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?

990-N Filing Threshold Increased

Great news for the small nonprofits.  The filing threshold has finally increased from $25,000 in gross receipts to $50,000 in gross receipts for tax years ending on or after December 31, 2010.  This means if the nonprofit’s gross receipts are normally $50,000 or less you can file the simple 990-N e-postcard as opposed to the more detailed 990-EZ or 990 forms.  To read more about how to determine if you gross receipts are considered $50,000 or less, check out the IRS's website.

It is simple to file an 990-N.  Simply go to the IRS's website and follow the instructions.  The process takes less than 15 minutes.

The increase in the filing threshold for 990-N is part of the 2006 Pension Protection Act of 2006 which mandated most tax exempt organizations file an annual return.

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.

HEALTH CARE TAX CREDIT FOR SMALLER CHURCHES

Millions of small employers received postcards from the IRS last Spring that alerted them to the new small business health care tax credit and encouraged them to check their eligibility. Perhaps your church did not receive this notice because it does not file a tax return. Even if you didn’t receive a postcard, your church still may be eligible.

Eligibility Rules

• Providing health care coverage. A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.

• Church size. A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).

• Average annual wage. A qualifying employer must pay average annual wages below $50,000.

Amount of Credit

• Maximum Amount. The credit is worth up to 25 percent of a church’s premium costs in 2010. On Jan. 1, 2014, this rate increases to 35 percent.

• Phase-out. The credit phases out gradually for churches with average wages between $25,000 and $50,000 and for churches with the equivalent of between 10 and 25 full-time workers.

The church will use new Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the health care tax credit. It will then include the amount of the credit on Line 44f of revised Form 990-T, Exempt Organization Business Income Tax Return. Form 990-T (draft available for viewing) will be revised for the 2011 filing season to enable eligible tax-exempt organizations –– even those that owe no tax on unrelated business income –– to claim the health care tax credit.

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.  www.pskcpa.com.

Are you at risk of losing your tax exempt status?

Tax exempt organizations are required to file an annual return with the IRS.  If the organization fails to do so for three consecutive years, the exempt organization automatically loses its exempt status.  The IRS announced today one-time relief benefits for Form 990-N and Form 990-EZ filers that have failed to file for the previous three years.  

Please note that the relief does not include organizations that are required to file a Form 990.  To read more about this one time exemption, click here.  The IRS provided a list of organizations that are at risk of automatic revocation.  You can view the list here. 

If you need help with your annual filing requirements, please contact us.  We will walk you through the process and help you stay in compliance.

Failure to File Form 990 for 3 years = No longer tax exempt

As you may know, the IRS revamped the Form 990 a few years ago.  During this process a law was passed that requires an automatic revocation of tax exempt status for failure to file form 990, 990-EZ, 990-N or 990-PF for three consecutive years.  Did you get that?  You will lose your tax exempt status if you do not file your annual return three years in a row?  If you do lose your status, you have to start the application process again.  The IRS cannot reverse the revocation. 

So let's review the rules on who must file.  Most tax exempt organizations must file an annual return (except for these organizations).  Here are four types of returns - 990, 990-EZ, 990-N, and 990-PF.  The following thresholds are for the tax year 2009.  The 990 must be filed if the tax exempt organization has gross receipts equal to or greater than $500,000 OR total assets equal to or greater than $1.25 million.  The 990-EZ can be filed if the tax exempt organization has gross receipts equal to or less than $500,000 OR total assets equal to or less than $1.25 million.  The 990-N must be filed if the tax exempt organization has gross receipts equal to or less than $25,000.  Private foundations must file a 990-PF regardless of financial activity.

The 2010 tax year thresholds drop to $200,000 for gross receipts and $500,000 for total assets.  The 990-N threshold increases to gross receipts equal to or less than $50,000.  This can be confusing so I recommend you use the IRS charts.

Here is where this might affect you or someone you know.  The 990-N is a relatively new form and small organizations simply may not be aware of the new filing requirements.  Another example includes organizations with volunteer officers that rotate frequently.  It is important that all tax exempt organizations, regardless of size have a process in place to ensure annual compliance.  As you can see, annual compliance has become critical. 

