Hey, Fletch: How Does the New Tax Law Affect Moving Expenses?

What the changed rules mean for churches.

In this biweekly column, longtime executive pastor and XPastor.org founder David Fletcher takes on readers’ questions about finances, staffing, communications, and more. Submit your questions using the subject line “Hey, Fletch” to editor@churchlawandtax.com.

The new tax law affects relocation expenses for churches. Have you heard how churches are handling this? Are their policies changing? Since this is taxable income to the new hire, are receipts still required? Are they issuing it similar to a bonus now? Are they keeping the same relocation dollars, or are they grossing up to ensure the new hire receives sufficient after tax dollars for the move? These are just a few questions that come to mind.

To make things easy to understand, let’s assume you give a new pastor $10,000 for moving expenses. Your number might not be that high, but it is an easy number to illustrate.

Before the new rules, the pastor would give adequate receipts to document the expenses. All $10,000 would be tax-free to the employee. There would be no tax reporting by the church because it is an expense. Voilà, you are done.

The rules changed. The entire $10,000 is now taxable income. Essentially, the moving expenses become a bonus to the employee. As a bonus, the church is not required to have receipts from the pastor. However, as a way to justify the size of the bonus, the church may want receipts (and may require receipts if the policy is they will reimburse up to $10,000).

On that $10,000 for moving expenses, the church cannot pay the 7.65% employer’s portion of FICA (Federal Insurance Contributions Act). Pastors are under SECA (Self Employment Contributions Act). You cannot remit the 7.65% portion of the employee’s FICA—again, because they are under SECA. Pastors may ask their church to withhold funds from their paychecks and remit them to the government. The pastor pays into SECA 15.3% of the $10,000, which would be $1,530. Plus the pastor is required to pay local, state and federal income tax.

To offset the taxes, you can “gross up” the amount given for moving expenses. You can add funds to cover an equivalent amount of an employee’s portion of FICA and an amount to cover local, state, and federal taxes. You would give $10,000 for moving expenses, $765 for FICA equivalency and $2,000 for taxes. That comes to $12,675, all of which is all taxable income. Depending on the pastor’s tax rate, and if the church wants to give more money to offset those taxes, this number could go as high as $15,500.

To learn more about how the Tax Cuts and Jobs Act affects your church, read “ Integrating Tax Reform for 2018—and Beyond.”

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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