Maximizing
Tax Benefits
for Ministers
Churches of Strength
Conference
Chatham Baptist
Church
February 25, 2012
by:
Sylvan Knobloch
What is New in 2012?
 IRS
website www.irs.gov
 Child tax credit
 Marriage penalty relief
 Education Saving Accounts, Education
Assistance, American Opportunity Tax Credit
American Opportunity Credit helps with
offsetting education cost
 Deduction for state and local taxes
 Payroll tax holiday
 2012 Mileage rate .555
 Second Parsonage Allowance [Phillip A Driscoll
vs Commissioner] Ministers can receive a
second home exclusion for parsonage
allowance. [his vacation home].
Who is a minister?





Ordained, licensed or commissioned
Administer ordinances of church
Conduct religious services
Management responsibilities of church
A religious leader
Minister’s Dual Status
For Federal income taxes ministers are employees
 Ministers
must receive a W-2.
 Can be self-employed – revivals, etc.
For Social Security they are self-employed
 Must
pay Social Security taxes
 Unless filed 4361 Page 12 important note.
 Pay
quarterly Social Security payments for 2012,
due
 April 17
 June 15
 September 17
 January 15, 2013
 Ministers who report their income taxes as
employees [W-2] can request that their church
voluntarily withhold income taxes from their
wages.
 Complete W-4; on line 6 request an additional
amount of income tax be withheld – to cover you
SS quarterly payments page 13.
Minister’s Housing Allowance
 Adopt
initial procedure
 Receive written request
 Provide written response
 Approve in advance
 Housing
allowance cannot be designated
retroactively.
 I have sample housing allowance resolutions and
worksheets available. (If you need help crafting this
resolution please call 217-391-3133)
Determining the amount
 Church
does not designate amount of
housing allowance.
 Minister designates amount and church
approves the identical amount.
 If IRS audits minister (lowest of the three):


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The amount actually used to provide a
home
The amount officially designated as a
housing allowance
The fair rental value of the home including
furnishings, appurtenances, plus utilities
Establishing Housing
Allowance

Ministers who own or rent their own home do not pay
federal income taxes on the amount of their
compensation that their employing church
designates in advance as a housing allowance,
however, how do we determine Housing Allowance?

The amount actually used to provide a home
The amount officially designated as a housing
allowance
The fair rental value of the home, including furnishing,
& utilities.




If audited the IRS will allow the lowest of these three.
If a minister, is only paid a housing allowance then
he will not receive a W2.
 Minister-
 The
Provided Housing
excludable portion of a housing allowance is
not taxable for federal income tax purposes, (It is
deducted from Line 1 on W2). The entire housing
allowance is taxable for Social Security (SECA)
purpose (reported on Schedule SE).
Employer- Provided Housing
The Fair Rental Value of the housing plus utilities (if
paid by employer) is:
• Excludable for federal income tax purposes
• Includible for social security (SECA) purposes
• A housing allowance may be provided to a
minister living in employer-provided housing. It is a
designation of the cash salary. The housing
allowance may cover certain housing expenses
paid by the minister.
Housing expenses include:
Mortgage payments
Rent
Real estate taxes
Property insurance
Utilities
Furnishings
Structural repairs and remodeling
Yard maintenance and improvements
Maintenance items
Homeowners association dues
Accountable Reimbursement Plans
 An
accountable reimbursement plan provides
advance or reimbursements of an employee’s
ministry expenditures incurred in the performance of
their duties.
Accountable plans must meet 3 criteria of IRS:
1. Expense must have business connection
2. You must adequately account for the
expense to your employer within a
reasonable period of time.
3. You must return any excess advance submit
receipts within a reasonable period of time.
I
have a sample resolution for church to approve an
accountable reimbursement plan.
Accountable plan
Reimbursements
of business expenses
under such an arrangement are not
reported as taxable income on the
minister’s Form W-2 or Form 1040, and
there are no deductions claimed. In
effect the minister is reporting to the
church rather than to IRS.
You will report on Schedule A and C
expenses not included as
accountable expenses.
What is included:
 Travel
for ministry away from home (lodging, meals
and travel)
 Entertainment Hospitality Expense – ministry
connection is required (who, what, where, why,
when)
Meals at home: $8-11/person
Snacks at home: $2.50-3.50/person
 Training expenses
 Educational Expenses – must follow IRS guidelines
 Subscriptions Expenses
 Cell Phone Expenses – if required by church for
convenience of church
 Moving expense on the Accountable plan
Non-accountable



