Transcript Strategies for a 2010 Denomination

Your Presenter Today is
Rev. Dougald W. McLaurin, Jr.
Associational Missionary
(Director of Missions)
Tar River Baptist Association
Contact him at [email protected]
Legal Issues and IRS
Guidelines Affecting The
Local Church
We are called to be good witnesses of our
Lord to this world.
Scriptural premises to serve
as our guidelines
“…..You shall be my witnesses….” Acts 1: 8
“Give to Caesar what is Caesar’s and to God what is
God’s.” Matthew 22: 21
Issues For Discussion

IRS rules and regulations for ministers and
church staff
 Charitable giving requirements
 Reclamation of NC Sales Tax
 Need For Personnel policies and procedures
 Importance of staff being a part of the
Annuity Board Retirement system
Estimates run from 65 – 85%
of churches may be out of
compliance with the rules,
regulations, and laws that
govern withholding, charitable
giving, staff policies, etc.
IF WE DON’T ADDRESS
YOUR CONCERNS
There is NO WAY to address everything you need
to know to effectively serve the church with all the
regulations before us today. In the event we do
not cover a topic to your satisfaction or do not
address the issue, please leave your
questions/concerns on the table (forms provided)
when you leave. We will get the information for
you and send it to every person registered in
attendance.
The Dual View Of Those In
Ministry
Ministers are considered and employee of
the church for IRS purposes…….
Ministers are considered as self-employed
for Social Security purposes……
Many Churches are out of
compliance with the law. This can
lead to substantial penalties.
Federal law specifies that any corporate officer,
director, or employee who is responsible for
withholding taxes and paying them over to the
government may be liable for a penalty in the
amount of 100% of such taxes if they are either
not withheld or not paid over to the government.
Many Churches are out of
compliance with the law. This can
lead to substantial penalties.
This penalty is of special relevance to church
leaders, given the high rate of noncompliance by
churches with the payroll reporting procedures.
Why are so many churches out of
compliance with the law?
1.
Many treasurers lack specialized knowledge of
the unique rules related to churches and
ministers.
2. Treasurer turnover rates are high, not
permitting time to fully understand the
application of payroll reporting rules for
churches.
Why are so many churches out of
compliance with the law?
Some treasurers assume churches are
“exempt” from the laws since we are a
church.
You need to UNDERSTAND, the courts have
ruled payroll tax reporting laws DO apply to
the church.
3.
Special rules UNIQUE to the
church
1.
Ministers are ALWAYS self-employed for
Social Security purposes and must pay their
own SECA (not FICA).
You may need to know that some ministers are
exempted from Social Security due to religious
considerations. They must have the
appropriate forms on file with the
government.
Special rules UNIQUE to the
church
2.
A minister’s wages are exempt from income
tax withholding. However, some ministers do
elect to allow the church to withhold taxes.
Generally, the pastor should pay estimated
taxes on a quarterly basis to avoid penalties
for underpayment of taxes.
Special rules UNIQUE to the
church
3. There is a special rule exempting churches
from the employer’s share of social security
and withholding taxes due to religious beliefs.
However, this must be on file BEFORE
October 31, 1984. The church would still
have to issue W2’s for non-ministerial staff.
Ministers SHOULD receive a
W-2 Form from their church
treasurer indicating the salary
of the minister at the church.
This is SALARY ONLY.
To Repeat----Ministers Should
Receive a W-2
Receiving nothing is both inappropriate and
illegal…..
A letter from the treasurer indicating earnings is
not appropriate and unacceptable…….
1099’s are not appropriate but better than
nothing…..
To Repeat----Ministers Should
Receive a W-2
What is appropriate…..
Legal…….
Ethical……
Acceptable……
And in compliance with IRS Law is….
ALL Ministers should receive a W2
Maximizing Tax Benefits For
Ministers
I operate from the premise that the church
should do all it can to maximize the earnings
of its ministers. Many churches can not
afford to pay “high salaries.” However,
EVERY church can and should maximize
the earnings of its ministers and protect the
minister’s family as much as possible.
