Faith-Based Accounting

YA MEAN I GOTTA DEAL WITH THE I.R.S.?

That’s right!  Even though churches normally do not have to file a tax return (most nonprofits have to file an informational return annually – IRS form 990), there is certain information that you must collect and provide to the IRS.  And I’m not talking about payroll tax information – 941 and W-2 forms.

If you pay at least $600 in a calendar year for the services of non-employees (and they are not corporations), you must get them to complete form W-9 (provides tax reporting information to you) and you must issue them an IRS form 1099-MISC.

 And if the church operates a preschool or private school that is not separately incorporated, you must file IRS form 5578.  This is a statement about racial non-discrimination.

 And if your church has “unrelated business income” of over $1,000 before deducting related expenses, you must file and IRS form 990-T.  Again, I’m not talking about net income of over $1,000; I’m talking about gross receipts of that amount.  And you could possibly have to pay income tax!  But that’s the subject of a whole new blog entry!

For more information, go to the IRS website – www.irs.gov.  Or even better, contact us at www.pskcpa.com.

 

 --Dan Williams, CPA, Church and Ministry partner at PSK LLP.

Be Thankful Even for Taxes

I have a friend who has reminded me to be thankful for annoying things such as the red light I am stopped at, because I am privileged enough to live in a country that has roads, and orderly ones at that. This same attitude can be applied to taxes—thankfulness for them and for the ability to pay them.

I wanted to start with this thought, because none of us like taxes. But we can be thankful for them, and also take care to report them properly. As additional incentive for excellence in this area, did you know that if payroll taxes are not withheld and paid to the IRS, the Church’s Board of Directors and employees may be personally liable? Some thoughts on ensuring your Church is addressing taxes appropriately:

Who performs the Church’s payroll? Even If the Church is fortunate enough to use an outside payroll service provider, it is still important that the Business Administrator ensure that the following are occurring:

• For all non-minister employees, the Church correctly withheld and paid the employees’ share of FICA taxes.
• IRS form 941 was filed for each quarter of the calendar year.
• The totals from the four quarterly 941 forms agreed with the totals on IRS form W-3, which is prepared at year end and filed with the IRS along with employee W-2s by February 28 each year.
•  Timely deposits of payroll taxes are made to the IRS. Required deposits vary. Generally, deposits may be made quarterly if total quarterly payroll taxes are $2,500 or less. Otherwise, deposits must be made monthly, or even more frequently for very large organizations.
• W-2 forms are provided to all employees (including ministers) by January 31.

How about your Church? Do you know for certain that payroll taxes are calculated, withheld, and remitted to the IRS correctly and in a timely manner?

 

--Justin Baldwin, CPA is a Senior Auditor specializing in church accounting with PSK LLP.

Health Care Bill Provides Money For Small Churches

Does your church have 25 or fewer full time employees?  If so, the government wants to give you some money.  The recently passed health care bill included a tax credit for small businesses that provide health insurance for their employees.  Although churches do not typically file income tax returns, they are still eligible for the tax credit.

You are correct, there is a catch!  There are three primary factors that would qualify your church:

• The church must pay for a portion of its employees’ health insurance
• The church must have less than 25 full-time employees
• The average wage of a full-time church employee must be below $50,000

If your church meets the criteria above, the church could be reimbursed up to 25% of the health insurance costs that were paid by the church.

As of now, the credit is good for 2010 to 2013 and then the maximum rate increases to 35% (good news).  This could be money in your church's pocket!  Let PSK assist you in determining if your church qualifies for the health care tax credit.

2 Tips Related to Employee Allowances

Some churches give pastors (or other employees) monthly expense allowances in their paycheck. The allowances provide a way to advance cash to employees so that they can purchase items needed for the church or to carry out their role within the church.  There are two important things to keep in mind if your church does this. 

1.  The church needs to be aware that the expenses must be substantiated under an accountable plan, the same way a reimbursement would.  Among other things, proper substantiation includes a receipt as well as a documented business purpose. Otherwise, the allowance is taxable income.

2.  Further, some churches will allow the employee to keep the portion of the allowance that wasn't used and call it a "bonus". Taking this action would not only cause the "bonus" to be taxable income, but would also cause the entire allowance to be taxable (even the portion that was properly substantiated). This is not recommended and can cause church employees heartache come tax time.

Expense allowances are one of many ways to allow pastors to purchase items for the church.  Purchase orders, expense reimbursements and credit cards are a few others.  Each have their own advantages and pitfalls.  Which methods work well for your church?

Is Your Church Exposed?

David Middlebrook, partner with the Church Law Group, recently spoke at our monthly church breakfast on the topic of intellectual property.  He made some very interesting comments regarding employment agreements.  Here are a few things that I learned.

