«Prepared by Richard R. Hammar, J.D., LL.M., CPA Publish date: January 30, 2015 Revised as of February 10, 2015 Editors: The Reverend Canon William F. ...»
For Episcopal Churches
Richard R. Hammar, J.D., LL.M., CPA
Publish date: January 30, 2015
Revised as of February 10, 2015
The Reverend Canon William F. Geisler, CPA
Nancy N. Fritschner, CPA
• Page 38: Box 12w: Employer contributions (including an employee’s
contributions through an Internal Revenue Code section 125 cafeteria
plan) to Health Savings Account (HSA) [February 10, 2015] Mary Kate Wold CEO and President 19 East 34th Street New York, NY 10016 (800) 223-6602 Dear Treasurers, Wardens, and Administrators, In keeping with The Church Pension Fund’s ongoing commitment to conserving our natural and financial resources, this year the 2015 Federal Reporting Requirements for Episcopal Churches is being offered exclusively as an online booklet.
The 2015 Clergy Tax Guide also is being disseminated online.
To access that document, please go to www.cpg.org/taxpubs and click the “Active Clergy” or “Retired Clergy” options.
Faithfully, Mary Kate Wold CEO and President Table of Contents Introduction
Small Employer Health Care Tax Credit.................. 2 Maximizing Tax Benefits for Your Minister............ 2 Special notes for new clergy
Special notes for churches hiring those receiving pensions
Sample housing allowance resolution for minister who owns his/her home
Sample housing allowance resolution for minister in church-provided rectory................8 Accountable reimbursements
Medical Insurance Reimbursement Plan/ Employer Payment Plan — Section 106...............9 Mass transit benefits
Flexible spending accounts (FSA)
Health flexible spending accounts
Dependent care flexible spending accounts...... 12 Section 403(b) plans
Complying With Federal Payroll Tax
Step 1. Employer identification number (EIN)
Step 2. Employee or self-employed?.
................. 13 Step 3. Social Security number of each worker
Step 4. Complete a Form W-4
Step 5. Compute taxable wages
Step 6. Determine the amount of income tax to withhold
Step 7. Withhold Social Security and Medicare taxes from non-ordained employees’ wages.
..... 17 Step 8. Church must deposit the taxes it withholds
Step 9. Filing Form 941 quarterly
Step 10. Prepare a Form W-2
Step 11. Prepare Forms 1099-MISC
Other Important Requirements for Churches......... 29 Reporting group term life insurance
Reporting the value of health care coverage provided to non-dependent domestic partners and their children and adult children age 27 or older
New hire report
Annual certification of racial non-discrimination
New reporting requirements for 2015 calendar year: Employer-provided health insurance offer and coverage
Charitable contribution substantiation rules.......34 Sample Form W-2
Helpful Numbers and Resources
Introduction The most important federal reporting obligation for most churches is the withholding and reporting of employee income taxes and Social Security and Medicare taxes. These payroll reporting requirements apply, in whole or in part, to almost every church.
Note: The term “church” is used broadly throughout this publication and refers to actions taken by the vestry and/or the congregation, depending on the nature of the action.
Many of the reporting obligations covered in Federal Reporting Requirements for Episcopal Churches can be met by using a payroll services provider.
Warning Federal law specifies that any corporate officer, director, or employee who is responsible for withholding taxes and paying them to the government may be liable for a penalty in the amount of 100% of such taxes if they are either not withheld or not remitted to the government.
This penalty is of special relevance to church leaders, given the high rate of non-compliance by churches with payroll reporting procedures.
A number of special rules apply to churches:
1. A definition of “minister” for IRS tax purposes. Although all Christians are ministers, theologically speaking, for tax purposes the IRS designation of “minister” applies in The Episcopal Church exclusively to ordained ministers — bishops, priests, and deacons.
2. Ministers are always self-employed for Social Security and Medicare tax purposes with respect to their church compensation.
While most ministers are employees for federal income tax reporting purposes, they are self-employed for Social Security and Medicare tax with respect to their church compensation. This means that they pay the “self-employment tax” (SECA) rather than the employee’s share of Social Security and Medicare taxes. As such, it is incorrect for churches to withhold the employee’s share of Social Security and Medicare taxes from their wages.
3. A minister’s wages are exempt from compulsory income tax withholding, whether the minister reports his/her income taxes as an employee or as self-employed. Ministers may enter into a voluntary withholding agreement with their employing church.
4. Because of liabilities attached to vestries and rectors, consider using a professional payroll service. A payroll service makes tax payments, files tax reports, and produces all year-end paperwork.
1 The 2015 Federal Reporting Requirements for Episcopal Churches Using a payroll service places responsibility on a third party, guarantees your employees are paid on time, and relieves the treasurer of producing W-2 Forms, 1099 Forms, and end-of-year tax reconciliations.
Small Employer Health Care Tax Credit The Affordable Care Act created the Small Employer Health Care Tax Credit to encourage small employers to continue to offer healthcare coverage to their employees. The credit was first effective for the 2010 tax year, and will continue through the 2016 tax year, although beginning in 2014, only employers who purchase coverage through the Small Business Health Options Program (SHOP) will be eligible.
Under the current state of the Affordable Care Act, Episcopal employers participating in The Episcopal Church Medical Trust (Medical Trust) plans will not be eligible to claim the Small Employer Health Care Tax Credit for 2014, 2015, and 2016 because the credit is only available to those employers that purchase coverage through the SHOP.
