Your Presenter Today is Rev. Dougald W. McLaurin, Jr. Associational Missionary (Director of Missions) Tar River Baptist Association Contact him at DOMTarRiver@aol.com
Legal Issues and IRS Guidelines Affecting The Local Church We are called to be good witnesses of our Lord to this world.
Scriptural premises to serve as our guidelines “…..You shall be my witnesses….” Acts 1: 8 “Give to Caesar what is Caesar’s and to God what is God’s.” Matthew 22: 21
Issues For Discussion IRS rules and regulations for ministers and church staff Charitable giving requirements Reclamation of NC Sales Tax Need For Personnel policies and procedures Importance of staff being a part of the Annuity Board Retirement system
Estimates run from 65 – 85% of churches may be out of compliance with the rules, regulations, and laws that govern withholding, charitable giving, staff policies, etc.
IF WE DON’T ADDRESS YOUR CONCERNS There is NO WAY to address everything you need to know to effectively serve the church with all the regulations before us today. In the event we do not cover a topic to your satisfaction or do not address the issue, please leave your questions/concerns on the table (forms provided) when you leave. We will get the information for you and send it to every person registered in attendance.
The Dual View Of Those In Ministry Ministers are considered and employee of the church for IRS purposes……. Ministers are considered as self-employed for Social Security purposes……
Many Churches are out of compliance with the law. This can lead to substantial penalties. Federal law specifies that any corporate officer, director, or employee who is responsible for withholding taxes and paying them over to the government may be liable for a penalty in the amount of 100% of such taxes if they are either not withheld or not paid over to the government.
Many Churches are out of compliance with the law. This can lead to substantial penalties. This penalty is of special relevance to church leaders, given the high rate of noncompliance by churches with the payroll reporting procedures.
Why are so many churches out of compliance with the law? 1. Many treasurers lack specialized knowledge of the unique rules related to churches and ministers. 2. Treasurer turnover rates are high, not permitting time to fully understand the application of payroll reporting rules for churches.
Why are so many churches out of compliance with the law? 3. Some treasurers assume churches are “exempt” from the laws since we are a church. You need to UNDERSTAND, the courts have ruled payroll tax reporting laws DO apply to the church.
Special rules UNIQUE to the church 1. Ministers are ALWAYS self-employed for Social Security purposes and must pay their own SECA (not FICA). You may need to know that some ministers are exempted from Social Security due to religious considerations. They must have the appropriate forms on file with the government.
Special rules UNIQUE to the church 2. A minister’s wages are exempt from income tax withholding. However, some ministers do elect to allow the church to withhold taxes. Generally, the pastor should pay estimated taxes on a quarterly basis to avoid penalties for underpayment of taxes.
Special rules UNIQUE to the church 3.There is a special rule exempting churches from the employer’s share of social security and withholding taxes due to religious beliefs. However, this must be on file BEFORE October 31, 1984. The church would still have to issue W2’s for non-ministerial staff.
Ministers SHOULD receive a W-2 Form from their church treasurer indicating the salary of the minister at the church. This is SALARY ONLY.
To Repeat----Ministers Should Receive a W-2 Receiving nothing is both inappropriate and illegal….. A letter from the treasurer indicating earnings is not appropriate and unacceptable……. 1099’s are not appropriate but better than nothing…..
To Repeat----Ministers Should Receive a W-2 What is appropriate….. Legal……. Ethical…… Acceptable…… And in compliance with IRS Law is…. ALL Ministers should receive a W2
Maximizing Tax Benefits For Ministers I operate from the premise that the church should do all it can to maximize the earnings of its ministers. Many churches can not afford to pay “high salaries.” However, EVERY church can and should maximize the earnings of its ministers and protect the minister’s family as much as possible.
Maximizing Tax Benefits For Ministers HOUSING ALLOWANCE: This is the most important benefit for those in ministry. Make certain a portion of the minister’s compensation is designated - by vote of the church – as housing allowance for the minister. If you fail to do that (by vote of the church), it is considered gross pay.
Housing Allowance Information The housing allowance is nontaxable for income tax reporting purposes Housing allowance is considered in the computation of SECA. Ministers living in their own homes may also deduct interest, taxes, etc. Ministers living in church-owned homes may exclude the fair-rental value from their gross pay
Housing Allowance Information Out-of-pocket expenses (utilities, furnishings, repairs, etc.) in the parsonage may also be excluded from their gross pay Remember---the amount designated as housing allowance MUST BE approved by the church in advance and though excluded for income tax purposes, it must be included in computation of SECA.
