Wednesday, March 26

"Erroneous" Form 1099-MISC Issuance

Question:

A minister receives a Form 1099-MISC from a church for which he provided no services during the year. His current church issues him a W-2. Is the Form 1099-MISC income taxable? If yes, how should he report this on his tax return?

Answer:

It is apparent that the church in the question above distributed money to someone, otherwise no Form 1099-MISC would have been issued! There are three likely explanations for a situation of this nature:

The first possibility is actually a fairly common situation. It could be that the church that issued the Form 1099-MISC has identified him as a "missionary" and has chosen to support him financially even though he provides no services directly to that congregation. In this situation, the Form 1099-MISC income is taxable as support.

Another alternative possibility is that he received Form 1099-MISC income that he was required by contractual arrangement to pass along to his employer who is already fully compensating him. In this case, he should report the Form 1099-MISC income on Schedule C; he should then deduct an identical amount as a ministerial expense, providing the name and Employer Identification Number of the employer to whom the income was forwarded.

Finally, it may be that an erroneous Form 1099-MISC has been issued. It is not wise, no matter the situation, to ignore the matter. An individual who believes that he has received a tax document in error should request a corrected form. He may wish to consult a tax professional to ensure proper reporting and avoid undue IRS scrutiny.

Wednesday, March 19

Unreimbursed Minister's Expenses

Question:

A church has an accountable plan in place to reimburse its minister for business expenses. Unfortunately, the church often does not have the funds available to reimburse its minister at the end of the year. How can it address this issue?

Answer:

The easy answer for the church is to simply reimburse as much as possible; the minister could then deduct any unreimbursed expenses on Form 2106 for federal tax purposes. However, there are two difficulties for the minister in this scenario:
  • Unreimbursed business expenses for an employee can only be deducted on Form 2106, which flows through to Schedule A. Schedule A deductions only benefit a taxpayer who itemizes rather than taking advantage of the standard deduction.
  • Also, unreimbursed business expenses are only deductible to the extent they exceed 2% of the taxpayer's adjusted gross income (AGI). For instance, a taxpayer with $50,000 of wages and no other deductions would have an AGI of $50,000, and could only deduct on Schedule A unreimbursed employee business expenses over $1,000 (2% of $50,000).
A better alternative would be for the church to reconsider the minister's compensation package. To provide an attractive salary but no reimbursement for expenses is not as satisfactory as providing reimbursement for expenses, then considering adequate compensation. For example, a church that pays its minister $20,000 but reimburses none of his $2,000 in business expenses is essentially paying him $18,000, while he is taxed on $20,000 if he is not able to itemize. However, if the church builds $2,000 for reimbursement into his compensation and pays him $18,000 in salary, he will only be taxed on $18,000, as he should be.

Tuesday, February 25

Minister Employed by Church in Non-ministerial Position

Question:

Our ministry recently re-hired a former minister for a non-ministerial position. Because this minister had previously "opted out" of Social Security, we have a Form 4361 on file. Should we begin withholding FICA taxes, as we would for a normal employee? Or, should we continue to exclude this employee from FICA withholdings?

Answer:

According to IRS Publication 517, (1) ministers are exempt from all required withholding, including FICA taxes, although they may owe self-employment taxes, and (2) only ministers performing "sacerdotal duties" are eligible for exemption from self-employment taxes by virtue of filing Form 4361. See this previous post (Ministers Employed in Parachurch Organizations) for a condensed description of sacerdotal functions.

Therefore, a minister who has previously opted out will remain subject to FICA tax withholding on non-ministerial income. Further, his non-ministerial income is ineligible for housing allowance benefits. Essentially, the ministry should ignore his Form 4361 and withhold FICA taxes as it would for a normal employee.

Monthly Support as Benevolence

Question:

A older member of our church, a retired children's ministry worker for another organization, is living on a small monthly Social Security benefit. As a church, we have decided to provide her with a monthly love gift. Can we treat this recurring gift in the same way as ordinary benevolent gifts (as nontaxable income)? Are we required to provide her with a Form 1099-MISC?

Answer:

The key consideration here is her relationship to her current church: did she ever provide services to this church in the past? If so, the IRS will likely view this benevolence as payment for past under-compensation, and it will be taxable. If, however, the church has no obligation to make up for lack of compensation for past services, and the motive is truly benevolent, this should be treated as standard benevolence; no Form 1099-MISC should be issued.

Please follow the links below for other guidelines relating to benevolence.

Benevolence Fund Receipts and Disbursements

Benevolence Not Reportable on Form 1099-MISC

Friday, February 21

Updating Your Organization's Responsible Party

Important news for ministries and small businesses:

As of January 1, 2014, any person assigned an employer identification number (EIN) by the IRS will be required to report a change in "responsible party" using Form 8822-B. For churches and small businesses not registered with the Securities and Exchange Commission, the responsible party is "the person who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets." 

Most churches and businesses presumably have not filed updated information with the IRS since obtaining an original EIN, so those entities will be required to file Form 8822-B by March 1, 2014. IRS information regarding penalties and extended deadlines has been vague. We would recommend that ministries and business owners review their original EIN filings (Form SS-4) and file Form 8822-B based on any changes in responsible party since the original SS-4 filing. Going forward, any change in responsible party should be reported to the IRS on Form 8822-B within 60 days of the change.