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Director of Finance and Administration Director of Finance and Administration

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Director of Finance and Administration - PPT Presentation

UNITED METHODIST CLERGY Special ANSWERS TO 3 KEY QUESTIONS 1 CLERGY PAY WHAT INCOME TAX Governed by Internal Revenue Code Internal Revenue Regulations Revenue Rulings US Court Decision ID: 624929

income tax paid clergy tax income clergy paid seca 000 pay housing church employees employee local churches exempt conference

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Slide1

Director of Finance and AdministrationSlide2

UNITED METHODIST CLERGY

SpecialSlide3

ANSWERS TO 3 KEY QUESTIONSSlide4

1. CLERGY

PAY WHAT?Slide5

INCOME TAX

Governed

by:

Internal

Revenue

Code

Internal

Revenue

Regulations

Revenue Rulings

U.S

. Court DecisionSlide6

SOCIAL SECURITY AND MEDICARE TAXESSlide7

PAYROLL TAX

Governed by either:

Self

Employment Contributions Act (SECA)

Federal

Insurance Contributions Act (

FICA)

These

taxes fund Social Security and Medicare. Slide8

PAYROLL TAX

The tax rate for Social Security and Medicare is 15.3% of Wages/Income

.

In

FICA

½

is paid by the employer (7.65

%)

½

is withheld from employee paychecks (7.65

%)

Key

Point: The Employer Pays FICA.Slide9

BUT

A self-employed individual pays under SECA and is responsible for paying the entire share.

WHY?

They employ themselves.Slide10

AS CLERGY WE PAY WHICH ONE?

Most people with an employer pay

FICA …

But clergy are

special

so …

CLERGY PAY SECA!Slide11

2. CLERGY

WORK FOR WHO?Slide12

Conference, bishop

or local church?

Conference board of

pensions? Slide13

THE LOCAL CHURCH

At least as far as income tax is concernedSlide14

3. EMPLOYMENT

STATUS?

Seriously? What does that mean?Slide15

REMEMBER

Clergy are treated as employees of the salary paying unit.Slide16

That was for

purposes of income tax.Slide17

BUT, REMEMBER, CLERGY ARE

SPECIAL

CLERGY ARE ALSO RESPONSIBLE FOR SECA.Slide18

WHY?Slide19

Churches don’t know squat about tax and finance.Slide20

Congress made clergy

self-employed for

purposes of SECA.

Easy, right?Slide21

NOPE.Slide22

SECA

Most people who pay SECA have a particular employment

status

They aren’t “employees” at

all

They are “independent

contractors”

That means they aren’t “employees” of who/whatever is paying themSlide23

SO WHAT?

When someone is an “independent contractor,” the “employer” will issue a tax form called a

1099

which will list the amounts paid during the course of the preceding year.

They do NOT get a W-2

.Slide24

SO, CLERGY GET A 1099, RIGHT?

REMEMBER, WE’RE

SPECIAL

WRONG!Slide25

CLERGY GET A W-2

Despite paying SECA,

clergy

are “employees” for

income

tax purposes Slide26

CLERGY THUS …

Receive benefits through the administration of the conference

Supervised by their bishop

are

employed by the local church for purposes of income tax.

BUT

Clergy

are self-employed for purposes of Social Security and

Medicare

meaning

they pay SECA, which is paid by them individually by April 15 and filed as a schedule SE with the rest of his or her tax return.

BUT

As employees

of local churches they are issued a W-2 by January 31 of each year, reflecting the wages paid by the local church with notes for tax-deferred pension and housing (we’ll get there later).

BUT

Slide27

CHURCHES SHOULD NOTSlide28

CHURCHES SHOULD NOT …

Give clergy a 1099 reflecting their salary support; or

Withhold

and pay FICA from and on

behalf of clergy

Elder

Deacon

Licensed Local

PastorSlide29

CHURCHES SHOULDSlide30

CHURCHES SHOULD …

Give

clergy a W-2 reflecting the cash support paid during the year

Show - 0 -

in the boxes for Social Security and Medicare Wages

Reflect

amounts paid before income tax in the Notes section of the W-2 to make SECA reporting easier for the clergySlide31

INCOME TAX

BASICS

In case you’ve never had it explainedSlide32

INCOME TAXSlide33

TAXABLE INCOMESlide34

Getting there is a

4

step process that includes a ton of smaller steps on form 1040.Slide35

GROSS INCOME

Box 1 of

W-2 Any

other income

(

excluding housing)

