Transparency In Ministry

Intellectual property is created by individuals using the mind or intellect. These creations include songs, books, sermons, dramas, bible study materials, inventions, websites, etc. Employees may produce or create these items as part of their employment.

Who owns the rights to this property is becoming a significant issue with churches and ministries.

If the Church oversees or controls the work performed, provides a place, equipment or support for creation - the Church owns the property. If the Church or employer pays the employee to create the product, defines the product - Church/Employer owns the property.

Intellectual property is protected by the U.S. Copyright Act and under this act the Work for Hire Doctrine applies. This doctrine applies to entities who request and pay for the created property. If a minister or employees wishes to own the property, a written contract must be negotiated between the organization, defining who owns the property. This contract should be in place prior to creating the property. Any Church resources utilized by the employee to create the property should be reimbursed or is included in the taxable compensation of the employee. The amount taxable to the minister is based on the fair value of the resources used - whether it is a computer, office space, secretarial support.

This is a complex area for churches. We suggest you consult an attorney to provide guidance in these areas.

According to the April 2007 issue of the Church Treasurer Alert!

The U.S. Department of Labor's Bureau of Labor Statistics, has released a study for the private employer costs for employee compensation. Employee compensation averaged $25.52 per hour worked in 2006. Wages and salaries, which averaged $18.04, accounted for 70 percent of these costs, while benefits, which averaged $7.48, accounted for the remaining percent.

The following represented other average compensation/benefit issues:

Employer costs for insurance benefits - $1.89/hour
Legally required benefits (Social security, medicare, unemployment, etc) - $2.18/hour
Paid leave benefits (vacation, holiday, sick leave) - $1.73/hour
Retirement and savings benefits - $.93/hour

Where does your ministry or church fit in the above study?

Need help with compensation/benefit issues? Contact us.

Mention the words “employee benefits” to a church or ministry and you might hear the groans of someone burned by sky-rocketing costs and mind-numbing complexity. But one type of benefit — a retirement plan — need not be a stress-inducing perk. In fact, it might just be the powerful tool you’ve been looking for to retain employees.

While choosing a retirement plan can be complicated, the underlying concepts are not. The best plan for you will depend on the employee's personal retirement needs, the size of your church or ministry, and how you wish to motivate your employees. Here are a few of the most popular plans available.

401(k) plan/403(b). The 401(k)/(403(b) is the workhorse of the retirement world, offering attractive flexibility to employers and employees. Up to 25% of compensation or $45,000 ($50,000 if over 50) can be paid into an employee’s account. The Church has the option to match employee contributions and specify when the benefits are vested. The downside to all this flexibility is high cost. Those with fewer than 20 employees may find other plans more economical.

Simplified Employee Pension Plan (SEP IRA). The SEP IRA was designed to give smaller churches/ministries a low cost alternative to the 401(k). Unlike the 401(k), however, employees cannot contribute a portion of their own pay. What’s more, vesting is immediate, and the same percentage of salary that is contributed to the senior pastor's account must be paid to each eligible employee’s account. On the plus side, the maximum contribution limit is the same as a 401(k), and contributions can vary from year to year. So, if you have a lean year, you can reduce your contributions accordingly.

SIMPLE IRA. Another option is the SIMPLE IRA. Designed for churches/ministries with 100 or fewer eligible employees, the SIMPLE IRA permits worker contributions of up to $10,500 ($13,000 if over 50), plus a mandatory employer match of up to 3%. The SIMPLE IRA is often viewed as a good entry-level retirement plan. One drawback is the lower contribution limits compared to a SEP IRA or 401(k), which may hinder an individual's retirement needs.

So which retirement plan is best for you? The answer will require careful analysis. But whether your time frame is near or far, or your business large or small, the good news is that more retirement options are available today than ever before. Give us a call to find the plan best suited for you and your business.

Scenario: Pastor Brown is 63, retired and currently receives social security benefits. He is a member of the “community” church. In February 2007, the “community” church hired Pastor Brown to be the pastor of visitation and outreach and his annual compensation will be $27,500.

Question? How does the change in employment status affect the pastor’s social security benefits?

Because Pastor Brown has not reached his full retirement age, his social security benefits that he is receiving will be reduced. If he earns more than $12,960 his benefits will be reduced by $1 for every $2 that he earns.

His benefits will be reduced as follows:

Annual compensation $27,500
Less: Allowable income 12,960
Excess compensation 14.540
Benefits reduced (Divide by 2) 7,270

Social security benefits will be reduced by $7,270 in 2007.

