Church Employees Health Insurance Premiums Paid by Employee by hhg13510

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									            Welcome!
          Tax Issues and the IRS


               David Whipple




3/18/10
          Topics to be Covered

              g   Church Reporting Requirements

              g   Professional Reimbursement

              g   Money Handling Procedures

              g   Tax Deductible Receipts

              g   Comprehensive Clergy Reporting
                   Income Tax Filing Example



3/18/10
          Church Reporting Requirements


            Why Church Leaders Should Take the
                Payroll Tax Reporting Rules Seriously

                 Penalties for noncompliance: For Example:
                 Church Officers May Be Personally Liable
                 For the Penalty Equal to the Amount of
                 Payroll Taxes That Are Not Withheld or
                 Deposited.

                 Christian Testimony




3/18/10
   Church Reporting Requirements

            The Most Significant Federal Reporting
                 Obligation of Most Churches is the
                 Withholding and Reporting of Employee
                 Income Taxes and Social Security Taxes.
              Section 6672. Says that any corporate
               officer, director, or employee who is
               responsible for withholding taxes and
               paying them over to the government is
               liable for a penalty in the amount of 100
               % of such taxes.
            Summary of Payroll Tax Reporting Penalties.
            Ten Common Payroll Tax Reporting Errors.




3/18/10
        Church Reporting Requirements


  Why Churches Often Fail To Comply With The
       Payroll Reporting Rules.

        Payroll Reporting Rules Are Complex

        Unique Rules for Churches

        Church Treasurers Are Often Volunteer,
         Uncompensated Individuals Who Serve For
         Limited Terms, and thus lack the time to
         familiarize themselves with the Obligations.




     3/18/10
          10-Step Approach To Compliance
            Step 1: Obtain an Employer Identification Number
                  (EIN) from the Federal Government


                  This number must be listed on returns, and
                  is used to reconcile a church’s deposits of
                  withheld taxes with the W-2 forms issued to
                  employees.

                  The EIN number is not your Tax Exemption
                  Number and has no relationship to your
                  nonprofit corporation status.

                  You can obtain an EIN by submitting a Form
                  SS-4 to the IRS.



3/18/10
          10-Step Approach To Compliance
            Step 2: Determine whether each church worker is
                  an employee or self-employed. If in doubt treat
                  the worker as an employee.


                  Must Obtain the worker’s social security
                  number.

                  Churches must withhold 31% of the
                  compensation paid to a self-employed
                  person who fails to provide his or her social
                  security number to the church. (Backup
                  Withholding)




3/18/10
          10-Step Approach To Compliance
    Step 3: Have Each Employee Complete a W-4
          Form.


           If an employee does not complete such a
           form, then the church must treat the
           employee as a single person without any
           withholding allowances or exemptions.

           The church is not responsible for verifying
           the withholding allowances. However,
           employers must submit to the IRS and Form
           W-4 on which an employee claims more
           than 10 withholding allowances.




3/18/10
            10-Step Approach To Compliance
            Step 4: Compute Each Employee’s Taxable Wages.


                  Wages subject to federal withholding include pay
                  given to an employee for service performed.
                     Bonuses
                     Christmas and Special Offerings
                     Retirement Gifts
                     Portion of Employee’s Social Security Tax Paid by Church
                     Personal Use of Church-Provided Car
                     Purchases of Church Property for less than FMV
                     Business Expense Reimbursement under Nonaccoutable
                      plan.
                     Imputed interest on no-interest or low-interest loans
                     Noncash Compensation
                  Measure pay that is not in money by its FMV



3/18/10
            10-Step Approach To Compliance
            Step 5: Determine amount of income tax to withhold
             from each employees wages.

               Recommendation: Be sure to obtain a new IRS
                Publication 15 (Circular E) in January of each year.
                 Wage Bracket Method

                 Percentage Method


            Step 6: Withhold Social Security and Medicare Taxes
             from Nonminister Employees’ Wages.
                 Subject to Social Security and Medicare Taxes
                  (Combined Rate 15.3%). Rate is paid equally (7.65%)
                  by the employer and the employee. Churches must
                  withhold the employees portion and pay the employers
                  portion.

3/18/10
            10-Step Approach To Compliance
            Step 7: The church must deposit the taxes it
             withholds.

               Churches accumulate three kinds of federal payroll
               taxes.
                   Income Taxes Withheld from employee wages
                   Employees share of social security and Medicare taxes
                   Employers share of social security and Medicare taxes
                       Monthly Depositor Rule (Reported payroll taxes of $50,000
                        or less; must deposit by the 15th day of the following
                        month)
                       Semiweekly Depositor Rule
            Step 8: All Employers Subject to Income Tax
             Withholding, Social Security Taxes, or both, must file
             Form 941 quarterly.
                   Form 941 is due on the last day of the month following the end
                    of each calendar quarter.




