Methodist ministers have historically reported salary and professional expenses on Schedule C. In a landmark court case, Weber v. Commissioner, a court determined that a Methodist minister was a W2 employee rather than an independent contractor. The court stated the following as criteria in determining that status: The minister was subject to significant control. The minister was required to work at the church to which he was assigned. The minister didn’t have the right to unilaterally discontinue regular services of the local church. The position was intended to be permanent, as opposed to transitory. The benefits, such as health insurance and pension, indicated an employment relationship. An IRS Publication on Form I-9 States: "Hiring employees without complying with the employment eligibility verification requirements is a violation of the employer sanction laws. This laws requires employees hired after November 6, 1986, to present documentation that establishes identity and employment eligibility, and employers to record this information on Forms I-9."
Employee vs. Independent Contractor Employees typically: Receive salaries or hourly wages (whether part-time or fulltime). Can be fired. Can quit without penalty. Must submit reports. Must obey instructions. Must do the work themselves. Are hired to provide services for an indefinite period of time, rather than to accomplish a particular task. Are eligible for fringe benefits (health, disability, pension, sick pay, etc.). Are provided what is needed to do their job. Are reimbursed for expenses. Independent contractors are considered self-employed. They typically: Set their own hours. Decide how to get the work done (rather than follow someone else’s instructions). Offer their services to the public. Provide their own equipment. May work on someone else’s property, and for several persons at the same time. May employ assistants. Are hired to do a particular task, and are paid by the job. Have a substantial financial investment in the work.
Tab P – IRS Form 941 – Employer’s Quarterly Federal Tax Return Part 1 ◦ Line 1 – Number of employees ◦ Line 2 – Wages subject to federal income tax ◦ Line 3 – Tax withholdings ◦ Line 4 – Check if not subject to social security or medicare
Part 1 ◦ Line 5 – if 4 is not checked, enter wages subject to social security and multiply by percentages ◦ Line 7 – Adjustments ◦ Line 8 – Calculation ◦ Line 9 – Advance Earned Income Credit payments ◦ Line 10 – Calculation ◦ Line 11 – Tax deposits made for the quarter
Part 1 ◦ Line 12 – Balance due ◦ Line 13 – Overpayment Parts 2-5 – Information and signature Tab P – IRS letter ◦ If one minister and no other staff, 941 not required
Note the difference between the wages reported on line 2 and the wages reported on lines 5a and 5c. The difference is the amount of the pastors wages for the quarter.
Employment Tax (pg 101) ◦ FICA ◦ FUTA Clergy Compensation (pg 94) ◦ Discussed in detail in W-2 slides later Business Expenses (pg 47) ◦ Accountable Reimbursement Plans ◦ Non-accountable Reimbursements
Completing a Clergy W-2 ◦ www.gcfa.org, Pastor link, Tax Packet link Box A – Employees Social Security Number Box B – Employer Identification Number ◦ Each church should have its own Boxes C, D, E, F – Name and Address Information
Box 1 – Compensation – includes: ◦ Salary ◦ Gifts ◦ Allowances (other than housing) ◦ Per diem or mileage in excess of IRS rates ◦ Taxable Fringe Benefits ◦ Non-qualified moving expense
Box 1 – Compensation – does not include: ◦ Pension withholdings ◦ Housing and utilities allowances ◦ Health premiums ◦ Accountable reimbursement plan payments ◦ MRA or DCA ◦ Excludable fringe benefits
Box 2 – Tax Withholdings ◦ Any voluntary withholdings for clergy Boxes 3, 4, 5, 6 – Blank for clergy ◦ Because clergy are considered self-employed for social security purposes Boxes 7, 8, 9 – Not applicable