Maximizing Tax Benefits For
Ministers

HOUSING ALLOWANCE: This is the
most important benefit for those in ministry.
Make certain a portion of the minister’s
compensation is designated - by vote of the
church – as housing allowance for the
minister. If you fail to do that (by vote of
the church), it is considered gross pay.
Housing Allowance Information

The housing allowance is nontaxable for income
tax reporting purposes
 Housing allowance is considered in the
computation of SECA.
 Ministers living in their own homes may also
deduct interest, taxes, etc.
 Ministers living in church-owned homes may
exclude the fair-rental value from their gross pay
Housing Allowance Information

Out-of-pocket expenses (utilities,
furnishings, repairs, etc.) in the parsonage
may also be excluded from their gross pay
 Remember---the amount designated as
housing allowance MUST BE approved by
the church in advance and though excluded
for income tax purposes, it must be included
in computation of SECA.
Housing Allowance Information

The IRS recognizes employee contracts,
covenants, minutes of business meetings, budgets,
etc. PROVIDED the church has duly adopted the
designation as a housing allowance.

Giving your pastor $150,000 and saying “break it
down pastor any way you like,” is not accepted by
the IRS as appropriate.
Maximizing Tax Benefits For
Ministers
Another premise I operate from is that the
church should UNDERSTAND, the “cost” of
the pastor being your pastor is NOT income
to the pastor. THEREFORE, the church
should do everything it can to insure he does
not have to pay taxes on money that he uses
to serve the church as its minister.
Maximizing Tax Benefits For
Ministers
Every church should ADOPT an ACCOUNTABLE
REIMBURSEMENT PLAN for its ministers/staff.
The basic “rule of thumb” is, staff members have
to be accountable to someone – either the church or
to the IRS. To make your staff members
accountable to the IRS means that they will have to
pay taxes for expenses it cost them personally to
serve as your minister. That should NOT happen.
Accountable Reimbursement Plan
The BEST way for ministers to handle their ministryrelated work expense is through an accountable
reimbursement plan:
A church agrees to reimburse staff for all ministry-related
expenses that are properly substantiated as to the date,
amount, place, and ministry purpose.
Reimbursements in such a manner are not considered
taxable income. An “allowance” is considered taxable
income.
Accountable Reimbursement Plan
The church should establish an accountable expenses
reimbursement plan in an appropriate resolution/motion.
When making such a motion, the church should pay close
attention to:
1.
Condition the reimbursement of any expense on
adequate substantiation. This will include written
evidence for all expenses, and receipts for expenses of
$75 or more. The evidence must substantiate the amount,
date, place, and business nature of each expense.
Accountable Reimbursement Plan
I would expect the minister to turn in MOST receipts under
$75 as well. I would have a provision for a statement of
explanation for reimbursement of items that a receipt might
not be available (I.e. fast food meal, parking fees, etc.)
The KEY POINT is this: the church MUST require the
same degree of substantiation as would be required for a
deduction on the minister’s income tax return.
Accountable Reimbursement Plan
2.
Expenses must be substantiated, and excess
reimbursements returned to the church, within a
“reasonable period” of time. According to IRS rules,
expenses substantiated within 60 days are deemed
appropriate as is excess reimbursements received within
120 days.
Reimbursements to ministers for non-ministry related,
personal expenses should be included as taxable income on
the minister’s W2.
Complying With Federal payroll
tax reporting obligations…..
Yet another premise I feel is important and
under which we should operate is the fact
that a church should be a good witness to the
world around us by complying with the
rules, regulations, procedures—the law. The
following slides will deal with 11 steps to
insure your compliance.
Complying With Federal payroll
tax reporting obligations…..
STEP ONE: Obtain an employer
identification (EIN) from the federal
government if this has not been done.
This is NOT a tax-exemption number!
Complying With Federal payroll
tax reporting obligations…..
STEP TWO: Determine whether church workers
are employees or self-employed.
