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
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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