Box 10 – Dependent Care Benefits Paid Box 11 - Not Applicable for Most Clergy ◦ Applies to non-qualified pension plans Box 12 – Clergy Contributions – most used: ◦ C – Life insurance benefits > $50,000 ◦ E – 403(b) employee salary reduction contributions ◦ P – Qualified moving expense payments
Box 13 – Check if on retirement plan Box 14 May report housing and utilities allowances here ◦ If you do not list, must tell clergy separately Boxes 16-20 – State and local wages and tax withholdings
Example information and W2 (Page 94 Worth’s Guide) ◦ Cash Compensation$51,000 ◦ Parsonage Allowance ( own home) 24,000 ◦ Contributions to Salary Reduction 403(b) Retirement 6,000 ◦ Taxable Salary on W-2$ 21,000 ◦ Federal Income Tax voluntarily Withheld $ 6,000 ◦ Health Insurance Premiums $ 5,520 ◦ Group Term Life Insurance Premium $ 420 ($50,000 policy)
Q&A from www.gcfa.org/TaxPacket.html What is a housing allowance? (Q 1-2) ◦ An exclusion from taxable income for federal income tax purposes
How much can an allowance be? (Q 4) ◦ The lesser of: The amount designated as the housing allowance, The amount of actual expenses, or The fair rental value of the property (furnished plus utilities) How is an allowance set up? (Q 9) ◦ In advance and changed prospectively if needed ◦ Charge Conference resolution ◦ Attachments A & B provide examples
What can be included in actual expenses? (Q10) ◦ Attachment C provides a worksheet ◦ Examples include: Utilities Furniture and appliances Building repairs and remodeling Insurance and taxes Maintenance items
What if allowance is more than actual? (Q 12) ◦ Can be paid to pastor as taxable income How is the allowance reported? (Q 13) ◦ Can include in box 14 on W-2 ◦ Not reported in box 1 if not more than actual Is allowance excluded from social security? ◦ No! Included for social security purposes. (Q 16)
Role of the Local Church Finance Committee, Financial Secretary and Treasurer ◦ 2004 Discipline, Paragraph 259 ◦ New 259.4 from 2008 General Conference!
Provide Financial Direction Provide for the Annual Funding Program Provide for the Church’s Budget (Balanced) Provide Financial Communications Provide for Financial Reports Provide Substantiation Provide Safeguards for Church Funds Provide for the Annual Audit Preserve Financial Records Plan for Giving Beyond the Budget Encourage Planned Giving
Supervise the Counting Committee, which shall consist of at least 2 persons not related Receive and deposit all funds given to the church Provide the Church Treasurer with a record of the funds deposited Check your records with those of the Treasurer at least once a quarter Report to the Committee on Finance the amount of revenue on a monthly basis Work with the Committee on Finance to develop policies and procedures for handling all funds and then implement those policies Record all funds received from individuals or groups on a separate form Send to individuals, preferably monthly, a statement of the amount of gifts they have given the church
Keep accurate and detailed records of the expenditures of the church Disburse funds to the cause for which they have been contributed Make monthly remittances to the conference treasurer for apportionment payments and other gifts Receive from the financial secretary weekly deposit slips indicating the amounts deposited, along with the statement recording the sources of all funds received and the purpose for which they were given Provide a regular report to the Committee on Finance and the Administrative Council of the expenditures for the year and fund balances Implement the policies of the Committee on Finance to establish procedures for paying bills, investing “idle” funds, and payment of special offerings Provide to the Committee on Finance, a listing of all checks written each month(check number, payee, & amount), including voided checks Make yourself aware of all responsibilities the treasurer has with the different governmental units Prepares records for annual audit
Policies And Procedures That We Use To Ensure Completeness, Accuracy, Authorization And Validity Of Data.