* Churches must withhold 30% of pay to a selfemployed person who has not supplied a SS
number
* Some employee benefits are non-taxable ONLY
when received as employees
* The Church Annuity Plan covers only W2
employees
Complying With Federal payroll
tax reporting obligations…..
STEP THREE: Obtain the Social Security
Number for each worker.
Churches can be penalized if the Social Security
number they report is incorrect.
Complying With Federal payroll
tax reporting obligations…..
STEP FOUR: Have each employee complete a W4.
Ordained ministers do NOT have to complete a W4
UNLESS they enter into a voluntary withholding
with the church.
Complying With Federal payroll
tax reporting obligations…..
STEP FIVE: Compute each employee’s taxable
wage
Wages subject to federal withholding include pay
given to any employee for services performed. The
pay may be cash or in other forms. Non-money
pay must be fair-market value.
Complying With Federal payroll
tax reporting obligations…..
WAGES: Wages often include a number of items in addition to salary,
Here are some common examples:
Bonuses
Christmas/Special occasion Gifts
Retirement Gifts
SOCIAL SECURITY OFFSET
Personal use church car
Church loan below-market interest
Forgiven debts
Expenses with NO accountable plan
Purchases of church property for less than fair-market
Complying With Federal payroll
tax reporting obligations…..
STEP SIX: Determine the amount of income tax to withhold from each
employee’s wages.
The most common way to determine is through the wage bracket
method but you can use the percentage method.
Complying With Federal payroll
tax reporting obligations…..
STEP SEVEN: Withhold Social Security and Medicare (FICA) taxes
from non-minister employee’s wages.
The combined Social Security and Medicare tax rate is 15.3% of each
employees wages. This is divided by the employer and the employee.
Therefore, the church’s portion is 7.65% of the employee’s wages.
The church MUST withhold the employee’s share of social security.
REMINDER: Any Social Security Offset by the church for a minister is
considered taxable income.
Complying With Federal payroll
tax reporting obligations…..
STEP EIGHT: The church MUST DEPOSIT the taxes it withholds
The church accumulates 3 kinds of federal payroll taxes: income taxes,
employer's share of SS taxes, and employees share of SS taxes. ALL
must be deposited on a monthly basis. MOST CHURCHES, beginning
in 2001 can make payments every three months UNLESS they have
more than $2500 combined quarterly employment taxes.
Complying With Federal payroll
tax reporting obligations…..
STEP NINE: All employers subject to income tax withholding, Social
Security and Medicare, or both, MUST file Form 941 quarterly
Forms are due April 30, July 31, October 31, and January 31
It is the position of the IRS national office that churches with only one
employee (the minister) need NOT file a Form 941
Complying With Federal payroll
tax reporting obligations…..
STEP TEN: Prepare a W2 for EVERY employee – including ordained
ministers. Employee should receive no later than February 1
TAKE NOTE OF ANY CHANGES IN THE W2 FORM FROM YEAR
TO YEAR
For ministers, you do NOT include designated housing and reimbursed
ministry expenses on the W2. The church does NOT report Social
Security or Medicare wages for the minister.
Complying With Federal payroll
tax reporting obligations…..
REMEMBER----wages for income tax purposes include:
*
*
*
*
Bonuses
Church gifts
SS Offset
Purchases of church
property below market
* Moving expenses paid
DIRECTLY to pastor
* “Discretionary funds”
for the pastor to spend
“as he sees fit”
*The cost of sending the pastor to the Holy
Land if paid by the church
* Personal use of church-provided car
* Business expense reimbursements under a
non-accountable plan
* Church paid group insurance beyond
$50,000
* “Below-market” interest loans by the
church
* Debt forgiven by the church
Complying With Federal payroll
tax reporting obligations…..
MORE EXAMPLES----wages for income tax purposes include:
* Severance pay
* Payment of the ministers personal
* Church’s reimbursement expenses by the church
of spouse’s expenses
* Per Diem rates higher than IRS
* Travel reimbursement
guidelines
higher than IRS
Complying With Federal payroll
tax reporting obligations…..