Housing Allowance Information The IRS recognizes employee contracts, covenants, minutes of business meetings, budgets, etc. PROVIDED the church has duly adopted the designation as a housing allowance. Giving your pastor $150,000 and saying “break it down pastor any way you like,” is not accepted by the IRS as appropriate.
Maximizing Tax Benefits For Ministers Another premise I operate from is that the church should UNDERSTAND, the “cost” of the pastor being your pastor is NOT income to the pastor. THEREFORE, the church should do everything it can to insure he does not have to pay taxes on money that he uses to serve the church as its minister.
Maximizing Tax Benefits For Ministers Every church should ADOPT an ACCOUNTABLE REIMBURSEMENT PLAN for its ministers/staff. The basic “rule of thumb” is, staff members have to be accountable to someone – either the church or to the IRS. To make your staff members accountable to the IRS means that they will have to pay taxes for expenses it cost them personally to serve as your minister. That should NOT happen.
Accountable Reimbursement Plan The BEST way for ministers to handle their ministry- related work expense is through an accountable reimbursement plan: A church agrees to reimburse staff for all ministry-related expenses that are properly substantiated as to the date, amount, place, and ministry purpose. Reimbursements in such a manner are not considered taxable income. An “allowance” is considered taxable income.
Accountable Reimbursement Plan The church should establish an accountable expenses reimbursement plan in an appropriate resolution/motion. When making such a motion, the church should pay close attention to: 1.Condition the reimbursement of any expense on adequate substantiation. This will include written evidence for all expenses, and receipts for expenses of $75 or more. The evidence must substantiate the amount, date, place, and business nature of each expense.
Accountable Reimbursement Plan I would expect the minister to turn in MOST receipts under $75 as well. I would have a provision for a statement of explanation for reimbursement of items that a receipt might not be available (I.e. fast food meal, parking fees, etc.) The KEY POINT is this: the church MUST require the same degree of substantiation as would be required for a deduction on the minister’s income tax return.
Accountable Reimbursement Plan 2.Expenses must be substantiated, and excess reimbursements returned to the church, within a “reasonable period” of time. According to IRS rules, expenses substantiated within 60 days are deemed appropriate as is excess reimbursements received within 120 days. Reimbursements to ministers for non-ministry related, personal expenses should be included as taxable income on the minister’s W2.
Complying With Federal payroll tax reporting obligations….. Yet another premise I feel is important and under which we should operate is the fact that a church should be a good witness to the world around us by complying with the rules, regulations, procedures—the law. The following slides will deal with 11 steps to insure your compliance.
Complying With Federal payroll tax reporting obligations….. STEP ONE: Obtain an employer identification (EIN) from the federal government if this has not been done. This is NOT a tax-exemption number!
Complying With Federal payroll tax reporting obligations….. STEP TWO: Determine whether church workers are employees or self-employed. *Churches must withhold 30% of pay to a self- employed person who has not supplied a SS number *Some employee benefits are non-taxable ONLY when received as employees *The Church Annuity Plan covers only W2 employees
Complying With Federal payroll tax reporting obligations….. STEP THREE: Obtain the Social Security Number for each worker. Churches can be penalized if the Social Security number they report is incorrect.
Complying With Federal payroll tax reporting obligations….. STEP FOUR: Have each employee complete a W4. Ordained ministers do NOT have to complete a W4 UNLESS they enter into a voluntary withholding with the church.
Complying With Federal payroll tax reporting obligations….. STEP FIVE: Compute each employee’s taxable wage Wages subject to federal withholding include pay given to any employee for services performed. The pay may be cash or in other forms. Non-money pay must be fair-market value.
Complying With Federal payroll tax reporting obligations….. WAGES: Wages often include a number of items in addition to salary, Here are some common examples: BonusesChristmas/Special occasion Gifts Retirement GiftsSOCIAL SECURITY OFFSET Personal use church carChurch loan below-market interest Forgiven debtsExpenses with NO accountable plan Purchases of church property for less than fair-market
Complying With Federal payroll tax reporting obligations….. STEP SIX: Determine the amount of income tax to withhold from each employee’s wages. The most common way to determine is through the wage bracket method but you can use the percentage method.
Complying With Federal payroll tax reporting obligations….. STEP SEVEN: Withhold Social Security and Medicare (FICA) taxes from non-minister employee’s wages. The combined Social Security and Medicare tax rate is 15.3% of each employees wages. This is divided by the employer and the employee. Therefore, the church’s portion is 7.65% of the employee’s wages. The church MUST withhold the employee’s share of social security. REMINDER: Any Social Security Offset by the church for a minister is considered taxable income.