DRAFT Template for Internal Control Policy ◦ Should be available at Annual Conference Required for local churches from 2008 General Conference
FISCAL RESPONSIBILITY and MANAGEMENT POLICIES IN LOCAL CHURCHES Florida Annual Conference The Cabinet of the Florida Annual Conference after consulting with The United Methodist Book of Discipline, the Financial Services Office of the Florida Conference, the Conference Chancellor, and Florida Law establish the following fiscal and management policies to insure the protection of the Church as well as those persons involved in the handling of church funds. All local church bank accounts, brokerage and investment accounts, and any other financial accounts shall require two signatures for all transactions. The local church pastor or his or her family member, relative, or business associate shall not be one of those signatories for any local church accounts. The local church shall have in place a process (paper trail) by which all local church expenses are approved by the local church pastor and/or other responsible person(s) who are not themselves signatories for local church accounts. It is preferable that the pastor not be one of the persons authorizing payment. The church treasurer, or someone so designated, will produce clear and timely financial reports on a monthly basis and provide copies to the pastor and the Chair of the Finance Committee and Chair of the Church Council. The person(s) responsible for reconciling bank, brokerage and similar accounts shall not be the person(s) who also has signatory authority for that account and also shall not be the local church pastor or a family member or business associate of the local church pastor. Bank and other investment statements shall not be mailed to a person with signatory authority. The use of ATMs or other means to withdraw cash directly from local church accounts shall not be permitted. Cash expenses, for example through a petty cash fund, shall be kept to a minimum ($100.), reconciled regularly (at least quarterly), and accounted for in the same way as other expenses.
United Methodist churches sometimes commonly have a fund called the Pastor’s Discretionary Fund. Written policies in accordance with the General Council on Finance and Administration guidelines are required. (See "A Matter of Good Stewardship: Tips For Responsible Handling of a Pastor’s Discretionary Fund." GCFA Legal Department, September 20, 2001). If a Pastor’s Discretionary Fund exists, the pastor shall be required to maintain a log and receipts as documentation for the money spent out of such a fund. No checks will be made out to cash. This fund is not to be used as a reimbursement account for business expenses. Every effort should be made to write the check directly to the merchant or agency. On rare occasion a check may be written to the pastor for expenses that fit the guidelines but only when a receipt is presented. All financial records will be maintained on the church campus. If physical circumstances necessitate, a written exception by the district superintendent, with directives as provided by the district superintendent, may be obtained. If a credit card is made available to the pastor or staff for the purpose of church-related expenses, the pastor or staff person is responsible for the submission of receipts and explanation of the purpose for all transactions. Church credit cards shall not be used for personal expenses. Clear guidelines as to the nature of "church-related expenses" should be established in advance of provision of the card. A travel allowance will no longer be documented separately from the cash salary of a pastor. Travel may be reimbursed through a Reimbursable Account that requires the documentation of travel through mileage logs and receipts. The church shall make provisions for an annual audit according to The Book of Discipline ¶258.4c. Guidelines for this audit are provided by The General Council on Finance and Administration "Local Church Audit Guide" which is available from the Conference Treasurer’s office and the GCFA website www.gcfa.org.www.gcfa.org Many Local Churches have Policies and Procedures of their own in addition to the Florida Conference Policies and Procedures.
What is an audit? (pg 4) ◦ “an independent evaluation of the financial reports and records and the internal controls of the local church” ◦ Not a symbol of distrust!