THINGS NOT TO REPORT AS SALARY FOR MINISTERS:
* Fair rental value of
* Housing Allowance
parsonage
* Contributions to Retirement Plans
* Expenses reimbursed
(Under Salary Reduction Agreement
under accountable plan
approved by the church)
* Travel expenses
* Items purchased by the church for the
in accordance with IRS
minister to accomplish his task as
guidelines
minister of the church
CONSULT IRS OR CLERGY TAX LAW GUIDES IF YOU HAVE
QUESTIONS. Tar River Baptist Association should have the up-to-date
information that will be of help to its member churches.
Complying With Federal payroll
tax reporting obligations…..
STEP ELEVEN: Prepare a Form 1099-MISC for every self-employed
person receiving non-employee compensation of $600 or more.
Like the W2, this should be issued BEFORE February 1
Persons that receive 1099’s are NOT eligible to participate in the
Church Annuity Plan.
Some additional helps to keep you
in compliance…..
NEED HELP COMPLETING A FORM: Call the centralized IRS site
for questions about their forms. Their number is 1-304-263-8700 (M-F
8:30 – 4:30 EST). TRBA might also be able to offer some help to you.
FORM I-9: EVERY employer in the United States must complete this
form to confirm the identity of all new employees. All employees since
November 6, 1986 should have this on file.
Annual Certification of racial nondiscrimination: Churches that
operate, supervise, or control a private school must file this form each
year with the IRS. This includes a preschool operation.
Some additional helps to keep you
in compliance…..
Charitable contribution substantiation rules: There are two important
rules with regards to substantiation of charitable gifts:
1. IF THE GIFT IS OVER $250 the donor must receive written
acknowledgement from the church that satisfies the following
requirements:
* Receipt must be in writing
* Receipt must identify the donor by name
* For non-cash contributions valued over $250, the receipt must
include a description of the property. NO VALUE NEEDS TO BE
STATED
Some additional helps to keep you
in compliance…..
* The receipt must state whether the church provided any goods or
services in return for the contributions and if so, an estimate of their
value
* If the church provides “intangible religious benefits,: then the receipt
must contain a statement to that effect
* The written receipt must be received by the date the donor file his
tax return (or extensions)
Some additional helps to keep you
in compliance…..
If the gift is a “Quid pro quo” contribution of more than
$75 ( a payment that is partly contribution and partly
payment for goods and services), the church must provide a
written statement to the donor that satisfies two conditions:
*
Must inform the donor the amount that is tax-deductible is
limited to the excess of the amount of money (or value of
property) over the value of any goods and services provided
by the church
Some additional helps to keep you
in compliance…..
•
The statement must provide the donor with a
good faith estimate of the value of the goods
or services furnished to the donor
•
NOTE: All designated contributions are
NOT necessarily tax-deductible to the donor.
Not all designated gifts are
considered tax deductible
•
Due to abuse by some, the IRS has
established some basic guidelines related to
designated giving and receipts for charitable
gifts. As a general rule, anything you give
with a designation that it MUST be used in a
certain manner and for which you can have
returned if not used in that manner, is not
considered deductible for you still have
control of its use.
One final “rule of thumb” for
charitable giving……
If someone receives CREDIT for a contribution
(even a love offering), the IRS requires
substantiation.
If a staff member receives a “love offering” from
the church for which members have received a
contribution credit (this would include gifts and
trips), then the treasurer MUST include this on the
staff members W2 as income.