Complying With Federal payroll tax reporting obligations….. STEP EIGHT: The church MUST DEPOSIT the taxes it withholds The church accumulates 3 kinds of federal payroll taxes: income taxes, employer's share of SS taxes, and employees share of SS taxes. ALL must be deposited on a monthly basis. MOST CHURCHES, beginning in 2001 can make payments every three months UNLESS they have more than $2500 combined quarterly employment taxes.
Complying With Federal payroll tax reporting obligations….. STEP NINE: All employers subject to income tax withholding, Social Security and Medicare, or both, MUST file Form 941 quarterly Forms are due April 30, July 31, October 31, and January 31 It is the position of the IRS national office that churches with only one employee (the minister) need NOT file a Form 941
Complying With Federal payroll tax reporting obligations….. STEP TEN: Prepare a W2 for EVERY employee – including ordained ministers. Employee should receive no later than February 1 TAKE NOTE OF ANY CHANGES IN THE W2 FORM FROM YEAR TO YEAR For ministers, you do NOT include designated housing and reimbursed ministry expenses on the W2. The church does NOT report Social Security or Medicare wages for the minister.
Complying With Federal payroll tax reporting obligations….. REMEMBER----wages for income tax purposes include: *Bonuses*The cost of sending the pastor to the Holy *Church gifts Land if paid by the church *SS Offset* Personal use of church-provided car *Purchases of church * Business expense reimbursements under a property below market non-accountable plan *Moving expenses paid * Church paid group insurance beyond DIRECTLY to pastor $50,000 *“Discretionary funds”* “Below-market” interest loans by the for the pastor to spend church “as he sees fit” * Debt forgiven by the church
Complying With Federal payroll tax reporting obligations….. MORE EXAMPLES----wages for income tax purposes include: *Severance pay* Payment of the ministers personal *Church’s reimbursement expenses by the church of spouse’s expenses* Per Diem rates higher than IRS *Travel reimbursement guidelines higher than IRS
Complying With Federal payroll tax reporting obligations….. THINGS NOT TO REPORT AS SALARY FOR MINISTERS: *Fair rental value of * Housing Allowance parsonage* Contributions to Retirement Plans *Expenses reimbursed (Under Salary Reduction Agreement under accountable plan approved by the church) *Travel expenses * Items purchased by the church for the in accordance with IRS minister to accomplish his task as guidelines minister of the church CONSULT IRS OR CLERGY TAX LAW GUIDES IF YOU HAVE QUESTIONS. Tar River Baptist Association should have the up-to- date information that will be of help to its member churches.
Complying With Federal payroll tax reporting obligations….. STEP ELEVEN: Prepare a Form 1099-MISC for every self-employed person receiving non-employee compensation of $600 or more. Like the W2, this should be issued BEFORE February 1 Persons that receive 1099’s are NOT eligible to participate in the Church Annuity Plan.
Some additional helps to keep you in compliance….. NEED HELP COMPLETING A FORM: Call the centralized IRS site for questions about their forms. Their number is 1-304-263-8700 (M-F 8:30 – 4:30 EST). TRBA might also be able to offer some help to you. FORM I-9: EVERY employer in the United States must complete this form to confirm the identity of all new employees. All employees since November 6, 1986 should have this on file. Annual Certification of racial nondiscrimination: Churches that operate, supervise, or control a private school must file this form each year with the IRS. This includes a preschool operation.
Some additional helps to keep you in compliance….. Charitable contribution substantiation rules: There are two important rules with regards to substantiation of charitable gifts: 1.IF THE GIFT IS OVER $250 the donor must receive written acknowledgement from the church that satisfies the following requirements: *Receipt must be in writing *Receipt must identify the donor by name *For non-cash contributions valued over $250, the receipt must include a description of the property. NO VALUE NEEDS TO BE STATED
Some additional helps to keep you in compliance….. *The receipt must state whether the church provided any goods or services in return for the contributions and if so, an estimate of their value *If the church provides “intangible religious benefits,: then the receipt must contain a statement to that effect *The written receipt must be received by the date the donor file his tax return (or extensions)
Some additional helps to keep you in compliance….. If the gift is a “Quid pro quo” contribution of more than $75 ( a payment that is partly contribution and partly payment for goods and services), the church must provide a written statement to the donor that satisfies two conditions: *Must inform the donor the amount that is tax-deductible is limited to the excess of the amount of money (or value of property) over the value of any goods and services provided by the church
Some additional helps to keep you in compliance….. The statement must provide the donor with a good faith estimate of the value of the goods or services furnished to the donor NOTE: All designated contributions are NOT necessarily tax-deductible to the donor.
