Myth
12
If you don’t want to do all
the work figuring employment tax for part-time church employees, just give them a
love offering and call them independent contractors.
Ministers have filed tax returns as
self-employed, and not as employees, for over 90 years.
No law has changed. The clear
black letter of the law says two things: a) a minister
is Self-Employed for SE tax purposes b) a minister is not subject to withholding of any
tax. So why use a W-2 withholding form? Clergy Tax and Financial
Services will
give a $100.00 gift certificate to the restaurant of choice to the first person who can
provide a legitimate copy of federal legislation changing tax law to declare ministers as
employees.
Recent tax court cases have made it clear that the employment status of ministers is
a matter of his or her individual situation. A minister who is tightly controlled
in the details of his/her work may be considered an employee, while the vast majority of
ministers who do not labor under such control are self-employed. As of this writing, only
one tax court has designated a senior minister as an employee, and several have designated
ministers as self-employed.
If you review the theology of ministry of your church or denomination and don’t
have a theological problem with employee status; review the term "Instant in season
and out of season" and reflect, how will you reprove your employer! Or order our booklet: "The Theology
of Ministers' Employment Status".
Do you really want to be a hireling?
Few churches and church leaders are willing to fully implement an ARP. There may
well be expenses which the minister does not want to reveal to his church board.
In addition, ARP is a "use it or lose it matter."
Ministers, who usually fund an ARP out of their ministerial budget, tend to estimate low, and
lose some of the protection of the Accountable Reimbursement Plan.
With employee status, the minister is subject to
2% reduction of all employee business
expenses on Schedule A; in other words, pays taxes on a portion of expenses.
Employee status limits the medical insurance deduction by making employee business expenses a
"below the line" deduction.
Employee status increases tax for the parsonage dweller
who does not itemize
deductions and therefore cannot deduct employee business expenses.
Employee status can be expensive in the extreme to the minister who has an approved
4361 (Exemption from Self-Employment Tax)
More important, employee status may subject the local church, the district
headquarters, and national church to deep pocket lawsuits, based on any purported misdeeds of
the minister. A W2 innocently prepared by a scrupulous treasurer may be the
only opening a lawyer
needs.
We hear this claim, but no one has proved it and we haven't found any
proof. In fact, CTFS will give a dinner for two to the first person who
can proves it.
A minister's employee business expenses, taken as miscellaneous
deductions, far exceed
the cost to the average worker of safety shoes and union dues. That raises an audit flag for the IRS.
On the other hand, the
self-employed minister who lists the same expenses on a Schedule C generally
has lower expenses compared to small businesses whose owners also
file Schedule C.
What law changed? Ministers have had such a right for decades.
The 1997 TAX Act specifically says that ministers can have a TSA (tax
sheltered annuity) plan. By
implication, pension and medical benefits are included.
Your housing allowance can be changed at any time but no change can be
retroactive. It is always best to estimate expenses high (we suggest $5000 more than you
think you will spend). Any unused portion can be added to your income at tax time.
Lots of ministers have reviewed the rules and concluded that they can opt out in
good conscience. If you are new to the ministry, you need a consultation with
an expert at CTFS.
Yep, we’ve seen the slick advertising too - the shackled minister quailing
before an angry judge! The fact is that innocent errors can cost the the
minister or church board members tax penalties, but no minister has gone to jail for
innocent errors in the United States.
Myth # 10 "A lot of churches are losing
their tax-exempt status."
The fact is that very few churches lose exempt status, and when the do, it is
usually for practices that are blatant and way off base.
Churches get in trouble more in this area than any other area of law.
If
you pay a church employee more than $50.00 in a calendar quarter, you must
do the proper withholding and then file quarterly 941 reports with the
IRS and W-2 forms. Subject employees include babysitters
for Women’s Bible Class, church musicians, gardeners who only serve the church, part-time
secretaries, youth workers, and many others.
Your church can be subject to a significant penalties for failure to comply (but you
won’t go to jail).
If you have a church employee question ask
for a conference via phone with a Clergy tax expert.
