Church and Christian Ministry Compensation

Concepts

B y Corey A. Pfaffe, CPA, PhD, Spring 2012

Employee or Independent Contractor

• Who is an employee and who is not?• You can ask the IRS, if you wish• Typical church employees

– pastors– office and facilities staff

• Typical church independent contractors– janitorial and snow removal service

companies– accounting/bookkeeping service firms

According to the IRS, who is a minister? And, what difference

does it make?• A minister is an individual who is a

“duly ordained, commissioned, or licensed minister of a church” [and other 501(c)(3) religious organizations] who performs services “in the exercise of his ministry.”

• Dual Status

It makes a big difference to be both an employee and a self-employed

person!• Eligible for all employee benefit

provisions of the Internal Revenue Code, the most common are:– Health care plans– Retirement plans

• 7.65% (5.65% in 2011+) FICA tax withholding replaced with personal responsibility for 15.3% (13.3% in 2011+) SE tax

• Federal and state income tax withholding optional

• Form 1040-ES

Assumptions

Typical Minister’s Annual Form W-2

$35,000 Cash salary 30,000 Housing allowance designation (6,000) Minister’s 403(b) plan elective deferral (5,000) Pastor’s optional federal and state income tax withholding$54,000 Net amount paid to minister

Assumptions

Typical Minister’s Annual Form W-2

$35,000 Cash salary 30,000 Housing allowance designation (6,000) Minister’s 403(b) plan elective deferral (5,000) Pastor’s optional federal and state income tax withholding$54,000 Net amount paid to minister

Typical Minister’s Annual Form W-2

$35,000 Cash salary 30,000 Housing allowance designation (6,000) Minister’s 403(b) plan elective deferral (5,000) Pastor’s optional federal & state tax withholding$54,000 Net amount paid to minister

• Accountable plan for professional expense reimbursements• Health insurance premiums and other qualified health benefits• Employer contributions to 403(b) plan

Irrelevant items

Housing Allowance

• Principal residence• Three-part test

– Actual expenses– Designated amount– Fair rental value, plus actual cost of

utilities• Partial reduction of deductible

expenses

Retirement Plan Options

• Internal Revenue Code Section 403(b) plans

• Traditional Individual Retirement Accounts (IRAs)

• Roth IRAs (and Roth 403(b) plans)

Health Benefits for Ministers

• Health insurance• Health Reimbursement Arrangements

(HRAs)• Health Savings Accounts (HSAs)

Professional Expenses

• Travel—car (@ $.555/mile), airplane• Lodging and meals• Materials• Entertainment

Opting Out of Social Security

• 15.3% (13.3% in 2011+) SECA; not 7.65% (5.65% in 2011+) FICA

• Requirements• Caution!

For more information...

• Non-profit organization accounting principles

• Compensation practices• Benevolent activities• Contributions issues• Foreign missions support• Ministerial tax planning

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