Until Pastor Brown reaches the age of 66, his social security benefits will be reduced based on the maximum income allowed for those benefits. Currently the annual maximum earned income level is $12,960.

If Pastor Brown is 68, retired and called back into ministry and receives an annual compensation of $27,500. His social security benefits will not be reduced because he has reached the full retirement age of 66.

Occasionally ministers speak for another church and the church collects a love offering that will be paid to the guest speaker. How is the payment reported to the IRS? Is this taxable income to the minister?

If the church paid more than $600 for these services, the church reports these payments to the guest pastor, using Form 1099 Misc. For instructions for Form 1099-Misc, see instructions.

Before February 1st of the subsequent year, a Form 1099-Misc is mailed to the recipient. Before March 1st of the subsequent year the Church files copies of the Form 1099-Misc and a 1096 transmittal form with the IRS.

At the end of the year the guest minister receives Form 1099-Misc and includes the income reported on Form 1099 as taxable wages in their personal tax return.

So yes...the fees paid to guest speakers (non-employees) are taxable, if they exceed $600.

Scenario: Pastor Brown is going to take a week of vacation to Florida. He wants one of the youth pastors who work part-time to accompany he and his family. The church paid for the airfare and the hotel rooms for both pastors.

Question: Are the travel costs paid by the church, taxable compensation to the minister?

Answer: YES. Under IRS Publication 463, if a trip is “personal” in nature, the travel costs represent a personal expense and not a business expense. Because the church paid for these personal costs, the travel costs for both pastors are included as taxable compensation in Pastor Brown’s W-2 at the end of the year.

Why Pastor Brown's W-2 and not the youth pastor? It was Pastor Brown's decision and authorization for the church to pay for the youth pastor's airfare. It was Pastor Brown's request that the youth pastor accompany his family. Even if a business purpose could be performed during the vacation, the trip was primarily personal in nature, therefore justifying these expenses as taxable compensation to Pastor Brown.

Do you have any questions about other types of personal expenses that may be taxable? Post a comment.

In the previous post on love offerings, we discussed the definition of a gift. A gift = detached generosity. The following is a common church scenario:

On a weekly basis love offerings envelopes are available for congregants to fill out and include a donation for their pastor. The love offerings are received regularly and systematically and the church makes a payment to the pastor on a monthly basis.

Question: Are these offerings considered a gift to the pastor or taxable compensation?

What are special offerings?

In Banks v. Commissioner, 62 T.C.M. 1611 (1991) special offerings were given to a minister on four separate occasions during the year. The offerings were in addition to the minister’s salary and amounted to more than $40,000 annually. The members of the church who gave the offerings did not take a tax deduction for their contribution because their intent was to give a true gift. However, the Commissioner was able to use the Duberstein case and show that the gifts were in fact for services rendered.

Testimony of congregation members indicated that transfers were designed to compensate the minister for the excellent work the minister had done and to encourage them to remain with the congregation. The court also found that the amounts transferred to the minister were part of a highly structured program for transferring money to the minister on a regular basis. The regularity of the payments from church members to the minister also “suggests that the transfers did not emanate from a detached and disinterested generosity but, instead, were designed to compensate for service as a minister”.

The same type of ruling was upheld in Goodwin v. United States, 67 F.3d 149 (8th Cir. 1995). The court held that the gifts to the pastor and his wife were taxable income based on evaluating the donor’s intent. Although the gifts were anonymous and not coerced, payments were made on a regular basis; were systematically organized and collected by church personnel; were substantial compared to pastor’s salary; and were made to retain the pastor’s services.

So are love offerings, collected regularly and systematically by the church and paid to the pastor, taxable compensation?

YES.

These payments should be included in the pastor’s W-2 and considered as part of the minister’s annual compensation.

Classify this as a Taxable Valentine.

Scenario: On a weekly basis love offering envelopes are available for congregants to fill out and include a donation for their pastor. The love offerings are received regularly and systematically and the church makes a payment to the pastor on a monthly basis.

Question: Are these offerings considered a gift to the pastor or taxable compensation?

Answer: IRC Section 102 stipulates that “gross income does not include the value of property acquired by gift, bequest, devise, or inheritance”. An employee who receives this type of gift, however, shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.

So what exactly is a gift?

Over the past 47 years, several cases have highlighted similar scenarios.

In the Commissioner v. Duberstein, 363 U.S. 278, 285 (1960) case, the courts concluded that whether money or property transferred by an employer to an employee is an excludable gift is based on the reason for the employer’s action. If the employer’s reason for giving is based on a detached or disinterested generosity, affection, respect, admiration, charity or like impulses, the transaction is a gift and excludible from compensation.