Utilizes Fund Accounting Types of Funds ◦ Unrestricted Current – Main operating fund ◦ Restricted Current – Contributor specified or for a specific operating purpose (budgeted items) ◦ Plant/Capital – Used to acquire or renovate capital assets or to service debt on capital assets ◦ Endowment-Permanent –principal held in perpetuity and earnings used for specific purpose Term- principal held for a specific period then becomes available for use Quasi – endowment fund –designated by the governing board for specific purposes for a long but unspecified period
Three Kinds of Net Assets (Donor Imposed) Permanently Restricted Net Assets – Permanent Endowments Temporarily Restricted Net Assets – Restrictions that expired by the passage of time or by actions of the church. Such as Term endowments or Building Funds Unrestricted Net Assets
Statement of Financial Position – Assets, Liabilities, and Net Assets Statement of Activities – Revenues, Gains, Expenses, and Loses ◦ All expenses are reported as decreases in net assets ◦ Non Profits have a great deal of flexibility in the layout of the Statement of Activities Statement of Cash Flows –Changes in Net Assets, Adjustments, Investments, and Financing
Why do an audit? (pg 6-7) ◦ Protection for you! ◦ Build trust and confidence ◦ Set habits of responsibility ◦ Reassure donors ◦ Provide checks and balances
Who can do an audit? (pg 8-9) ◦ Independent ◦ Qualified ◦ Not necessarily a CPA
What does an audit do? (pg 12-13) ◦ Verify reports ◦ Document restrictions ◦ Evaluate processes What is included in an audit? (pg 14) ◦ ALL funds or organizations operating under Churches Federal ID #. (Except UMW which must be audited but may be audited separately)
What do auditors need? (pg 15) ◦ Policies ◦ Administrative Council and Finance Committee Minutes ◦ Bank and Investment Account Statements ◦ Bank Reconciliations ◦ List of all Bank and Investment Accounts, including persons authorized to sign on each ◦ Contribution counter tally sheets and deposit records ◦ All Invoices, payroll data and payroll tax returns ◦ Financial Reports, General Ledgers, General Journals and any Subsidiary Journals, Check registers and Fund Balance Reports ◦ Budget Information ◦ Fixed Asset Schedule ◦ And more!!
How is an audit done? (pg 16-22) ◦ Confirmations (Addendum III – example) ◦ Bank reconciliations ◦ Deposit records ◦ Procedure review – internal controls
Internal Controls ◦ Segregation of duties (pg 24) Fin. Secretary & Treasurer – not same person and not related Auditor – not Fin. Secretary or Treasurer and not related to either Receipts & Disbursements – by different people (when possible) ◦ Authorizations (pg 25) ◦ Reporting
Auditor’s Report (pg 28) ◦ Audit Report to Church Audit Committee ◦ Annual Audit Report by Church (Addendum II) Audit Check-off List (Addendum I)
Q&A from www.gcfa.org/TaxPacket.html What is an Accountable Reimbursement Plan (ARP)? (Q 1) ◦ “a method for claiming and reimbursing professional or business expenses” Is part of the Charge Conference Documents
Advantages ◦ Convenience ◦ Data ◦ No complex rules ◦ Fewer limits ◦ Tax savings Disadvantages ◦ More church review of expenditures ◦ Use it or lose it (can’t be paid as salary if not used)
What is in an ARP? (Q 5) ◦ Sample policies available at www.gcfa.org/TaxPacket.html When should an ARP be set up? (Q 6) ◦ In advance of budget year ◦ Can be changed with new agreement
What can be included in an ARP? (Q 11) ◦ Office supplies ◦ Office equipment ◦ Office postage ◦ Software ◦ Professional books ◦ Continuing education ◦ Etc….
What is not included? ◦ Mileage to church from home ◦ Mileage to home and back to church for lunch ◦ Vacations ◦ Trips to visit sick relatives ◦ Computer used by family ◦ More examples in appendix to Q&A
Who should be paid? (Q 12) ◦ Pay directly to vendor ◦ Reimburse staff member ◦ Either method is OK! Are there required documents? (Q 13) ◦ Actual receipts ◦ Documentation of business purpose Listed property – cell phones, vehicles, etc.
What is a business expense? (Q 21) ◦ Related to purpose and goals of church ◦ Same requirements for churches as for other businesses Can church not pay related business expense? ◦ Yes! Payments approved by church. (Q 22) Who owns what is bought with ARP? ◦ The church (Q 24)
IRS Standard Business Mileage Rate ◦ 2008 Rate = $0.505 per mile (Jan-Jun) ◦ 2008 Rate = $0.585 per mile (Jul-Dec) ◦ 2009 Rate = $0.55 per mile ◦ Charitable Mileage Rate - $0.14 per mile
Pastors Discretionary Fund Record Retention Fraud Detection Additional Resources GCFA.org website IRS Tax Guide Florida Annual Conference Web Site Hammer Church & Clergy Tax Guide