The Pastor’s/Overseer’s Compensation Package. Establishing a Tax-Advantageous Compensation...

The Pastor’s/Overseer’s Compensation Package

Establishing a Tax-Advantageous Compensation Package

Establish the fringe benefits that will be provided

Medical Insurance Expense Reimbursement Housing Allowance Retirement

Medical Insurance

Premiums paid for accident and health insurance by an employer—the church—are not taxable income according to Sec. 106.

Revenue Ruling 61-146

Pay pastor’s medical insurance as a benefitOR

adjust salary to pay premiums.

Pay with church check OR

pay with personal check and be reimbursed,OR

pay by spousal payroll deduction and be reimbursed.

Document—furnish clerk with an invoice.

HRA—Health Reimbursement Arrangement, Rev. Ruling 2002-41

Must be paid by employer Cannot make a salary reduction

election to pay Any unused portion is carried

forward.

Can be reimbursed for out-of-pocket costs—costs not paid by insurance.

Self-Insured Medical Reimbursement Plans

Must have a plan or arrangement uniform to all employees.

Employer pays medical expense directly to hospital, doctor, etc.

When funded by salary reduction, it becomes “use it or lose it.”

Cafeteria Plans

Separate written plan maintained by employer

Employee selects benefits according to Sec. 125. Child care, self-insured medical

reimbursement plans, health benefits, etc.

Benefits are “use it or lose it.”

Expense Reimbursement

Establish an accountable reimbursement plan for auto and professional employee business expense Written plan

Employer can initially adjust the salary to fund the plan.

Expenses for a minister are no different than for any other professional.

Accountable Reimbursement Expenses

You must account to your employer: Account book Diary Statement of

expense with supporting documentary evidence—receipts

1. Not reported on tax return

2. Employer does not include on W-2

3. Do not have to substantiate to IRS

4. Significantly lowers risk of audit

Professional Expenses

IRS Publication 535 Auto Expense:

58.5¢ mileage allowance (7/08) log mileage date odometer reading B/E place/purpose

Lodging/Mealsaway overnight

Professional Expenses

Record: amountdateplace traveled tobusiness purpose

Must have receipts for:lodging any other expense over $75.00

You may maintain an account book for any expense under $75.00.

IRS rule and “company” policy may differ.

Professional Expenses

Entertainment: Meals directly related to conducting your job

Education Expense Computer—percent used in job Office supplies/postage Seminars/dues Subscriptions, books, long-distance

phone calls, cell phone

Professional Expenses

Business expense is only allowable for the person earning an income.

Exception: As entertainment expense, spouse’s meals are deductible.

Per Diem Rates

Applicable per diem depends on locality of travel.

www.policyworks.gov/perdiem Consistently apply in accordance with

reasonable business practice. May use per diem for food. Actual lodging expense must be used.

Without Accountable Reimbursement

Report Employee Business Expense, Form 2106 Subject to:

2% itemized deduction limitation—job expense

IRC 265 limitation Taxable Compensation divided by Gross

Compensation Percentage Ratio allowable deductible Expense on Schedule A

Result in more income tax—Greater chance of audit.

Designate Housing Allowance

IRS Code Sec. 107:In the case of a minister of the Gospel, gross

income does not include:1. The rental value of a home furnished to

him as part of his compensation; or 2. The rental allowance paid to him as part

of his compensation, to the extent used by him to rent or provide a home.

Housing Allowance

Must be designated in advance Must be a specific dollar amount or a

specific percent of salary Minutes of finance committee IRS will accept a perpetually worded

designation.

Tax plan annually and increase as needed.

$150,000 Home

Principal $ 835

Taxes 1,782

Interest 8,081

Insurance 1,340

Repairs 793

Furniture 1,409

Decorator Items 463

Utilities, Telephone 3,738

Misc. Supplies 642

$19,083

Ministers Who Own

FRV Home $18,000

FRV Furniture 6,000

Decorator Items 463

Utilities 3,738

Miscellaneous 642

$28,843 Reduces Income Tax Does not reduce Social Security Tax

Three Hoops

Must use the smallest:1. Actual amount spent—$19,0832. FRV—Fair Rental Value—$28,843

Rule of thumb: House—1% of Market Value per month ($150,000 house = $1,500 per month) Furnishings—1/3 of house value ($150,000 x 33% = $50,000 - 1% = $500)

3. Amount designated as allowance = $24,000

Ministers Who Rent

Ministers who rent their homes will want to designate an amount to cover:

actual rent cost of furnishings cost of decorating renters insurance

utilities, etc.

Your local church EIN #

Church of God of Prophecy125 Main StreetYour Town, TN 31234

123-45-6789

John H. Doe

246 Washington Avenue

Your Town, TN 31234

$26,582.80

E $3,888.00

X

Not included in Box 1$24,000.00Parsonage Allow.

Why Consider InvestingNow for Retirement?

Jan Couch

P.O. Box 2910Cleveland, TN 37320-2910

423.559.5222FAX: 423.559.5238

kjcouch@aol.com

jan@cogop.org