However in Borgadus v. Commissioner, 302 U.S. 34, 45 (1936) if the gifts are made or intended to be made for any services rendered or to be rendered, then the gifts would be taxable.

So a donor can give based on a detached or disinterested generosity and it cannot be perceived to be based on services rendered or to be rendered. These gifts are not taxable tothe pastor and the donor does not receive a charitable deduction for income tax purposes.

Gift = detached generosity.

Are the love offerings a detached generous gift?

See the next post as we define special or love offerings?

Ministers may receive fees to perform marriages, funerals or baptismals directly from congregants or other individuals. These fees are typically incurred in the performance of their ministerial duties and represent taxable income under Treas. Reg. 1.61-2(a)(1). These fees are reported on schedule C of the minister’s tax return.

Little Debits are selected information obtained from various sources that provide “user friendly” information for churches and ministries. Short and sweet like Little Debbies.

Question: How are housing allowances reported to the taxing authorities?

By January 31st churches are required to file the W-2s with their employees. By February 28th the W-2s and W-3s are filed with the Social Security Administration.

The amount of a minister’s taxable compensation is reported in box 1 wages, tips and other compensation on the W2. The housing allowance is not reported on form W-2 or on the form 1099.

As a courtesy to the ministers, the church accountant may provide a letter that communicates the amount of housing allowance paid during the year. It is the minister’s responsibility to report excess housing allowance in Form 1040.

How to report and calculate the excess housing allowance coming up in post 2 of this series.

A church has decided to purchase gas cards, valued at $20 each, to give to their employees who make less than $30,000/year. The church will do this for several weeks. Is there a tax implication to the church’s employees?

YES and this is why…

This is considered a taxable fringe benefit according to Treasury Regulation 1.132-6(c) because the items given are gift cards. Any cash or cash equivalents (gift certificates, charge or credit cards) are considered taxable fringe benefits.

Housing Allowances…A great tax benefit to Ministers

One of the most important tax benefits available to ministers who own or rent their homes is the housing allowance. For churches who provide a parsonage, the minister may receive a parsonage allowance for designated expenses of the parsonage. These allowances must be designated in advance by the employing church. According to the 2007 Compensation Handbook for Church Staff, co-authored by James F. Cobble and Richard R. Hammar, a housing allowance represents:

1. compensation for ministerial services,

2. used to pay housing expenses, and

3. does not exceed the annual fair rental value of the home (furnished, plus utilities).

Housing related expenses include mortgage payments, utilities, repairs, furnishings, insurance, property taxes, additions and maintenance.

Ministers who own their own home or rent a home or apartment, do not pay federal income taxes on the designated housing allowance. Remember…these allowances must be designated in advance by the church.

However, many churches fail to designate a portion of a minister’s compensation as a housing allowance…and the minister is deprived of an important benefit under the IRS regulations.

In adopting a compensation package for 2007, churches may consider including a salary reduction agreement as part of the minister’s or lay staff’s compensation. According to the 2007 Compensation Handbook for Church Staff, co-authored by James F. Cobble and Richard R. Hammar, salary reduction agreements are used to handle certain staff expenses. The objective is to reduce a worker’s taxable income through salary reduction agreements specifically allowed by law. These allowances include:

1.Tax-sheltered annuity contributions

2.Cafeteria plans

3.Housing allowances

For more information on housing allowances, see post #3 of this series of compensation planning.

It's that time of year. Yes, compensation committees and church boards should be preparing for 2007 and adopting the compensation for employees. In adopting a 2007 compensation package for ministers and lay staff, consider salary as the most basis component of a compensation package. The amount of the salary should be set by the church board and documented in the minutes prior to payment. The compensation package may include salary reduction agreements (ie., various "plans" available for employees).

However, churches should remember that there are consequences to not following the IRS guidelines for compensation. If a church pays unreasonably high compensation – the IRS can:

1. Revoke the church's/ministry's exempt status – IRS has been reluctant to impose this penalty. Tax law does not define what amount is considered unreasonable

2. Impose Intermediate Sanctions – assess excise taxes to “disqualified persons” who are paid “excess benefits”.

According to the 2007 Compensation Handbook for Church Staff, co-authored by James F. Cobble and Richard R. Hammar, a disqualified person can be an officer, director or relative of the designated employee. A disqualified person who benefits from an excess benefit transaction is subject to an excise tax of 25% of the amount of the “excess benefit”.

An excess benefit is the amount by which the actual compensation exceeds the fair value of the services provided. The excise tax is assessed against the disqualified person, not against the employer. If the excess benefit is not corrected, additional excise taxes of up to 200% can be assessed.