3/18/10
            10-Step Approach To Compliance
            Step 9: Prepare a W-2 form for every employee

               Church Reports each employee’s wages and withheld
                income taxes and social security taxes on this form


                 Wages of a minister who reports his or her
                 income taxes as an employee do not include the
                 housing allowance exclusion.

                  Church should provide triplicate copies of W-2
                   directly to employees before February 1 of the
                   following year and submit an additional Copy for
                   each employee to the Social Security
                   Administration with a Form W-3
            Step 10: Prepare a Form 1099-MISC for every self-
             employed person receiving nonemployee
             compensation of $600 or more.
3/18/10
              Professional Reimbursement
      Advantages of An Accountable Reimbursement Plan:
       The implementation of an accountable reimbursement
       plan by a church is one of the most important
       components of a clergy compensation package.
            Clergy report their business expenses to the church rather
             than to the IRS.
            Clergy avoid the limitations on the deductibility of
             employee business expenses.
               The elimination of any deduction if you cannot itemize (70% of
                all taxpayers cannot itemize)
               The deductibility to the extent that expenses exceed 2% of the
                adjusted gross income.
            The Deason Allocation Rule is Avoided. Under this rule
             clergy must reduce their business expense deduction by
             the percentage of their percentage of their total
             compensation that consists of the tax-exempt housing
             allowance.

            The 50% limitation that applies to the deductibility of
             business meals and entertainment expenses is avoided.

3/18/10
          Professional Reimbursement
            How to Start A Reimbursement Policy when no
             policy exists or only partial reimbursement has
             been available. (No Additional Cost to
             Employer)
               From the employee’s past business expense
                records determine what the average annual
                amount he has been incurring.
               From the salary subtract this conservative
                expense average.
                  The adjusted salary and the money available for the
                   reimbursement of accounted professional expenses
                   will be two completely separate budget amounts for
                   the year.
               Adopt One of the Following Reimbursement Plans.
                  Employers who adopt an unlimited policy will simply
                   reimburse the employee each year for the actual
                   expenses adequately accounted for.
                  Employers who adopt a fixed limit
                     It is important to set the salary amount and the
                     reimbursement amount for the following calendar year, the
                     employee does not receive any unused portion and it is not
                     carried over to another year. (Use or Lose)


3/18/10
             Professional Reimbursement

    What ministers and lay church leaders need to know
     about Professional Reimbursement

            Reimbursing Employee Business Expenses out of Church
             Funds. (This eliminates any questions concerning salary
             restructuring).

            Salary Reduction Agreements. The tax code prohibits
             employers from paying for accountable reimbursements
             from the employees own salary reduction.

            Salary Restructuring Arrangements. The 2000 IRS ruling
             implies that the tax code prohibits employers from paying
             accountable reimbursements as a result of salary
             restructuring arrangements.




3/18/10
              Professional Reimbursement

            Meet the 3 requirements for an accountable arrangement
             ( business connection, substantiation, and return excess
             reimbursements.

            Designate a minister’s salary and establish a business
             reimbursement account as two separate actions of the
             board or compensation committee, without any indication
             that the reimbursement account is being funded out of
             what otherwise would be considered the minister’s salary

            Meet the following essential conditions of the 1999 IRS
             Ruling.
               Employees are reimbursed only for those expenses that would
                deductible as business expenses on personal tax return.
               If the employee’s expenses are less than the reimbursement
                max than the excess will not be given to the employee and will
                not be carried forward to the next year.




3/18/10
            Professional Reimbursement
      Examples

            Example (1). First Baptist Church Pays its Pastor $500 per
             week or $26,000 a year annually. $10,400 has been
             designated as a housing allowance.
                  At the end of the month the pastor adequately accounts his business
                  expenses of $265 for the month. First Baptist decides to designate
                  $265 of the $500 as paid for reimbursement. (Does Not Satisfy)

                  Employer must therefore report the entire amount as income on W-2
                  in Box 1.
            Example (2). First Baptist Church Pays its Pastor $500 per
             week or $26,000 a year annually. $10,400 has been
             designated as a housing allowance. Adopts a fixed limit
             accountable reimbursement policy of $3,000 initially sets
             a salary of $23,000.
                  At the end of the year First Baptist had paid pastor only $2,400 for
                  professional reimbursement. They decided to they would give him a
                  bonus for the remainder expense amount. The entire $3,000 must be
                  included on W-2. (Does Not Satisfy).




3/18/10
             Professional Reimbursement
      Examples

            Example (3). First Baptist Church Pays its Pastor $500 per
             week or $26,000 a year annually. $10,400 has been
             designated as a housing allowance. Adopts a fixed limit
             accountable reimbursement policy of $3,000 and initially
             sets a salary of $23,000.
                   At the end of the year First Baptist had paid pastor only $2,400 for
                   professional reimbursement. The remaining budgeted amount was
                   not disbursed and such the $2,400 is not included on the the W-2. The
                   plan does satisfy the IRS Requirements.


