Issues of Concern to Ministers
Ministerial Issues

Who is a Minister?





Administers the sacraments
Conducts religious worship
Management responsibility in church
Considered a religious leader by church
Ordained, commissioned or licensed
Ministerial Issues

What is included in a Minister’s taxable
compensation?








Base salary
Personal use of Church provided auto
Non accountable exp reimbursements
Social Security supplement
Special occasion “gifts” from Church
Unrestricted Minister’s discretionary fund
Bargain purchases of Church property
Group term life ins premiums >$50,000
Ministerial Issues

What are non taxable fringe
benefits?






Parsonage or housing allowance
Group term life ins premium <$50,000
Medical insurance premiums
403(b)/401(k)
Accountable reimbursement plan
Section 125 plan
Ministerial Issues

Special tax & reporting rules





Eligibility for housing allowance
Self-employed status - Social Security
Exemption from automatic FITW
Eligibility to opt out of SE tax
“Double Deduction” issue
Ministerial Issues

Dual Tax Status


Common law employee of the Church
Self-employed with respect to Social
Security taxes
Ministerial Issues

Federal Income Taxes



Ministers are exempt from mandatory
withholding of federal income tax
Ministers may elect to have withholding
of their federal income taxes by
completing Form W-4
Withholding vs estimated taxes
Dollars look like they have been there all
year
 No late payment penalties due to late
estimates

Ministerial Issues

Form 4361-Application for
Exemption from Self Employment
Tax


Minister must be opposed to public
insurance based on religious beliefs
and not for financial reasons
Must file form by the due date including
extensions of the 2nd tax year in which
the Minister had at least $400 of net
earnings from self-employment
Ministerial Issues

What is the “double deduction”?

Ministers who own their homes and
who itemize may deduct mortgage
interest and real estate taxes on Sch A
even though the income is excluded
per IRC Section 107.
Ministerial Issues

Housing Allowance

Board approval in advance

When should housing allowance be reviewed during
the year

3-point test



Board approved
Actual housing spent
Fair rental value of home fully furnished plus
utilities
Ministerial Issues

Housing Allowance (cont’d)




When should a home be purchased?
Is housing allowance subject to selfemployment tax?
How much compensation can be
designated as housing allowance?
High housing allowance? Get an
appraisal for documentation.
Ministerial Issues

What constitutes housing allowance?








Rent paid for housing
Interest expense included in mortgage
Principal portion of home mortgage
Real estate taxes on the home
Insurance on the home and contents
Cost of all furnishings
Assessments by government
Utilities
Ministerial Issues

What constitutes housing allowance?









Telephone line
Repairs and maintenance of home
Down payment on the home
Costs of purchasing the home
Cost of maintenance tools/equipment
Pest control
Routine cleaning
Firewood
Domestic items
Ministerial Issues

What happens if a Minister does not
spend all of his/her housing
allowance on housing expenses?

Excess should be reported as income
on Minister’s tax return.
Ministerial Issues

Housing allowance example
#1
Authorized housing
10,000
Actual housing expenses 12,000
FRV plus utilities
24,000
#2
30,000
32,000
24,000
#1 limited to amount authorized - $10,000
#2 limited to FRV plus utilities - $24,000
Ministerial Issues

Other Housing Allowance Issues




Owning two homes
Amending housing allowance
Limits on housing allowance
Retired ministers
Ministerial Issues

Taxable income

Love offerings

Sabbatical income

Discretionary funds
Ministerial Issues

What is an “accountable” plan?




EE reports to Church rather than to IRS
Reimbursements are not income to EE
EE cannot claim any deduction on Form 1040
Plan must meet four requirements
 Only business exp reimbursement
 Must provide adequate documentation


Excess reimbursement returned


Not more than 60 days after exp incurred
Not more than 120 days after paid
Church cannot reduce EE’s salary
Ministerial Issues

Advantages of an accountable
reimbursement plan





Avoids including the reimbursement in the
taxable income of the employee
Avoids the possibility that the employee will be
unable to deduct expenses because of the
standard deduction
Avoids the expense reduction caused by the
Deason allocation rule
Avoids the statutory 50% reduction for M/E
Avoids 2% of AGI floor on Schedule A
Ministerial Issues

Deason Rule-1964 (Dalan Decision 1992)



Unreimbursed business expenses
Limited by housing allowance over total
compensation
Example
 Total income
40,000
 Housing allowance
10,000
 Nontaxable %
25%
 Unreimbursed bus exp
4,000
 Nondeductible bus exp
1,000
Ministerial Issues

Self employment tax

Example
Salary
30,000
 Housing allowance
10,000
 Unreimbursed bus exp
(4,000)
 SE taxable income
36,000

Ministerial Issues

What is the most important asset of Watermark
Community Church?


Exempt status
How do you protect this status?



Follow the rules/laws
Document everything
Remember Church’s fiduciary responsibility
Ministerial Issues

Summary





Monitor FITW/estimated tax payments
Review H/A throughout the year
Plan major purchases
Use Church’s accountable plan
Safeguard Church’s exempt status
Ministerial Issues

Contact information
Julie Fry, CPA
 Salmon Sims Thomas & Associates PLLC
 12720 Hillcrest Road, Suite 900
 Dallas, TX 75230
 972.392.1143
