Church leaders have flooded us recently with questions about a new Internal Revenue Service notice that addresses the tax treatment of employer-paid medical benefits. Before the enactment of the Affordable Care Act, employers could provide private health insurance, tax-free, to employees either by directly paying the costs of that insurance to health insurers or by reimbursing the employees for the substantiated cost of their premiums.
But several ACA-related reforms called into question the tax-free treatment of these arrangements heading into 2014. The IRS addressed this question directly in late 2013 when it issued IRS Notice 2013-54. The implications of this notice are significant for churches because, in many instances, these arrangements are no longer allowed and may be subject to substantial penalties.
Churches and Ministers Should Be Aware of the Following Deadlines in May and June of 2014
Note: If a date listed below for filing a return or making a tax payment falls on a Saturday, Sunday, or legal holiday (either national or statewide in a state where the return is required to be filed), the return or tax payment is due on the following business day.
• If your church or organization reported withheld taxes of more than $50,000 during the most recent lookback period (for 2014 the lookback period is July 1, 2012, through June 30, 2013), then the withheld payroll taxes are deposited semiweekly. This means that for paydays falling on Wednesday, Thursday, or Friday, the payroll taxes must be deposited on or by the following Wednesday. For all other paydays, the payroll taxes must be deposited on the Friday following the payday. Note further that large employers having withheld taxes of $100,000 or more at the end of any day must deposit the taxes by the next banking day. The deposit days are based on the timing of the employer’s payroll. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes (7.65 percent of wages), and the employer’s share of Social Security and Medicare taxes (an additional 7.65 percent of employee wages).
• If your church or organization reported withheld taxes of $50,000 or less during the most recent lookback period (for 2014 the lookback period is July 1, 2012, through June 30, 2013), then withheld payroll taxes are deposited monthly. Monthly deposits are due by the 15th day of the following month. Note, however, that if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church need not deposit the taxes. Instead, it can pay the total withheld taxes directly to the IRS with its quarterly Form 941. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes (7.65 percent of wages), and the employer’s share of Social Security and Medicare taxes (an additional 7.65 percent of employee wages).
Note: You must use electronic funds transfer to make all federal employment tax deposits. Generally, electronic fund transfers are made using the Electronic Federal Tax Payment System (EFTPS). If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, or payroll service to make deposits on your behalf. If you fail to make a timely deposit, you may be subject to a 10-percent failure-to-deposit penalty. EFTPS is a free service provided by the Department of the Treasury. For more information about EFTPS, visit the EFTPS website,eftps.gov.
• Churches having nonminister employees (or one or more ministers who report their federal income taxes as employees and who have elected voluntary withholding) may file their employer’s quarterly federal tax return (Form 941) by this date instead of April 30 if all taxes for the first calendar quarter have been deposited in full and on time.
• An unrelated business income tax return (Form 990-T) must be filed by this date by churches and any other organization exempt from federal income tax that had gross income from an unrelated trade or business of $1,000 or more in 2013.
• Annual certification (for calendar year 2013) of racial nondiscrimination by a private school exempt from federal income tax (Form 5578) must be filed by this date by schools that operate on a calendar-year basis. Fiscal year schools must file the form by the 15th day of the fifth month following the end of their fiscal year. This form must be filed by preschools, primary and secondary schools, and colleges, whether operated as a separate legal entity or by a church.
• Ministers (who have not elected voluntary withholding) and self-employed workers must file their second quarterly estimated federal tax payment for 2014 by this date. A similar rule applies in many states to payments of estimated state taxes. Nonminister employees of churches that filed a timely Form 8274 (waiving the church’s obligation to withhold and pay FICA taxes) are treated as self-employed for Social Security purposes, and accordingly are subject to the estimated tax deadlines with respect to their self-employment (Social Security) taxes unless they ask their employing church to withhold an additional amount of income taxes from each paycheck that will be sufficient to cover self-employment taxes (use a new Form W-4 to make this request).
• A church must make quarterly estimated tax payments if it expects an unrelated business income tax liability for the year to be $500 or more. Use IRS Form 990-W to figure estimated taxes. Deposit quarterly tax payments electronically using the EFTPS system.
• Now is a good time to review the 2014 housing or parsonage allowances designated for all ministers on staff. If an allowance designated for 2014 is clearly below actual housing expenses, then the church board should consider declaring a larger portion of the minister’s remaining compensation as a housing or parsonage allowance. Clergy who own their homes may never claim a housing allowance exclusion greater than the fair rental value of the home (furnished, including utilities). Therefore, the allowance ordinarily should not be significantly more than this amount. Also, any changes made only apply prospectively, never retroactively.
For more information, the Feature Article for the May 2014 issue of Church Finance Today goes deeper on this matter; the article also is included in the all-new Affordable Care Act: Church Administrators Survival Guide available at ChurchLawAndTaxStore.com.