ODDS AND ENDS ABOUT CHARITABLE
GIVING






Keep tax records 7 years
Hours, services, volunteerism is NOT a legal
contribution
Money counters should not be from the same
family/household
Cancelled checks are not proof of contributions
A person that gets the money; counts the money;
deposits the money, etc. SHOULD NOT SIGN
CHECKS
Two signatures should be on church checks
A Suggested Procedure For Sunday Offerings






Count and verify loose change and cash
contributions
Do NOT open envelopes
Place bag in night deposit at bank
On Monday, financial secretary gets bag, counts
money, and makes records of contributions from
envelopes
Prepare deposit slip and take to bank
Get contribution records to contributors in a
timely manner
Reclamation Of N.C. Sales Tax
Churches can claim refunds for NC Sales taxes paid. Forms are available
by calling 1-919-733-7983. Listed below are items for which churches
can NOT receive a refund:
• Tax paid on the purchase, lease, or rental of motor vehicles
• State sales tax on electricity, natural gas, and telephone service
• Local occupancy taxes on hotel bills and restaurant (prepared food)
taxes
• Scrap tire disposal and white goods tax
• REIMBURSEMENTS MADE TO EMPLOYEES OR OTHER
INDIVIDUALS FOR SALES TAX PAID DIRECTLY BY THE
EMPLOYEE OR INDIVIDUAL
Planning Financial Support
For Church Staff
The church has the responsibility of being a
good employer. Staff/church policies and
procedures, personnel handbooks,
deliberate planning to address financial
needs of the staff ALL contribute to a better
work environment.
Forms, workbooks, sample
policies and procedures, etc.
are available to the church
through the Tar River Baptist
Association or the Baptist
State Convention of North
Carolina or their websites.
Tar River’s Website is
www.tarriverba.com
The Baptist State Convention’s
website is www.bscnc.org
Six steps to financial support planning
*
*
*
*
*
*
Determine the needs
Establish written support policies
Provide for ministry-related expenses
Provide employee benefits
Determine personal income
Complete a financial support worksheet
Determining The Need
Ask each church employee to complete a
Financial Support Review (copies
available). This will help you determine if
the church is adequately meeting both the
church’s and the employee’s needs. This
tool will enable the church to more
effectively plan for this year’s staff support
and the ministry needs of the church.
Financial support review……
Forms are available at TRBA.
The church should ask each staff member to
complete this form and return to the committee for
their review.
The committee should determine if any
adjustments should be made for that employee.
Financial support review……
The following areas need to be reviewed:
1. Mileage driven the previous year for “church
business.”
2. Any foreseen major changes in mileage for the
upcoming year.
The church should examine current and projected
compensation at the IRS approved rates.
Financial support review……
3. How much money was spent by the staff member in
travel expenses to participate in church and denominational
conventions and conferences? This would include lodging,
food, commercial transportation, parking fees, etc.
4. Are their anticipated changes in convention,
conference, education plans for next year?
The church should explore what expenses they will
reimburse for such events.
Financial support review……
5. How much money was spent by the staff member on
materials such as books, periodicals, subscriptions, tapes,
etc. in preparation for sermons, studies, presentations, and
other things related to the ministry of the staff member?
6. Are their any special studies, promotions, activities
planned by the church or denomination that will require
additional purchases in the upcoming year?
The church should explore what expenses they will
reimburse for such materials.
Financial support review……
7. How much money was spent by the staff member on professional
development –conferences, education, workshops, etc.- to improve the
minister’s ability to minister to the church?
The church should determine how much they will reimburse?
8. How much money was spent by the staff member to ”entertain”
church groups, prospects, visiting evangelists, and other guests of the
church in their home or a restaurant?
The church should determine how much they will reimburse to offset
this expense to the staff member.
Thus far, we have just reviewed
what it cost the church staff
member TO BE YOUR CHURCH
STAFF MEMBER. Now– we
need to look at the benefits the
church will provide and the
personal income the staff
member can use as his/her
personal income.
Protection Benefits
The church should do all it can to protect
the staff member and his/her family.
Perhaps the church can not do all it needs to
do, but each year it needs to take additional
steps to protect the staff member!
Protection Benefits
There are several things the church needs to know about it’s staff
members – so ask!
1.
Does the staff member have health insurance?
2.
What is the cost to the family?
3.
Will the cost increase for next year?
The church should determine how much it can do to offer this as a
benefit for the staff member. If not fully, it can be “reimbursed” and/or
a “salary reduction agreement.”
Financial support review……
4. Does the staff member have life insurance? What is the cost?
Can the church cover this as a benefit if not already a benefit
(remember anything over the $50,000 premium will have to count as
income to the staff member).