            Example (4). First Baptist Church Pays its Pastor $500 per
             week or $26,000 a year annually. $10,400 has been
             designated as a housing allowance. Adopts a unlimited
             accountable reimbursement policy and initially sets a
             salary of $23,000.
                   At the end of the year First Baptist had paid pastor only $2,400 for
                   professional reimbursement.The $2,400 is not included on the the
                   W-2. The plan does satisfy the IRS Requirements.


            `
3/18/10
                 Professional Reimbursement
  Adequate Accounting
     Reg. 1.274-5A(e)(4) means the submission to the
      employer of an account book, diary, statement of
      expense, or similar record maintained by the
      employee in which the information as to each
      element of an expenditure is recorded at or near
      the time of the expenditure, together with the
      supporting documentary evidence.

        Details of time, place, destination, business purpose,
         business discussion.

        Actual receipts are required for any expense over
         $75.00

        Mileage Allowance
           32.5 per mile; requires the employee’s log of business
            miles, date, place, and purpose. Annually choose to
            become reimbursed for actual expenses or mileage
            allowance.


  Recommend that not-for-profit employees
   avoid adopting a plan that allows for payment
      advances.
   of 3/18/10
            Professional Reimbursement
      Miscellaneous Points of Information
            Contributions Are NOT Allowable as Professional
             Expenses. (They are always Schedule A Itemized
             Deductions)

            Babysitting Expenses Not Allowable as Professional
             Expenses.

            Telephone: The base rate portion of your home telephone
             cannot be used as a business expense. However, it is a
             utility that is a housing allowance expense. You may
             deduct long distance business calls.

            Cellular Phone: The business portion of your cellular
             phone bill is a legitimate professional expense. Personal
             Part of your Cellular phone should not be included in your
             housing allowance expense.




3/18/10
          Medical Insurance Premiums
              Church Employees’ Health Insurance Premiums
               Paid Directly to the insurer by the Church are
               Excludable from the Employees’ Gross Income
               For Federal Tax Reporting Purposes.

              Health Insurance Premiums paid directly to
               employees are excludable from the employees
               gross income if the church requires proof that
               employee actually paid the premium.

              If church provides employees with cash in lieu of
               paying their health insurance, the exclusion does
               not apply and the amount of cash is fully taxable
               (unless meets the definition of a health flexible
               spending arrangement.



3/18/10
                 Medical Insurance Premiums
  The IRS Code Section 105(b).
      The IRS pointed out that income tax
       regulations define a plan as an arrangement
       for the payment of amounts to employees in
       the event of personal injuries or sickness.

      The plan need not be in writing (although it is
       a good idea to have the board pass a
       resolution stating that they agree to pay the
       medical insurance premiums of said
       employee.

      The plan employer must be committed to
       certain rules and regulation governing
       payment. These rules must be made known
       to employees as definite policy determinable
       before the expenses are incurred.




       3/18/10
          Money Handling Procedures
              Banks often provide a lock bag that you can
              utilize to place deposits. The financial
              secretary would keep the key.

              Deposits should be taken to the bank as soon
              as possible.

              NEVER Send money home with anyone, if you
              cannot take the funds to the bank, a lock
              cabinet or safe needs to be purchased to
              house the funds over night.

              Designated Funds


              Year end receipts should be mailed out by the
              end of January, containing a statement
              similar to the following



3/18/10
          Money Handling Procedures

  Baptist Church Planters is an “Exempt Organization”
   described in Section 501(c)(3) of the Internal Revenue
   Code. Contributions to Baptist Church Planters are
   qualified for Federal income tax deduction as allowed by
   law. No goods or services were provided in exchange for
   this gift, other than intangible religious benefits. To be
   consistent with legal standards, discretion in the use and
   disposition of all gifts is under the control of Baptist
   Church Planters.




3/18/10
           Money Handling Procedures
            Separation of Duties:
               Treasurer: Pays the bills, writes checks.
               The Financial Secretary: Handles the deposit
                processing, receipt processing, and counting
                of funds. The financial secretary and the
                treasurer should not be the same person.
                    The Financial Secretary should never be you
                    the Pastor or Missionary Pastor.

                    Counting should never be done alone, At least
                    two and in some states three people are
                    required.