Employment agreements within churches are frequently overlooked, but are one of the least expensive measures a church can adopt to help protect itself. Although churches are subject to the higher calling and authority of the Scriptures, churches must still comply with and are subject to the worldly laws that preside over them. Employment agreements allow churches to hire with confidence, and terminate with less fear of legal repercussions. As part of the human resources process, all church employees should be under an employment agreement. In addition to matters included in a standard employment agreement, such as those common in for-profit entities, a church’s employment agreement should include:

1. A statement expressing that the church is a religious employer.
2. Guidelines for the required Christian code of conduct for employment (for example, specific behaviors that the church considers acceptable and unacceptable). The church may reference the Bible as a general guide for defining acceptable behavior.
3. A statement outlining the conditions of employment:
   1. Statement covering intellectual properties – absent a written agreement to the contrary, all works made for hire belong to the church.
   2. Statement mentioning that in the event of any dispute over employment, the church has the right to take the employee to Christian arbitration/mediation/dispute resolution. Additionally, the statement may mention that the employer will pay its portion of the fees and the employee will be responsible for his or her portion of the fees.
4. A confidentiality statement that outlines the expectations the church has for its employees.

PSK frequently consults with the Church Law Group in this area.  The Church Law Group specializes in legal matters for churches and nonprofit organizations, and can provide additional information regarding employment agreements.  

New Changes in Payroll Taxes

The Tax Relief, Unemployement Insurance Reauthorization & Job Creation Act that was signed into Law in December 2010 has made changes to the way you calculate your social security deductions on your employee paychecks for 2011.

Social Security tax rates will be reduced by two percentage points. The employee-portion of Social Security taxes will be reduced from the current 6.2% to a temporary rate of 4.2% for 2011 only. The employer-portion remains the same at 6.2%; and the Social Security wage base remains the same at $106,800 for 2011. Medicare tax rates are not changed: remaining at 1.45% each for employees and employers. Freelancers, farmers and other self-employed persons will see a corresponding reduction in their self-employment tax. The total 15.3% self-employment tax rate is temporarily reduced for 2011 to 13.3%. Self-employed persons will still be able to deduct the full amount of the employer's portion as an adjustment to income.

You have until January 31, 2011 to make sure you are calculating your employee deductions correctly and until March 31, 2011 to correct any payroll in January that might have been calculated using the old 6.2% deduction rate.

Please give us a call if you have any questions.

Pastor Coaching: A Remedy for Cloudy Vision

So you captured God's vision and executed your ministry plans, but now you feel like the chasing dog that caught the car! Lots of new believers, but now dealing with inadequate facilities...small group leaders a little crisp around the edges...budget constraints...

Is your vision getting cloudy?  We know a solution.

Through the leadership of Partners in Church Consulting, PSK (a proud member of the PCC Network) is excited to announce the unveiling of the PCC Coaching Network.  You can have access to Pastor Coaching from some of the nation's most innovative ministry leaders.

Check out the roster of coaches today:  pcccoachingnetwork.com

 

Making Work Pay Credit and Your Employees

The IRS has issued the 2009 version of IRS Publication 919, How Do I Adjust My Tax Withholding? as a result of the "Making Work Pay" credit in the American Recovery and Reinvestment Act of 2009 (ARRA).

Employees can use this publication to help them determine if their federal income tax withholding is sufficient, and, if necessary, prepare a new Form W-4 to adjust their withholding. The publication includes worksheets for projecting 2009 tax, withholding, and deductions. For 2009, a new worksheet (Worksheet 12) has been added on the "Making Work Pay" credit.The amount of the "Making Work Pay" credit is $400 (unless the person makes under $6,450; then it’s 6,2% of compensation).  Because the credit is refundable (people can get it even if they owe no tax), most low-income workers will also qualify for the full credit.  The credit is phased out for a married couple filing a joint return whose modified adjusted gross income (AGI) is between $150,000 and $190,000, and for other taxpayers whose modified AGI is between $75,000 and $95,000.

It is a good idea to look at Publication 15T and print out the employee notice (on page 73 of the publication) that you should provide to your employees explaining the changes.  Some employees are beginning to discover after filing their 2008 personal income tax returns that they didn't have enough money withheld from their paychecks.  Employees may really feel the shortfall in 2009 with the changes in the withholding rates.

Meetings and Training Policy

Churches and schools often have annual meetings or retreats that employees must attend.  A source of irritation for employees can be the issue of pay -- or no pay -- for time spent attending meetings and training sessions.

Tell employees they have to attend a meeting or training program, and the employees may raise questions like these:

• Is attendance mandatory, or can we skip it?
  
  
• If we show up, do we get paid?
  
  
• If we don’t get paid for the time at the meeting or training, why do we have to attend?

Church leadership can lessen, and even end, the irritation employees experience, and avoid having to deal with questions like those above by adopting a clear policy on the topic.

Address the following in this policy:

1. How often do you have employee meetings?  For example: once a year...once a month...every other month.
   
   
2. Is employee attendance requested or mandatory?  This is especially important if meetings are held when all employees aren’t on-duty but are required to come into work to attend the meeting.
   
   Warning: Keep in mind that if you require off-duty employees to attend meetings... you must pay them for that time, if they are non-exempt employees.  Under the Fair Labor Standards Act, employers must pay employees for attending meetings: (1) if their attendance is mandatory and (2) the meeting serves to benefit the employer.  If meetings are strictly voluntary and outside of working hours, you may not be required to pay employees.  Get information on the Fair Labor Standards Act from the U.S. Department of Labor’s “ELAWS” website –
   http://www.dol.gov/elaws/flsa.htm
   
   
3. Be sure and mention where the meetings are usually held, what time they are held and what type of topics will be discussed.