You can find more information on the annual filing requirements here.  PSK is here to help.  Please call to schedule an appointment if you need help with your organization’s annual filings.

 

Do you want to comment on proposed IRS Cell Phone regulations?

Related to the last post on IRS & Cell Phones, I read the actual IRS Notice 2009-46.  The IRS is considering three possible approaches, and they will allow public comment through September 4, 2009.  Go here to see the details. What approach would you suggest?

IRS & Cell Phones

The IRS Commissioner released this statement last week regarding the taxability of employer provided cell phones.  There has been much confusion on this topic.  The current law requires that the employee keep records supporting business use and personal use of employer provided cell phones.  The employer is then required to include the value of personal use as wages. 

These requirements can easily become overwhelming and impractical in this culture.  It is good to see the IRS is agreeing that the rule is outdated and simplification is needed.  Now it is up to Congress to fix it. 

Exempt Organizations & Texas Taxes - Are you required to file?

State requirements for exempt organizations vary from state to state.  In Texas, a charitable organization can apply for exemption from sales tax paid on purchases and franchise tax.  The application can vary depending on the type of organization.  The exemption is granted based on the organization’s federal exemption. 

Click here for a link to the guidelines for exempt organizations published by the Texas Comptroller of Public Accounts.

It is important to note that exempt organizations must collect tax on most of their sales.  There are a variety of exceptions to this, so you really must research what you are selling.  The state has a publication to guide exempt organizations on this matter. 

One last piece of information I will leave with you is that you can search for exempt organizations registered with the state at the Comptroller’s website at this link.

Call us if you need help with your tax exempt organization’s state requirements.

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.

IRS releases Dirty Dozen Tax Schemes

... and charitable organizations make the 2008 list.

The IRS listed the misuse of charitable organizations as one of the 12 most egregious tax scams by taxpayers.  Abuse by donors who try to maintain control over donated assets or income from donated assets is just one example.  Taxpayers are also claiming overvalued property donations for a larger deduction.  Finally, taxpayers are disguising private tuition payments as contributions to charitable or religious organizations.

This information is good to keep in mind.  We all like to think that our donors have the best intentions but the IRS is saying that these scams are happening on a large scale basis.  If you have someone who wants to control how their donation is used, you should know that the donation is considered a donor advised fund and is subject to strict rules. 

Noncash contributions also have certain requirements.  Individuals are required to file a form 8283 for noncash donations over $500.  A form 8282 is generally required to be completed by the charitable organization (aka you) to report dispositions of certain charitable property made within 3 years after the donor contributed the property.  Yes, I did say 3 years.  Certain charitable property is any donated property other than money and publicly traded securities over $5,000.

Remember there are usually exceptions to the rules but I have listed the general rules. 

Click here to see the entire list.

Coffee Shops

Does your church have a coffee shop?  Many churches have found that coffee shops are a great way to increase fellowship at their churches.  Often times, PSK is asked about the tax and accounting issues that come along with coffee shops.  These are great questions!  Nonprofit organizations can be taxed on dollars that are earned from activities that are not related to their tax-exempt purpose.  So, is selling coffee supportive of the church's tax-exempt status?

The IRS has some specific rules regarding coffee shops run by churches.  If the shop is run by volunteers and the purpose of the shop is to provide a format for church members to congregate and have religious discussions, then the shop supports the exempt purpose of the church and income would not be taxable.  If the church's coffee shop is attempting to compete with Starbucks, then there could be some tax ramifications.  Whether or not that income is taxable, it is a good idea to code all coffee shop activity separate general ledger accounts, one account for income and another account for expenses.

Contact PSK if you have specific questions about your church's coffee shop!

1099s to Employees

Oh no!  Two people came up with the same new way to ask an old question - besides the W-2 that I issue to an employee, can I give him/her a 1099 also, for special work done?

The answer is always the same - NO!

The new twist was this - Our minister sometimes receives stipends for services offered a church member (e.g., a wedding, funeral, baptism, etc.), but the check is written to the church.  Can I issue a 1099 for these funds, since it's not a part of the budgeted salary?  The answer is still NO!