In summary, a small church employer may receive a refundable credit of up to 25% (increasing to 35% for 2014 through 2016) of the employer contributions towards health insurance, limited to the amount of certain payroll taxes paid and the average premium in the small group market in the state. The employer must have fewer than 25 full-time equivalent employees, have average wages of less than $50,000 (not including clergy wages), and pay premiums equal to a uniform percentage (but not less than 50%) of the healthcare premium for each employee enrolled in benefits.
The Medical Trust has posted memoranda on the CPG website each year to explain the Small Employer Health Care Tax Credit, and to describe who is eligible, and how to apply. Click here to view the 2013 tax year memorandum.
The memorandum for the 2014 tax year will be posted early in 2015.
In addition, click here to see more information from the Internal Revenue Service website about the Small Employer Health Care Tax Credit.
Maximizing Tax Benefits for Your Minister Special Notes for New Clergy
• When negotiating the contract for a new minister, make certain that a proper housing allowance resolution has been adopted by the vestry (or other governing body) before compensation is earned.
• Also when negotiating contracts, arrange for reimbursable expense plans for automobile and other necessary business expenses.
The 2015 Federal Reporting Requirements for Episcopal Churches
• Recommend that the minister begin saving for retirement through a Section 403(b) salary reduction plan as soon as possible.
• Discretionary funds are the property of the church. The minister must use them only for proper purposes and account to the church for such funds.
• Make certain the compensation details have been properly reported to The Church Pension Fund, and that regular payments are being made to The Church Pension Fund for required contributions to benefit plans.
• If you have questions, contact either of the following before taking action:
Nancy Fritschner (877) 305-1414 Bill Geisler (877) 305-1415 Special Notes for Churches Hiring Those Receiving Pensions
• The pension received by a minister from The Church Pension Fund Clergy Pension Plan (the “Clergy Pension Plan”) and distributions from The Episcopal Church Retirement Savings Plan (“RSVP”) sponsored by The Church Pension Fund are designated as housing allowance for federal income tax purposes. To the extent that these amounts were from contributions to the Clergy Pension Plan and the RSVP from earnings generated from ministerial services and are spent for qualified housing expenses for the minister’s primary residence, they may be excluded from taxation, subject to the housing allowance limitations.
• Earnings from ministerial services after retirement are also eligible for designation as housing allowance. If a minister’s Clergy Pension Plan benefits and withdrawals from an RSVP plan are enough to cover qualified housing costs, he/she should not request additional housing allowance designation for any compensation for ministerial services.
• Self-employment tax (SECA) is due on all currently earned income, even if the minister is retired and collecting Social Security. The cleric should include any currently earned housing allowance and/or the fair rental value of any church-provided housing. Failure by the cleric to include the proper value of such housing could result in additional tax liabilities, plus interest and penalties. If this income is not reported, the statute of limitations on assessing tax adjustments may not apply.
• Housing provided to ministers employed for a short time away from home (short time is generally considered to be a contract for one year or less) in some cases can be treated as a reimbursable business expense and will not be subject to income tax or self-employment tax (SECA). Contracts for an indefinite period, or a specific period of more than one year, would not qualify for such exclusion. Such arrangements could result in moving the minister’s “tax home” (primary residence).
3 The 2015 Federal Reporting Requirements for Episcopal Churches Be very careful about the wording of interim ministry contracts.
• Pensions are not earned income and therefore are not subject to selfemployment tax (SECA), except possibly retirement benefits paid from a non-qualified deferred compensation plan.
• Moving expenses are not deductible unless the minister is moving at least 50 miles to a new, full-time position. See Form 3903.
• If the minister is covered by Medicare and accepts a position that qualifies for employer-provided medical insurance, it is important that the minister talk with a Medicare representative. It is likely that Medicare would expect the employer’s insurance to become the minister’s primary coverage unless the minister is employed by an employer who qualifies for the Medicare Small Employer exception.
Likewise, when leaving such a position, it is again important that the minister contact Medicare to ensure proper coverage.
• Be aware of one important Clergy Pension Plan reporting requirement.
Some retired ministers who return to work may be considered to have “returned to active ministry” under the Clergy Pension Plan. To avoid such a determination, which will result in suspension of pension benefits and re-imposition of pension assessments, eligible retired ministers (those age 65 or older with 25 years of credited service) who work for The Episcopal Church after retirement will be required to receive the written permission of their “ecclesiastical authority” (usually their bishop). Their bishop (or ecclesiastical authority) must file a “Working While Pensioned” application, which must be approved by The Church Pension Fund prior to beginning the position. For more details, go to www.cpg.org and search for “Working While Pensioned.”
• The 2015 compensation limit for retired clergy is $36,500 for any 12-month period, including housing allowance (parish-provided housing does not count toward this limit). Note, however, that if a cleric returns to a position at the same organization from which he or she retired, he or she is required to apply for and receive a Working While Pensioned exception even if the compensation is below this compensation limit.
This compensation limit applies only until the cleric attains age 72.
• If you have questions, it is always better to call our tax line before taking action. (See tax line information on page 3.) 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, and thereby deprive the minister of an important tax benefit.
The 2015 Federal Reporting Requirements for Episcopal Churches A housing allowance is simply a portion of a minister’s compensation that is so designated in advance by the minister’s employing church. For example, in December of 2014 a church agrees to pay its minister “total compensation” of $45,000 for 2015, and, at the request of the minister, designates $15,000 of this amount as a housing allowance (the remaining $30,000 is salary). This “costs” the church nothing. It is simply a matter of designating part of a minister’s salary as “housing allowance.” The Internal Revenue Code (“Tax Code”) specifies that the housing allowance of ministers who own or rent their primary residence is nontaxable in computing federal income taxes to the extent that it is
1. Declared in advance
2. Used for qualified housing expenses