+Slide36

STEP 1

From Gross Income you subtract certain “above the line deductions.”Slide37

STEP 1

Health Savings Account Deductions (if you have

one)

Unreimbursed

Moving

Expenses

Self

Employment

tax

Contributions

to

IRAs

not PIP — before

tax contributions never even get reported as gross

income

Student loan

interestTuition

Gross Income

-Slide38

ADJUSTED GROSS INCOME (AGI)Slide39

STEP 2

Standard Deduction OR “Itemized Deductions”Slide40

STANDARD DEDUCTIONS 2016

SINGLE INDIVIDUALS

$6,300

$6,350

IN 2017

HEAD OF HOUSEHOLD

$9,300

$9,350 IN 2017

MARRIED FILING JOINTLY

$12,600

$12,700 IN 2017Slide41

STEP 2

Mortgage Interest (Primary

Residence

Only)

State and Local Income Tax

Property Tax

Medical and Dental Expenses (as long as they

exceed

7.5% of AGI

)

Charitable Contributions

Unreimbursed Business/Professional Expenses

(as

long as they exceed 2% of AGI)Slide42

STEP 2

Taxpayers choose standard or itemized deductions based on which one is larger.

For example, if Pastor Jane, a single taxpayer, gave $10,000 to the church she serves last year, she will definitely be itemizing

deductions. Why?

$10,000 is more than $

6,300

.Slide43

STEP 3

Tax is calculated based

on taxable income.Slide44

TAX BRACKETS

MARRIED FILING JOINTLY

INCOME BRACKET

$0 - $18,450

10%

$18,450 - $74,900

15%

$74,9000 - $151,200

25%

$151,200 - $230,450

28%

$230,450 - $411,500

30%

Top Bracket

39.6%

INDIVIDUAL

INCOME BRACKET

$0 - $9,225

10%

$9,225 - $37,450

15%

$37,450 - $90,750

25%

$90,750 - $189,300

28%

$189,300 - $411,500

30%

Top Bracket

39.6%

These will adjust slightly in 2017.Slide45

STEP 4

That amount is then reduced by any “

credits.”Slide46

BIGGEST CREDIT:

Previously paid or

withheld tax.

(Not

really a credit at all

)Slide47

CHILD TAX CREDIT – IF YOU HAVE KIDS:

$1,000 per child (under 17)

Phases out for taxpayers with AGI over $75,000 for individuals or $110,000

for

married filing

jointlySlide48

EARNED INCOME TAX CREDIT

Must have children and sufficiently low AGI earned income from work. Slide49

HOUSINGSlide50

HOUSING

At least as of today, compensation (cash or in-kind) paid to clergy in the form of “housing” is exempt from

INCOME

TAX

.

This is due to an old section of the Internal Revenue Code, and it

HAS

been and will probably continue to be challenged on grounds of the Establishment Clause of the 1st Amendment of the US Constitution

(26

U.S.C. sec.

107)

That same compensation

MUST

be reported and

IS

subject to SECA. Slide51

WHAT IS HOUSING?

Parsonages

Housing allowances

Amounts

paid for

utilities

A

mounts

paid for “

furnishings”Slide52

SO …

WHAT DOES THIS MEAN?Slide53

THIS IS ACTUALLY A BENEFIT

Something to remember:

(Even

if SECA

hurts)Slide54

WHAT’S THE RULE?

Clergy can exempt from

INCOME TAX

(not SECA) any compensation (in-kind or cash) paid for housing

including

Rent

M

ortgage payments

Utilities

F

urnishings

or other expenses related to

housingSlide55

BUT, THE AMOUNT THAT MAY BE EXEMPTED IS LIMITED TO:

The amount set by the congregation in a charge

conference

W

ill

need some form of housing resolution that states what housing is provided and how much the church intends to pay as ‘housing

The fair rental value of the pastor’s home fully furnished with utilities paid; and

The amount the pastor can actually substantiate with

receiptsSlide56

CASE #1

After

housing and taxes, what $ did he have available for the rest of living?

Factory Worker Jack was paid $45,000 in wages in 2015.

He rents an apartment for $500 a month in the small town of Missouri in which he works.