Now if a member gives a stipend directly to a minister, that should be considered self-employment income and not reported on a W-2.  If you have it, see Richard Hammer’s book, Church and Clergy Tax Guide: 2007.  He’s a lawyer and CPA who’s an expert on church and clergy tax issues.  Talking specifically about fees received for marriages, funerals, etc., he says “such fees ordinarily will be self-employment earnings for the minister if received directly from the members, and not employee wages.” Page 181.

But if the church accepts a check from a member that's supposed to be directed to the pastor, and then transfers it on to that pastor, those funds need to be shown on the pastor's W-2.

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

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.

Application for Exempt Status (Form 1023) - Where Can You Get a Copy?

Do you know where your original IRS application for exempt status is located?  Do you need a copy for your records?   Do not fear the IRS can help.  You can file a Form 4506A Request for Public Inspection or Copy of Exempt or Political Organization IRS Form.  You can find this form at the IRS's website http://www.irs.gov/pub/irs-pdf/f4506a.pdf.

The form is fairly straightforward (at least from my accountant's point of view).  When completing the form just add the following to the Line 5 Reason for Request:

"We need a copy of the original determination letter and Form 1023 for the organization's permanent file."

Make sure to check the boxes in Line 6 "Form 1023" and "Copy". 

We recommend that you have a copy of your Form 1023 and IRS Determination Letter in your permanent file.  The IRS granted your organization exemption based on the information you provided in your application.  It is your responsibility to notify the IRS of any changes that you make as your organization develops.   You can report minor changes on your annual Form 990.  Significant changes need to be addressed with the IRS before they occur.  Make sure to contact your CPA if you need to report significant changes to the IRS.

Are You Ready for the New 990?

The IRS issued the revised Form 990 and Form 990-EZ during the past year. It is effective for 2008 tax years which are filing in 2009. To say that the IRS made a few changes would be an understatement. The IRS completely changed the look of the form and now requires information not previously required. The new Form 990 is 11 pages and has additional schedules that you may be required to complete.

Check it out at http://www.irs.gov/charities/article/0,,id=185561,00.html.

The Form 990EZ is a condensed version of the new Form 990 which is available to taxpayers that fall under a certain threshold. It is 4 pages and has additional schedules that you may be required to complete.

You can check it out at http://www.irs.gov/pub/irs-tege/f990rez.pdf.

The IRS is allowing organizations time to adjust to the new forms by changing the filing requirements for three years. You will want to see what you are required to file in 2009 and the years following. We are finding some our Form 990 clients have an opportunity to file the Form 990-EZ which reduces the reporting significantly.

You can find the IRS phase in of filing requirements at http://www.irs.gov/charities/article/0,,id=184445,00.html.

What are we recommending?

We are suggesting clients get up to speed on the new information that is now being requested from the IRS. To help our client with this, we are hosting an informational session on January 13th from 8 – 10 am. We encourage you to contact us if you would like to attend. You do not have to be a client. We also suggest that you take a few minutes to watch the IRS’s web-based mini-course on preparing to file the new Form 990.

Check it out at http://www.stayexempt.org/mini-courses/newform990/player.html.

Raffles

It’s not unusual for church groups to have raffles as fund-raising events. And sometimes the prizes can be quite large!

Some things to remember:

1. Generally, if the prize is more than $600, the group awarding the prize MUST report it to the IRS.  Use IRS Form W-2G.

2. If the prize is more than $5,000, the group awarding the prize must also withhold federal income tax, and forward the amount to the IRS.

a. If it’s a cash prize, you reduce the prize by 25% and remit that amount to the IRS.

b. If it’s a non-cash prize, you should obtain 25% of the value of the prize from the winner before giving him/her the prize.

3. In some states, Texas for example, it is illegal to offer cash prizes for raffles.

FYI, a friend of mine won $15,000 in a church raffle last month!!! From what I understand, the church gave him five $3,000 checks, thinking this would skirt around the IRS requirements. No withholding; and the church didn’t even get his Social Security number for reporting purposes. So, if the IRS doesn’t know, I wonder if my friend will report the winnings all by himself! I’ll let you know what I find out.