5. Does the staff member have disability insurance? What is the
cost? Can the church include this as a benefit?
6. Does the staff member make contributions to the Annuity Board's
Retirement Program? (PLEASE NOTE: It is the opinion of your
presenter that the staff member should participate in the Annuity Board
Retirement. There are certain benefits that AUTOMATICALLY come
to the staff member that serve as a protection to the staff member and
to the church as a result of the staff member's involvement.)
A Few Words About Special
Benefits For Annuity Board
Retirement Participants
If your church contributes $420 per staff member to any plan to the
Cooperative Program of the Baptist State Convention of North Carolina,
and contributions are made on behalf of the staff member (by the staff
member or the church), then the staff member AUTOMATICALLY has
certain protection benefits IN ADDITION TO any other protection
benefits they might have. (PLEASE NOTE: This benefit is available to
ANY minister (including music DIRECTOR) and to SUPPORT STAFF
and daycare workers that work at least 20 hours per week (ministry
positions have no minimum number of hours to work).
EVERY CHURCH SHOULD MAKE CERTAIN THAT MONTHLY
CONTRIBUTIONS (AND I SAY AGAIN MONTHLY) SO THAT
STAFF MEMBERS WILL HAVE THIS FREE BENEFIT!!!!!!!
More Words About Special
Benefits For Annuity Board
Retirement Participants
Treasurers should make certain payments are
made on all staff members behalf on a
MONTHLY basis. Benefits are based on
twelve months of consecutive (not catch up)
contributions and participants would receive
a pro rated benefit if payments were not made
MONTHLY.
Yet----A Few More Words About
Special Benefits For Annuity
Board Retirement Participants
Eligible participants in the Board Retirement System have the following
AUTOMATIC benefits as a result of a partnership it the Baptist State
Convention of North Carolina:
Protection Benefits: For contributions of $1 a month (of
course, it should be more):
Disability Income Benefit of up to $500/month
Survivor Protection Benefit (based on age) of up to $100,000
and not less than $10,000 for those who die before
retirement (Contributing interims are not considered retired)
Yet----A Few More Words About
Special Benefits For Annuity
Board Retirement Participants
Investment Benefit: For contributions of $52 - $105
the Baptist State Convention of North Carolina will
contribute $1for every $3 the participant
contributes.
Churches are encouraged to contribute 10% of staff
member’s direct pay. The staff member is
encouraged to contribute 5%.
Now---we move into the
personal or “direct income” of
the minister. That is, the
money that is available to the
staff member to support the
family/personal expenses.
Personal income…….
1.
How much was the salary for the staff member last year?
2.
Did the staff member receive a COLA or merit raise last year?
3.
What was the housing allowance or value of the parsonage last
year?
4.
How much SECA taxes were paid by the staff member last year?
5.
How much did the church provide last year for SS Offset?
Upon review of the above, the church should determine what adjustments
need to be made in the next budget cycle for the staff member.
STEP 2: Establish written
financial support policies-------Every church should do all it can
to cut down on the potential for
conflict in the church. Written
policies clarify intentions and
reduce the potential for
misunderstandings.
Written policies should
include…….
1.
2.
Ministry related expenses: Should clearly state
what the church considers allowable business
expenses; staff member record keeping
expectations; types of expenses to be reimbursed
and reimbursement rates, etc.
Employee benefits: Should define levels of
coverage the church will provide for insurances;
retirement contributions by the church;
educational expenses: SS Offset, etc.
Written policies should
include…….
3.
Personal Income: This is the direct income the staff
member receives (housing allowance and taxable salary).
4.
OTHER Personnel policies: There are several other
policies the church should consider for its employees,
including the following:
* Vacation
* Sick leave
* Sabbatical leave
* Hiring issues
* Employee classifications
* Work hours
* Pay periods
* Church expectations
in “call backs” from
conferences/vacations
Your Presenter Today is
Rev. Dougald W. McLaurin,
Jr.
 Associational Missionary

(Director of Missions)
 Tar River Baptist Association
 Contact him at [email protected]