His

utilities (electric, gas, internet, home phone and basic cable) totaled $4,000 exactly. Slide57

CASE #1

STANDARD

DEDUCTION

$6,300

$38,700 of Taxable Income

TAX

BRACKET

25%

FICA

7.65% of wages

INCOME TAX OWED

$5,470*

FICA WITHELD

$3,442.50

HOUSING PAID

$6,000+$4,000=$10,000

WHAT’S LEFT?

$

45,000

-

$5,470

-

$3,442

-

$10,000

$

26,088

*Will be even less with above the line deductionsSlide58

CASE #2

Pastor Jack get’s the Conference minimum for an Elder: $35,000.

He also is provided a parsonage with utilities paid by the local church he serves.

After housing and taxes, what $ did he have left?

The fair rental value of the parsonage is approximately $6,000 annually, and his utilities were also $4,000. Slide59

CASE #2

STANDARD

DEDUCTION

$6,300

$28,700 of Taxable Income

TAX

BRACKET

15%

SECA

15.3% of gross

INCOME TAX OWED

$3,844*

SECA OWED

$6,885

HOUSING PAID

$0.00

WHAT’S LEFT?

$

3

5,000

-

$3,884

-

$6,885

$24,271

*Will be less because Self-Employment tax is an above the line deduction. Slide60

HOW TO PREPARE

There are only 2 options.Slide61

PREMIUM VERSION OF SOFTWARE

I know

it’s

expensive, but

it’s

cheaper than a preparer.

Just

be able to understand your forms and your status as an employee that happens to be self-employed in religious employment as a minister.Slide62

TAX PREPARER

The safest bet (not that we

bet),

BUT

you will have to tell them:

I am an employee of XYZ UMC, but the IRS treats me as self-employed for purposes of SECA only.

I

get a W-2.”

You

will also need to instruct them on anything like utilities, “furnishings allowances” or “additional amounts exempted for the purpose of housing.” Slide63

PROFESSIONAL EXPENSES

26 USC sec. 162 allows employees to deduct unreimbursed expenses incurred in

business

The deduction is “itemized,” and the amount must exceed 2% of Adjusted Gross IncomeSlide64

ACCOUNTABLE REIMBURSEMENT

Church must adopt an accountable reimbursement policy (charge conference form in Missouri

)

Clergy

will then account for expenses to the local church,

NOT

the IRS and reimbursements are

NOT

considered income (not taxed

)

BUSINESS

RELATED

(No personal use

)

Key

rule:

ADEQUATE ACCOUNTING

Itemized receipts

Mileage logs (beginning reading/end reading)Slide65

MILEAGE

Rate of reimbursement for business-travel: $.

535/mile

No commuting miles (home office exception

)

Alternative: Actual

costs (reimbursing clergy for gas)Slide66

FILING STATUS

Single

Married Filing

Jointly

Head of Household

Designed for single people caring for disabled children or relatives

Married Filing SeparateSlide67

MARRIED FILING SEPARATELY

Not typical

, but it can reduce tax liability for some couples who both work and make about the same amount.

Might

also be needed in circumstances of a divorce or estranged couple

.

Can also protect a spouse from the other’s tax liability. This is sometimes an issue in the midst of a divorce

.

HOWEVER

, couples filing separately lose the child tax credit, deduction for IRA contributions and other tax breaks. Slide68

www.nateberneking.comSlide69

QUESTIONSSlide70

PAYROLL

Clergy

No withholding unless W-4 Voluntary

Paid with Quarterly Payroll Taxes on Form 941

SECA Savings

Accounts

Part-Time (time reporting v. salary)

Based on Conference RulesSlide71

PAYROLL

Lay

Employer like any other employer subject to all laws EXCEPT unemployment insurance.

FICA + Medicare

= 7.65

%

Wage base limits on SS

Paid Time Off (Pastor’s may be a

ffected

by Conference Rules)Slide72

W-2Slide73

INDEPENDENT CONTRACTOR OR EMPLOYEE?

Determines whether the church gives a W-2 or

1099

Independent Contractor v.

Employee

Behavioral Factors

Who controls schedule?

Who supervises?

Who provides the tools

?

Financial Factors

How is compensation paid?

How are the worker’s finances managed?Slide74

INDEPENDENT CONTRACTOR OR EMPLOYEE?

Relationship Factors

Is there a written contract? What does it say?

Is the work done by an individual or a corporate entity?