Not all designated gifts are considered tax deductible Due to abuse by some, the IRS has established some basic guidelines related to designated giving and receipts for charitable gifts. As a general rule, anything you give with a designation that it MUST be used in a certain manner and for which you can have returned if not used in that manner, is not considered deductible for you still have control of its use.
One final “rule of thumb” for charitable giving…… If someone receives CREDIT for a contribution (even a love offering), the IRS requires substantiation. If a staff member receives a “love offering” from the church for which members have received a contribution credit (this would include gifts and trips), then the treasurer MUST include this on the staff members W2 as income.
ODDS AND ENDS ABOUT CHARITABLE GIVING Keep tax records 7 years Hours, services, volunteerism is NOT a legal contribution Money counters should not be from the same family/household Cancelled checks are not proof of contributions A person that gets the money; counts the money; deposits the money, etc. SHOULD NOT SIGN CHECKS Two signatures should be on church checks
A Suggested Procedure For Sunday Offerings Count and verify loose change and cash contributions Do NOT open envelopes Place bag in night deposit at bank On Monday, financial secretary gets bag, counts money, and makes records of contributions from envelopes Prepare deposit slip and take to bank Get contribution records to contributors in a timely manner
Reclamation Of N.C. Sales Tax Churches can claim refunds for NC Sales taxes paid. Forms are available by calling 1-919-733-7983. Listed below are items for which churches can NOT receive a refund: Tax paid on the purchase, lease, or rental of motor vehicles State sales tax on electricity, natural gas, and telephone service Local occupancy taxes on hotel bills and restaurant (prepared food) taxes Scrap tire disposal and white goods tax REIMBURSEMENTS MADE TO EMPLOYEES OR OTHER INDIVIDUALS FOR SALES TAX PAID DIRECTLY BY THE EMPLOYEE OR INDIVIDUAL
Planning Financial Support For Church Staff The church has the responsibility of being a good employer. Staff/church policies and procedures, personnel handbooks, deliberate planning to address financial needs of the staff ALL contribute to a better work environment.
Forms, workbooks, sample policies and procedures, etc. are available to the church through the Tar River Baptist Association or the Baptist State Convention of North Carolina or their websites.
Tar River’s Website is www.tarriverba.com The Baptist State Convention’s website is www.bscnc.org
Six steps to financial support planning *Determine the needs *Establish written support policies *Provide for ministry-related expenses *Provide employee benefits *Determine personal income *Complete a financial support worksheet
Determining The Need Ask each church employee to complete a Financial Support Review (copies available). This will help you determine if the church is adequately meeting both the church’s and the employee’s needs. This tool will enable the church to more effectively plan for this year’s staff support and the ministry needs of the church.
Financial support review…… Forms are available at TRBA. The church should ask each staff member to complete this form and return to the committee for their review. The committee should determine if any adjustments should be made for that employee.
Financial support review…… The following areas need to be reviewed: 1.Mileage driven the previous year for “church business.” 2.Any foreseen major changes in mileage for the upcoming year. The church should examine current and projected compensation at the IRS approved rates.
Financial support review…… 3. How much money was spent by the staff member in travel expenses to participate in church and denominational conventions and conferences? This would include lodging, food, commercial transportation, parking fees, etc. 4.Are their anticipated changes in convention, conference, education plans for next year? The church should explore what expenses they will reimburse for such events.
Financial support review…… 5. How much money was spent by the staff member on materials such as books, periodicals, subscriptions, tapes, etc. in preparation for sermons, studies, presentations, and other things related to the ministry of the staff member? 6.Are their any special studies, promotions, activities planned by the church or denomination that will require additional purchases in the upcoming year? The church should explore what expenses they will reimburse for such materials.
Financial support review…… 7.How much money was spent by the staff member on professional development –conferences, education, workshops, etc.- to improve the minister’s ability to minister to the church? The church should determine how much they will reimburse? 8.How much money was spent by the staff member to ”entertain” church groups, prospects, visiting evangelists, and other guests of the church in their home or a restaurant? The church should determine how much they will reimburse to offset this expense to the staff member.
Thus far, we have just reviewed what it cost the church staff member TO BE YOUR CHURCH STAFF MEMBER. Now– we need to look at the benefits the church will provide and the personal income the staff member can use as his/her personal income.