It is very important that compensation committees and ministry boards use available resources in determining the “reasonableness” of a minister's compensation. Watch the next post to determine the use of “salary reduction agreements” as a component of ministry compensation.

A senior pastor of a church wishes to purchase a church vehicle for his personal use. How is the sale recorded by the church? What are the tax implications to the pastor?

Fair value of the vehicle (adjusted for wear/tear) at the time of the sale will be used as the selling price. If the sale is consummated by an actual check written by the pastor, then the vehicle sold for $8,000 (with a net book value of $0 (cost less accumulated depreciation) is recorded in the general ledger using under the following scenario:
DR CASH $8,000 (as an example)
DR Accumulated depreciation $6,000
CR Vehicle $6,000
CR Gain on sale $8,000

If the pastor does not purchase the vehicle with a check but would like the sale to be included on part of his compensation, then his W-2 would include the sales price of the vehicle. This transaction would affect his annual compensation and should be approved by the board of compensation committee.

In our two previous posts…we’ve discussed the requirements for “donating” to other ministers and ministries. In this third posting, we will address “gifts” affecting excessive compensation…

Donations or gifts received by “visiting or guest pastors” from a recipient congregation must be included in the estimated salary for a pastor. These special speaking events can accumulate, $10,000 here, $10,000 there. These “gifts” are considered taxable income to the pastor and should be included in the annual compensation analysis of the pastor.

If a pastor receives more than $120,000 - $150,000 a year as compensation, then the board of the church of ministry is responsible for determining if the compensation is reasonable and not excessive as defined by IRS.

Concerned with excessive compensation or taxable “gifts”…e-mail us.

When a pastor performs services for a recipient congregation and the recipient congregation would like to “pay” the guest pastor for those services. The guest pastor has performed “services” consistent with the receipient congregation’s exempt purpose – those services are considered “professional services” and not a donation or contribution or mission expense. The funds received by the guest pastor represents taxable income, reported by a 1099.

The IRS is very particular about “services rendered” and when “services” are performed by individuals in the “line of duty” or in the ordinary course of employment – these “gifts, donations or reimbursements” represent taxable income. No if, ands or buts….

Ministries giving to ministries…can it affect excessive compensation? You betcha! See post #3 coming soon!

A well respected pastor is retiring from his local congregation. Other local community congregations and ministries would like to honor his service by donating to the retiring pastor’s congregation for a retirement gift (cash). Is this an allowable donation from the local pastors, congregations and ministries?

Several points are critical in understanding the IRS’ intent for allowing donations…

1. If a “donor” ministry wants to support a “donee” minister in performing his ministry, it can do so as long as it contributes importantly to the donor-ministry's tax-exempt purpose. However, it will be taxable income to the recipient minister, and a 1099 should be issued.
2. If a “donor” ministry wants to support a “donee” minister or ministry in their exempt purpose and the funds are not restricted as a gift to the minister, the donation will not be taxable income to the recipient minister.

However…the practice of exchanging “gifts” among friendly pastors using ministry funds would be personal inurnment to the recipient pastor and is taxable income, reported by a 1099.
Ministries giving to ministries…when it isn’t a “donation”…coming next. Blogging again soon.

If an employee uses a ministry provided cell phone to call home to a spouse while on a ministry trip, the same rules previously discussed apply. It depends on the actual level of use. For instance, one short call home a night probably would fall into the de minimis fringe category, but lengthy and numerous calls probably should be attributed to the employee as compensation.

(Can you hear us now??)

With the advancements with technology, cell phones, pagers and other “listed property” are being used by churches and ministry personnel. These costs are typically paid by the ministry…however…(can you hear me now???) certain calls received/made by the employee are personal. How should the ministry record the cost of these personal calls?

IRC Section 280F(d)(4) specifies that cellular phones are considered "listed property", and therefore special rules of substantiation apply to them, such as keeping logs as to use. With the cellular phone billing, however, each call is automatically logged, and therefore the billing records can provide substantiation as to use, if the calls are identified as “personal”. The personal use then should be attributed to the employee as compensation and recorded in the general ledger as follows:
DR Salaries $xx
CR Telephone expense $xx

If the personal calls are minimal, however, the de minimis rules may apply to them. Reg 1.132-6(e) states that gross income does not include the value of a de minimis fringe provided to an employee. The term “de minimis fringe" means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees) so small as to make the accounting for it unreasonable or administratively impracticable.

So…(can you hear me now??) Using this rule as a base, the answer really depends on the actual facts and circumstances of the particular situation. (simple huh?)