How is compensation structured and what benefits are given?Slide75

FAIR LABOR

STANDARDS ACT

Governs wage and hour

practices:

Minimum

Wage

Overtime

RulesSlide76

COMPLICATIONS

In May 2016, the Department of Labor issued new regulations for employers governed by the Fair Labor Standards Act (FLSA).

Then a Federal Court set aside the new regulations

.

Then … the

election.Slide77

FAIR LABOR STANDARDS ACT

Under the old/current regulations, many employers used several different exemptions to avoid paying overtime rates to employees.

Without knowing it, churches often excluded employees that should

NOT

have been.

The new regulations were meant to include more people in the requirement, requiring more employers to pay overtime, thereby increasing the rate of pay.

Good or bad, it was/is a chance to reset.Slide78

AREN’T CHURCHES EXEMPT?

NO!

“Enterprise” and “Intra-State Commerce” Exemptions likely will not apply. Slide79

FIRST, WHO IS COVERED BY FLSA?

Everyone

. Unless the FLSA or Federal Courts say it doesn’t apply to some group. The FLSA itself provides five exemptions:

Professionals

Administrative Employees

Computer

Outside Sales

ExecutiveSlide80

EXEMPTIONS ARE DETERMINED BY:

Job Description

Education Requirements

Actual Compliance

Titles and Descriptions Are

NOT

EnoughSlide81

EXEMPTIONS ALSO REQUIRE A CERTAIN SALARY:

Until

May 2016, the rate of pay was about $23,660 annually. Employees paid less than that in a year still required overtime, even if they were a professional or met the definition of an administrative employee.

The new regulations raised the threshold for salary from $23,660 to $43,476. Slide82

THE REGULATIONS REQUIRE PAPERWORK BY THE EMPLOYER

Tracking of hours

Increased pay for employees who qualify and who work overtime.

Or, it might mean the employee works fewer hours because the employer prefers not to pay the overtime rate. Slide83

BUT,

AREN’T

CHURCHES EXEMPT?

NO!

The two exemptions that work for employers are probably

NOT

going to apply. The only other exemptions apply to individual employees. Slide84

AREN’T PASTORS EXEMPT?

Probably.

ONLY

probably.

No statutory

exemption

However, one Federal Court stated that First Amendment provided a “ministerial exemption.” Slide85

AREN’T PASTORS EXEMPT?

Most full time pastors will qualify under the “professional exemption.”

Minimum

compensation requirements for

full-time

licensed, ordained and commissioned clergy set pay above the threshold

.

Part-time clergy, however, often fall below the thresholds (new or old).

We are going to

ASSUME

a ministerial

exemption

applies until we are told clearly it doesn’t. Slide86

WHAT ABOUT OTHER CHURCH EMPLOYEES?

The FLSA has no definite exemption that covers them.

Employees doing the work of a “pastor” are

PROBABLY

exempt

IF

they have education and ministerial job (i.e. youth pastor).

Others might qualify as “professionals” or “administrative employees,” but remember, they now must make at least $23,660. Slide87

CAN’T WE JUST PAY

A SALARY AND BE SAFE?

The amount of salary is

irrelevant

without a clearly defined exemption.

Employees

must be professional, administrative and be paid enough.

Clergy

might be exempt entirely, but anyone else is going to have to be paid sufficiently with hours recorded. Slide88

WHAT IF WE DON’T COMPLY?

There is no criminal

penalty.

If

an employer fails to comply, an employee is entitled to record his or her own time and pursue the church in federal court for back-pay with interest and penalties. Slide89

GCFA CAN HELP YOU

Offering a review of job descriptions and related positions to determine if exempt

.

The cost for this service is $60 per review. 

It can be accessed through the Conference Treasurer or GCFA www.umc.org/gcfa.Slide90

SEGREGATION OF DUTIES

Excuses

We’re a small church

But, we’re like a family

Protecting each other from temptation

Money Counting

Depositing

Check writing/

approving

≠Slide91

LEGAL ISSUES

Employee Handbook (never older than 5 years old)

Volunteer Handbooks

Lines of AuthoritySlide92

LEGAL ISSUES

Safe Sanctuary and Background Checks

Building Use

Schedules

Indemnification & Insurance

Church Contracts

Indemnification & Insurance

Term and Renewal (the curse of copier leases)

CostSlide93

www.nateberneking.comSlide94

SOCIAL MEDIA

@

NateBerneking

Nate Berneking

Facebook.com/

RevNateBernekingSlide95