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Remember, non-accountable reimbursements relate to any
payment made to an employee that is not properly
documented in accordance with IRS guidelines. For
example, a church gives their pastor $200/month for
expenses but does not require documentation. The amount is
considered taxable and is reported on W-2 line 1 and if not
included will be classified as Automatic Excess Benefit.
Salary Reduction Agreement for minister’s expenses are
considered salary as well and not excluded from W-2 line 1.
An arrangement that repays you for business expenses by
reducing the amount reported as your wages, salary or other
pay will be treated as a non-accountable plan and reported
on W-2, including an SRA that requires you to submit
expenses.
To claim expenses they must exceed 2% of adjusted gross
income. Some ministers have insufficient itemized expenses
to use Schedule A.
Caution – Deason rule may apply if audited.
Non-Taxable Employer Fringe Benefits
 Flexible
Spending Arrangement [FSA, Cafeteria or
Section 125], Health Reimbursement Arrangement
[HRA, Section 105] or Health Savings Account.
 These amounts should be established in advance by
the personnel/budget committee.
 Establishing correct language is very important in
developing such a policy. Ask an attorney or CPA to
assist in drafting a qualified FSA and/or HRA policy
procedure.
 Funded by SRA for reimbursement of employees’
medical expenses.

Caution: Reimbursing an employee for the extra medical
expenses typically not covered by an insurance policy
without an established FSA or HRA, results in taxable income
to the employee. Page 35
Complying with Federal Payroll Tax
Reporting
 Obtain
an Employer Identification Number (EIN) from
IRS Form SS-4. Call 1-800-829-4933 www.irs.gov search EIN.
 Determine whether each church worker is an
employee or self-employed.

Key point: Churches should always treat a worker as an
employee, since substantial penalties can be assessed
against a church for treating a worker as self-employed
when they are classified by IRS as an employee. Only W-2
employees can participate in retirement plans.
 Have
a Social Security Number for each employee.
 Each employee should complete a W-4.
 Compute each employee’s taxable wages.
 Determine the amount of tax to withhold from
employee wages.
Complying with Federal Payroll Tax
Reporting
 Withhold
SS and FICA taxes from non-minister
employees’ wages.
 The church must deposit the taxes it withholds. Church
accumulates three kinds of federal payroll taxes:



Income taxes
The employees’ share of SS and FICA withheld from wages
The employer’s share of SS and FICA withheld from taxes
 The
non-ministerial employees’ share of SS and FICA
[Hired contract workers complete a W-9.]
 All employers subject to income tax withholding must
file a 941 quarterly.
 Prepare Forms W-2 [1/31] , W-3, 1099, 1096 as
appropriate.
 Prepare a 1099 for every self-employed person
receiving more than $600.00/year.
New Hiring Considerations
 I-9
Form: Employment Eligibility Verification
 W-4 Form: Employee’s Withholding Allowance
Certificate – Ministers may voluntarily complete a
withholding agreement.
 W-5:
Earned Income Credit Form
 State Withholding Form
 Mandatory New Hire Reporting Form. Since 1977 all
employers including churches are required to report
all newly hired or returning employees to their
respective state within 20 days of hiring.
 Social Security Number – never accept a ITIN instead of a
SSN.
 Employee
Federal Tax reporting
 Call attention to retention policy p 70.
Page
41-46
Questions?
Resources

Edited by Randy Tompkins, Church Financial Guidebook:
resources for ministers, church treasures, financial secretaries
and church financial committee, Published by the
Stewardship Development Association 2012

Richard R Hammar, 2012 Church & Clergy Tax Guide by
Published by Christianity Today.

Richard R Hammar, 2012 Tax Return Preparation and Federal
Reporting Guide, Published by GuideStone, 2012

Busby, Dan; Drunen, John Van, Zondervan 2012 Minister’s tax
and Financial Guide Published by Zondervan

Worth, B.J Worth’s Income Tax Guide for Ministers published by
Evangel Publishing House Nappanee, IN
If you have questions
please call
Church Health and Staff
Development Director,
Sylvan Knobloch at
217-391-3133
Or email
sylvanknobloch@ibsa.org