Here’s some wording to consider in a meetings policy: "The Company holds monthly employee meetings.  These meetings are usually held at 4 p.m. in the staff lounge.  All employees are required to attend.  Off-duty personnel are required to punch-in at the start of the meeting and punch-out at the end of the meeting.  You will be paid your regular rate of pay for your attendance at these meetings."

NOTE: We’re not lawyers or spokespersons for the government!  We do try to provide accurate and helpful information.  But this is not intended to provide a legal service for your individual needs.  For legal guidance in your specific situations, always consult with an attorney who is familiar with employment law and labor issues.  Our friends at the Church Law Group would be happy to assist with legal guidance - www.churchlawgroup.com.  That having been said, we can offer you a sample policy on the meetings and training topic – www.pskcpa.com.

Need to Terminate an Employee? Document!

Unfortunately, there are lots of good reasons for terminating an employee. But be aware! What may appear to be an ironclad reason for dismissal still needs to be approached and executed with good planning. And the keys to your plan are documentation and communication.

When an incident occurs, make your written record of the incident as soon as possible. Keep your documentation to an accurate accounting of the job-related facts. Be specific and clear about the reason for dismissal.

This documentation will serve two important purposes: It is a record for the employee’s file. And it will be a key source of any written communication to the employee about the reason for the termination.

Communicating the specific reasons for dismissal to the employee makes it more difficult for the employee to later allege other discriminatory causes for the termination. (Example: If the discharged employee is a member of a legally protected group, you will need to be concerned that the employee may later claim discrimination as your real reason for discharge. Leaving the grounds for discharge vague and general runs the risk that a court will fail to see evidence that your decisions and actions were fair.)

Human resource professionals generally agree that proper documentation is essential and will work for you in defense of an unjust claim.

Now, to get even more specific. An employer’s specific documentation needs to begin long before the moment of termination, in most instances of a firing. The employer who wants the strongest possible defense against a potential charge of illegal discrimination or wrongful discharge will have written documentation of each significant incident and action leading up to a termination.

Especially helpful to an employer’s defense are written documents--such as warnings to the employee and performance reviews--that show the employer informed the employee of specific unacceptable behavior or performance... informed the employee of the required behavior or performance... and informed the employee of the consequences if the employee’s behavior does not change or performance does not improve.

Remember - these blog thoughts are meant to be accurate and helpful.  BUT, I am not an attorney!  For legal guidance regarding your specific situation, always consult with an attorney who is familiar with employment law and labor issues.  Don't know one?  Give us a call at PSK!

W-2's for Ministers

As part of your year-end payroll processing tasks, you might have a question or two about reporting minister's earnings and allowances on Form W-2.  Maybe, you just need a refresher.  Here are the general topics that we receive questions about.

Salary - Salary paid to minister is reported in Box 1.

Federal Withholding - May or may not be zero.  Ministers are exempt from withholding requirements but may elect to have withholding.   Enter the amount withheld.

Social Security, Social Security Withheld, Medicare, and Medicare Withheld - Ministers are considered self-employed for purposes of Social Security and Medicare taxes so these boxes are blank.

Housing & Utility Allowances - Should be reported in Box 14.  Remember that housing and utility allowances should be officially designated by the church in advance. 

All other boxes on the W-2 are generally the same for ministers and non-minister employees.

The IRS has an example of a Minister's Form W-2 in its Publication for Clergy and Religious Workers.  See it at ...

http://www.irs.gov/pub/irs-pdf/p517.pdf

Also, there is a good IRS Publication for Churches and Religious Organizations that cover a variety of tax issues.  Check it out at ...

http://www.irs.gov/pub/irs-pdf/p1828.pdf

Employees Performing Contract Services

Typically an employee of the church would not perform contract services.  Therefore all income should be reported on the employee's W2 as opposed to a 1099.  However, there is an exception if the employee is in a "transition" year.  This occurs when an employee retires from the church and subsequently performs contract services in the same calendar year. 

For example, an executive pastor retires from the church in June of 2008.  During July through December of 2008 the retired pastor performs several speaking engagements for the church for a fee.  In this situation the retired pastor would receive a W2 for their compensation from January to June and also a 1099-misc for the fees received for their speaking engagements performed from July to December.  Box 7 of the 1099-misc would be checked for speaking engagements.

In this situation it is still imperative that the church apply the employee vs. contractor tests in order to make sure that the retired pastor is in fact acting as a contractor and not an employee.

W-2's - Are You Ready For Year End?

It is getting to be that time of year to prepare for your year-end payroll processing.  Have you ever been a lucky recipient of a letter from the Social Security Administration stating that you have reported incorrect names or social security numbers on your W-2's?  Do you have a process in place to ensure you don't receive this letter? 

Here is a link to a list of good business practices to ensuring your are issuing correct W-2's.  http://www.ssa.gov/employer/critical.htm.

Stay tuned... my next blog post is on reporting minister wages.