerings collected on the behalf of a current or former employee in consideration of past services provided are taxable compensation. Similar to compensation to the pastor while he was in the church's employ, no taxes are to be withheld from this compensation. As a dual-status individual, he is responsible for self employment and income tax payments.

There may be a possible exception to tax ability if the resigning pastor is actually entering retirement.

The Minister Audit Technique Guide says:
"There are numerous court cases that ruled the organized authorization of funds to be paid to a retired minister at or near the time of retirement were gifts and not compensation for past services. Rev. Rul. 55-422, 1955-1 C.B. 14, discusses the fact pattern of those cases which would render the payments as gifts and not compensation."

Rev. Rul. 55-422, 1955-1 C.B. 14 discusses the result of cases in which a minister received a gift from his church after retirement. The court ruled it was a nontaxable gift because the pastor had been "adequately compensated for his past services," and "the recipient did not undertake to perform any further services for the congregation and was not expected to do so."

Employee Compensation: Free Housing and Food

Question:

A teacher in a foreign country was provided with "free" housing and food. Does this teacher need to report this as income for tax purposes?

Answer:

Publication 525 says the following:

"You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met.

The meals are:

1. Furnished on the business premises of your employer, and

2. Furnished for the convenience of your employer.

The lodging is:

1. Furnished on the business premises of your employer,

2. Furnished for the convenience of your employer, and

3. A condition of your employment. (You must accept it in order to be able to properly perform your duties.)"

Publication 15 defines convenience of the employer as: "'For the convenience of the employer' means you have a substantial business reason for providing the meals and lodging other than to provide additional compensation to the employee. For example, meals you provide at the place of work so that an employee is available for emergencies during his or her lunch period are generally considered to be for your convenience.

"However, whether meals or lodging are provided for the convenience of the employer depends on all of the facts and circumstances. A written statement that the meals or lodging are for your convenience is not sufficient."

If these conditions are not met, then the value of the food and housing are considered taxable compensation and must be reported as such.

Minister Contributing to His Own Ministry

Question:

Can a minister donate to his own ministry? If so, do amounts have to be from income he earned from non-ministry sources?

Answer:

The Minister Audit Technique Guide provides directions to its agents as they examine minister's tax returns. The Guide offers some helpful insight to ministers as well:

"Dues versus Contributions
...Ministers' contributions to the church are not deductible as business expenses. They may argue that they are expected to donate generously to the church as part of their employment. This is not sufficient to convert charitable contributions to business expenses. The distinction is that charitable contributions are given to a qualifying organization (such as a church) for the furtherance of its charitable activities. Dues, on the other hand, are usually paid with the expectation that a financial benefit will result to the individual, as in a realtor's multi-list dues or an electrician's union dues. A minister's salary and benefits are not likely to directly depend on the donations made to the church. They may still be deducted as contributions on Schedule A [our emphasis] but may not be used as a business expense to reduce self-employment tax."

So, while a minister's donation to his employing ministry is not deductible as a business expense, it is deductible on Schedule A as a charitable contribution. This is true regardless of the source of the monies donated.