Is Form 1099-Misc or Form W-2 the correct form to report a minister's income?
IRS indicates that form W-2 is the appropriate way to report a minister's taxable income paid as a regular salary by a church. (Rev. Ruling 80-11 & IRS Pub 517)

If the church provides the minister with Form 1099-Misc, premiums paid by the church for medical coverage must be included as taxable income. The chances for an IRS audit are increased if Form 1099-Misc is used.

What should the church do to enable the minister's housing allowance to be excluded from taxable income?
The housing allowance must be designated in advance and be recorded in church minutes.

The amount which can be excluded is limited by IRS (Section 107) to the least of:

1. Amount designated by the church,
2. Amount actually spent on housing for the year by the minister, or
3. Fair rental value of house, furniture, and utilities.

Are ministers covered by Social Security?
Per IRS, most ordained ministers are common-law employees for Federal income tax purposes, but self-employed for Social Security purposes (Tres. Reg. 31-3401 & IRS Pub. 517). Earnings from ministry services are subject to self-employment tax unless the minister has requested and received from IRS an exemption from self-employment tax for reason of conscience or religious principles.

Net earnings subject to Social Security tax are computed as the total of the following:

1. Income reported from W-2,
2. (Plus), Housing Allowance,
3. (Plus), Honoraria (weddings & funerals),
4. (Minus), any unreimbursed business expenses (automobile, office supplies, and travel)

If total earnings exceed $400 in a tax year, Schedule SE, Form 1040 must be filed by April 15 of the next year. Form 1040-ES with installments is paid by April 15, June 15, September 15, and January 15.

Under the new law, these are the steps to take to revoke exemption:

1. Fill out Revocation Form 2031 and file it in December 2000 or January 2001
2. Elect to begin paying taxes as of 1/1/2001 and make quarterly payments (4/15, 6/15, 9/15, 1/15)
3. You can get Form 2031 at any IRS office, or download it from the website http://www.irs.ustreas.gov/forms_pubs/formpub.html

Does the church pay unemployment taxes for its minister and lay employees?
Not in most states. Ministers and lay employees generally are exempt from state unemployment taxes. Your Association is exempted both from Federal Unemployment tax and Missouri unemployment tax (FUTA & SUTA). Please check with the employment division of your state.

Must IRS Form 941 be submitted if our pastor is the church's only employee and there is no withholding of taxes?
No. If there are no other employees of the church and there is no voluntary withholding of taxes for the minister, there is no need to file 941 forms.

If a minister wishes to have income tax withheld voluntarily, what is the process?
Ministers may elect to have tax withheld under the voluntary provision of Section 3401 (a)(9) of I. R. C. if agreed to by the church. A W-4 withholding declaration must be filled out by the minister and given to the church.

Is the expense reimbursement paid by a church taxable income to a minister?
No, it is not taxable. It is generally tax-free if it qualifies as an Accountable Plan. (i.e.) car allowance, office supplies.

What qualifies as an Accountable Plan for ministry-related expenses?
The church's reimbursement or allowance arrangement must meet all three of the following rules:

1. Expenses must have a business connection; expenses were paid or incurred while performing ministry services.
2. Adequate accounting to the church for expenses with documentary evidence, such as an accounting book, diary, or equivalent to verify the amount, time, place and professional purpose of each expense; and
3. Excess reimbursement not spent on ministry-related expenses must be returned to the church.

* Expenses must be substantiated within 60 days after expenses are paid or incurred and any excess reimbursement must be returned to the church within 120 days after the expenses are paid or incurred.

Can this Accountable Plan be funded through salary reduction?
No. Reimbursement for ministry-related expenses must be over and above the salary paid the minister. (IRS Pub 917, Pub 463).

Download Young's presentation on Church Tax Accounting and Minister Tax issues (.pps) (Minister Tax issues are the second half of the presentation.)

This take a few minutes to download on a broadband connection. The PowerPoint show comes up in your browser and you change slides with a click of the mouse or a page down, or down arrow on the keyboard. Note: You should not need any additional software to view these presentations.

For answers to additional accounting or tax questions, please contact Young Bae, CFO/VP Administration & Finance