Tax law for churches and clergy are unique and sometimes complex. For instance, are ministers employees or self-employed? Typically, they're both, and that's where the confusion sets in.
In this downloadable resource, we cover five tax trouble spots for churches: designating housing allowances, payroll tax withholding, love gifts to ministers, substantiating the business use of a cell phone, and differentiating whether a minister is an employee or self-employed.
Designating a Housing Allowance
The most important tax benefit available to ministers who own or rent their home is the housing allowance exclusion. Unfortunately, many churches fail to designate a portion of their minister's compensation as a housing allowance, thereby depriving the minister of an important tax benefit. Housing allowances must always be made in advance of receiving the benefit, never retroactively, and they should be put in writing, such as in an employment contract, in minutes during an official church meeting, or as part of the church's budget.
Understanding Payroll Tax Reporting Rules
Payroll tax reporting is one of the weakest areas for churches when it comes to complying with federal requirements. Church leaders may incur personal liability for the handling of payroll taxes, so its imperative that churches understand what their reporting obligations are.
Receiving Love Gifts
Churches and their members often desire to show their pastors appreciation with gifts. But "love gifts" create taxable income for ministers. Ministers need to know how to properly report gifts.
Substantiating Cell Phone Usage
Late in 2010, Congress enacted the Creating Small Business Jobs Act, which, among other changes, removed cell phones from the definition of listed property. As a result the heightened substantiation requirements and special depreciation rules that apply to listed property do not apply to cell phones. The IRS is considering four alternative methods to comply with the substantiation requirements that govern employee use of employer-provided cell phones, but these are still in the proposal stage.
Filing as an Employee or Self-Employed?
Ministers are typically employees for federal income tax purposes, but self-employed for Social Security taxes. This dichotomy is an area of ongoing confusion for churches and clergy.
Each of these topics represents an area where churches often fail to comply with tax laws, very often because they don't know—or don't understand—what the law requires. Failing to comply in these areas exposes a church to audits and penalties. This download is designed to give you the background you need to know what questions to ask and to evaluate whether your church is in compliance in these areas.