                    Should utilize a form that all three counters
                    sign and date with the amount. (see
                    enclosure)

                    Counters should be approved by the trustees
                    or deacons.
3/18/10
             Tax Receipts - Contributions
   The Ten Rules Substantiating Charitable
    Contributions
          1) Individual Cash Contributions of less than $250

          2) Individual Cash Contributions of $250 or more

          3) Individual “quid pro quo” cash contributions of
            $75 or less

          4) Individual “quid pro quo” cash contributions of
            more than $75

          5) Individual contributions of property valued at
            less than $250

3/18/10
             Tax Receipts - Contributions

          6) Individual contributions of property valued at
            $250 or more

          7) Individual contributions of property valued at
            less than $5,000

          8) Individual contributions of property valued at
            more than $500

          9) Individual contributions of property valued at
            more than $5,000

          10) Quid pro quo contributions of noncash property

3/18/10
          Comprehensive Example
    Church Salary                         $40,000
    Church Designated Housing Allowance   $12,000
    Honorarium Speaking                   $ 1,500
    Christmas Gift from Church            $   500
    Monthly Car Expense                   $ 3,600
    Interest Earnings at First Merit      $   500

    Housing Expenses Actually Incurred
    Mortgage Payments                     $6,000
    Utilities                             $2,800
    Home Insurance                        $ 500
    Real Property Taxes                   $ 810
    New Furniture                         $1,000
    Repairs                               $ 500
    Total                                 $11,610


3/18/10
          Comprehensive Example
    Business and Professional Expenses

    Business Use of Car ($.325 * 8,461.54)   $2,750
    Subscriptions                            $ 200
    Travel Expense to church convention
       Meals                                 $ 320
       lodging                               $ 300
       Airline Tickets                       $ 600
    Seminary Course to Improve Skills        $ 500
    Business Supplies                        $ 200
    Total                                    $4,870

    Medical Expenses
    Combined Expenses                        $1,500



3/18/10
          Comprehensive Example
   Taxes
   State Income Taxes                                    $1,200
   Real Estate Taxes                                     $ 810

   Interest
   Mortgage Interest on Home                             $4,000
   Credit Card Interest and Car Loan                     $ 500

   Charitable Contributions
   Cash contributions to First Baptist                   $4,500
   Misc. Cash Contributions with receipts                $ 800

   Travel Expenses associated with the honorarium of $1,500
      Travel and Lodging                                  $230
      Meals                                               $100
   Total                                                  $330

3/18/10
          Comprehensive Example

 Form 1040

 Line 7
 Church Salary                            $40,000
 Christmas Gift                           $   500
 Business Expense Allowance               $ 3,600
 Total on Line 7
                                          $44,100

 * Housing Allowance not included in church wages since
    it is an exclusion from gross income.




3/18/10
          Comprehensive Example
   Form 1040

   Line 21
   A minister’s Housing Allowance Exclusion is the lowest
   of:
   1) Actual Expenses incurred                $11,600

   2) Church Designated Amount                      $12,000

   3) FRV of Home (Furnished including utilities)   $12,500

   The minister would report the excess by which the
   Church Designated Allowance ($12,000) Exceeds his actual
   expenses ($11,600)
   Would report:    Excess Housing Allowance        $400


3/18/10
          Comprehensive Example
   Schedule A
   Lines 6 and 10

   Ministers are permitted to fully deduct real estate and
   mortgage interest payments as itemized expenses on
   Schedule A even though both items were included in
   housing allowance exclusion




3/18/10
          Comprehensive Example
   Schedule C-EZ
   Line 1
   Honorarium                                $1,500

   Line 2                                    $ 280
   Meals ($100) must be reduced by 50%, plus lodging of
   $230, totals $280.00

   The Schedule C-EZ income and expenses was associated
   only with the honorarium income. All other expenses
   need to be accounted for on a 2106




3/18/10
          Comprehensive Example
    Form 2106

    Line 3 Airline Tickets ($600) + Lodging ($300)   $900

    Line 4 Subscriptions ($200) + course ($500) +
    business supplies ($200)                         $900

    Line 5 Meals ($320) must be reduced by 50%

    Line 9 Column B (Meals 50%)                      $160




3/18/10
             Comprehensive Example

   Form 2106
   Line 10 Tax Court has ruled that actual business
   expenses (not reimbursed under an accountable plan)
   must be reduced by the percentage of total church
   compensation that is tax-exempt. Deason Rule.

   Total ministry income (salary,housing,car allow, Christmas gift    $55,700

   Housing Allowance Exclusion                                        $11,600

   Nontaxable Percentage ($11,600/$55,700)                            21%

   Total Business Expenses                                            $4,710

   Nondeductible Business Expense ($4,710*.21)                        $989

   Line 10                                                           $3,721


3/18/10
           Comprehensive Example
  Schedule SE

  Line 2

  Church Salary                       $40,000
  Christmas Gift                      $   500
  Business Expense Allowance          $ 3,600
  Housing Allowance                   $11,600
  Excess Housing Allowance            $   400
  Schedule C net Earnings             $ 1,220
  Employee Business Expenses         ($ 4,710)
  (only 50% of meals are included)   $ 52,610
  Total



3/18/10

								
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