Protection Benefits The church should do all it can to protect the staff member and his/her family. Perhaps the church can not do all it needs to do, but each year it needs to take additional steps to protect the staff member!
Protection Benefits There are several things the church needs to know about it’s staff members – so ask! 1.Does the staff member have health insurance? 2.What is the cost to the family? 3. Will the cost increase for next year? The church should determine how much it can do to offer this as a benefit for the staff member. If not fully, it can be “reimbursed” and/or a “salary reduction agreement.”
Financial support review…… 4.Does the staff member have life insurance? What is the cost? Can the church cover this as a benefit if not already a benefit (remember anything over the $50,000 premium will have to count as income to the staff member). 5.Does the staff member have disability insurance? What is the cost? Can the church include this as a benefit? 6.Does the staff member make contributions to the Annuity Board's Retirement Program? (PLEASE NOTE: It is the opinion of your presenter that the staff member should participate in the Annuity Board Retirement. There are certain benefits that AUTOMATICALLY come to the staff member that serve as a protection to the staff member and to the church as a result of the staff member's involvement.)
A Few Words About Special Benefits For Annuity Board Retirement Participants If your church contributes $420 per staff member to any plan to the Cooperative Program of the Baptist State Convention of North Carolina, and contributions are made on behalf of the staff member (by the staff member or the church), then the staff member AUTOMATICALLY has certain protection benefits IN ADDITION TO any other protection benefits they might have. (PLEASE NOTE: This benefit is available to ANY minister (including music DIRECTOR) and to SUPPORT STAFF and daycare workers that work at least 20 hours per week (ministry positions have no minimum number of hours to work). EVERY CHURCH SHOULD MAKE CERTAIN THAT MONTHLY CONTRIBUTIONS (AND I SAY AGAIN MONTHLY) SO THAT STAFF MEMBERS WILL HAVE THIS FREE BENEFIT!!!!!!!
More Words About Special Benefits For Annuity Board Retirement Participants Treasurers should make certain payments are made on all staff members behalf on a MONTHLY basis. Benefits are based on twelve months of consecutive (not catch up) contributions and participants would receive a pro rated benefit if payments were not made MONTHLY.
Yet----A Few More Words About Special Benefits For Annuity Board Retirement Participants Eligible participants in the Board Retirement System have the following AUTOMATIC benefits as a result of a partnership it the Baptist State Convention of North Carolina: Protection Benefits: For contributions of $1 a month (of course, it should be more): Disability Income Benefit of up to $500/month Survivor Protection Benefit (based on age) of up to $100,000 and not less than $10,000 for those who die before retirement (Contributing interims are not considered retired)
Yet----A Few More Words About Special Benefits For Annuity Board Retirement Participants Investment Benefit: For contributions of $52 - $105 the Baptist State Convention of North Carolina will contribute $1for every $3 the participant contributes. Churches are encouraged to contribute 10% of staff member’s direct pay. The staff member is encouraged to contribute 5%.
Now---we move into the personal or “direct income” of the minister. That is, the money that is available to the staff member to support the family/personal expenses.
Personal income……. 1.How much was the salary for the staff member last year? 2.Did the staff member receive a COLA or merit raise last year? 3.What was the housing allowance or value of the parsonage last year? 4.How much SECA taxes were paid by the staff member last year? 5.How much did the church provide last year for SS Offset? Upon review of the above, the church should determine what adjustments need to be made in the next budget cycle for the staff member.
STEP 2: Establish written financial support policies-------- Every church should do all it can to cut down on the potential for conflict in the church. Written policies clarify intentions and reduce the potential for misunderstandings.
Written policies should include……. 1. Ministry related expenses: Should clearly state what the church considers allowable business expenses; staff member record keeping expectations; types of expenses to be reimbursed and reimbursement rates, etc. 2. Employee benefits: Should define levels of coverage the church will provide for insurances; retirement contributions by the church; educational expenses: SS Offset, etc.
Written policies should include……. 3. Personal Income: This is the direct income the staff member receives (housing allowance and taxable salary). 4. OTHER Personnel policies: There are several other policies the church should consider for its employees, including the following: *Vacation* Sick leave *Sabbatical leave* Hiring issues *Employee classifications* Work hours *Pay periods* Church expectations in “call backs” from conferences/vacations
Your Presenter Today is Rev. Dougald W. McLaurin, Jr. Associational Missionary (Director of Missions) Tar River Baptist Association Contact him at DOMTarRiver@aol.com