Frequently Asked Questions

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General Questions

Q. What is an EIN number and do you have one?

 An EIN (Employer Identification Number) is a 9 digit number assigned by the IRS to organizations for payroll reporting purposes and other identification purposes. It is configured as follows: NN-NNNNNNN. The first two digits usually indicate the state location of the entity. This number may be applied for by mail or online. However, I would caution that if you do not have one, that you use proper reason for applying. The IRS uses this information to determine many filing responsibilities. If you are applying for the purpose of reporting payroll, be sure to use the right application purpose.

VIP Caution: Be sure the church bank account is registered with the federal ID number and not an officer’s social security number. If so, this should be corrected immediately. Refer to IRS Form SS-4.

Q. What is the difference between the EIN number and the tax exempt number?

A. The EIN number is described in #1 above and is sometimes confused with a tax exempt number. The EIN number is not a tax exempt number. Some states and local jurisdictions may use a configuration of the federal EIN number for data base information sharing and entity identification. For instance, New Jersey uses the federal ID # and attaches three zeroes at the end. Please be advised that there is no corresponding or similar number issued by the IRS as a tax exempt number

Q. What happens if we use the wrong federal identification number (EIN) and how do we know if it is correct?

A. An old and unused EIN number may be reassigned to another entity if the IRS does not see any activity on it for a specified period of time. If you later decide to use an old number that has been reassigned, the filings could become intermingled with another entity causing a tremendous task to unravel which could prove to be costly. If you have never used the number for any federal reporting purposes, it is best to confirm its status before filing any report.

Q. What do we do if no payroll forms have ever been filed?

A. If no reports have ever been filed, begin immediately. Voluntary compliance almost always is accepted as the compliance date. {See #5 below for further comment.} Whatever the cost, it is far less than involuntary compliance. The IRS has the discretion as to how far back they will go. Three years is usually the minimum and, even further, if they suspect fraud. Many churches would not be able to withstand the cost which could (and most probably will) be transferred to the responsible officers as a personal liability. Church officers have a fiduciary responsibility to handle these matters. A $10,000 liability could easily turn into many thousands which would be assessed totally & severally against each responsible officer (which could include the pastor).

Q. What do we do if payroll was being filed and then stopped?

A. Further, we are receiving notices from the IRS and other state and local agencies and my pastorate began mid 2010? I would suggest that the outstanding reports be completed and filed immediately. The government requires reports to be filed timely for each period even if there is no payroll. It seems that many church trustees and stewards cease the filings after the assignment of a new pastor. If no reports are filed the government will send requests until you submit the reports and pay any taxes due. This is another cause for having the payroll outsourced because.

Q. Are ministers (pastor’s) employees?

A. Ministries have a dual status in the IRC [3401 (a) (9)] in that they are most often considered employees for income tax purposes, but self-employed for the purpose of Social Security and Medicare. The employing church must not withhold and match social security and Medicare from pastor’s pay. Minister’s classifications are further complicated by the IRC in that they are not subject to federal withholding tax but are subject to federal income tax. They may, however, elect to have taxes withheld.

Professional Recommendation: We further recommend that the pastoring clergy person have the federal income tax, social security and Medicare estimated for the year and then deducted as a “flat federal withholding amount”. This procedure eliminates the pastor having to remember to make quarterly estimated tax payments and experience a shortage at the end of the year. This is also a case for having a formal Pastoral Compensation Package. In the event of an audit or examination, every confirmation and clarification needed is in the package and keeps the IRS out of the church and book records. Refer to IRS Publication 517 for further discussion of clergy

Q. How far back do we have to go when we start to report payroll taxes?

A. I would suggest that you cover your exposure period (a period for which returns have already been requested by a government entity) or start with the most recent assignment date of the current pastor; or start with the current year. The IRS is usually lenient with voluntary compliance, but please be advised that the selected compliance date should be consistent with all reports and registrations. {Call for an individual application of this suggestion.}

Q. Can we give 1099’s to paid church workers?

A. No!!! The 1099 is used for independent contractors and by definition; lay employees do not meet these criteria. Church employees must be given a W2 at the end of the year. The church should also have a completed W4 and I9 on file for each employee. A person that receives $100 or more a year is subject to social security and Medicare. For further information refer to IRS

Q. How responsible are pastor’s and church officers for non-payment of payroll taxes?

A. Extremely responsible. IRS defines church officers as the “responsible party” if they are in position and have the responsibility of the reporting and filing. Responsible party is a term the IRS uses to describe the person(s) responsible to insure payroll compliance is met no matter the title or positions.

Q. Should social security and Medicare be deducted and matched on pastor’s pay?

A. Absolutely not! Refer to No.6 above and IRS Publication 517.

Q. Some Pastors say they pay their own taxes (as opposed to the church withholding and filing them). What does this mean?

A. There are still far too many churches that do not provide the pastor with any kind of reporting document. Pastoring clergy are forced to do whatever they can to protect themselves. Some have even resorted to having the church report their pay thru a third party payroll service (eliminating the other church employees). Still other pastors think the church is “supposed” to withhold and match their taxes, but it is not true, except for the applicable state and local taxes. {Refer to No.6 and No.10 above.}

. Q. When is the 1099 used and when is the W4 appropriate?

A. The Form 1099 is used for independent contractor’s which included “visiting” ministers, not church pastors, {unless they are a guest minister at another church. For example: When a guest minister visits a church for a revival, the Form W9 should be signed BEFORE they serve. The Form W9 – {Backup Withholding} clearly states that if the independent contractor refuses to sign the form, the church is REQUIRED to withhold 28% from the honorarium and submit it to the IRS on Form 945 as Backup Withholding, under the premise that the refusal to sign is a posture of non-reporting and noncompliance, therefore the taxes are withheld as backup withholding. The Form W4 is used for church employees and must be signed at the point of hire just like any other employer. There is also another obligation of employers (including churches) to report all new employees within 20 days of the hire date. This law has been in effect since 1996. New Hire rules apply to all employers (including churches)

Q. What does the $600 rule apply to? Employees or independent contractors?

A. The $600 rule applies to independent contractors. NOT EMPLOYEES. An organization (church) is required to prepare a Form 1099 if the independent contractor payments (honorariums) amount to $600 or more in any given year. A church MAY give a 1099 for any amount. Many clergy believe that they do not have to report their honorariums if it is not supported by a 1099. This is absolutely not true. The reporting document is the responsibility of the church (organization) and the income reporting is the responsibility of the recipient (clergy). Refer to IRS Form W9 and 1099 instructions.

Q. Can pastors receive a retirement housing allowance?
  1. Yes! Revenue Ruling 63-156 addressed this issue. The conclusion was that a retired minister could exclude a housing allowance furnished “pursuant to official action being taken by the employing church in recognition of past services as a minister. There has been much argument and deliberation on this point, but IRS precedent does allow for retirement housing if it is predetermined and falls within the guidelines of Section 107 of the IRC. There are other IRS rulings on this allowance, but it is summarized that an employing church or convention or association of churches {if it is the employing entity} can allow a retirement housing allowance. This is particularly important in the Black church community because far too many retiring ministers have never had an official retirement plan. Still others are forced to work longer than able or planned because they do not have any retirement income.

 

This position is still further complicated by not having paid into social security (via SECA) on their church income and where they have no secular benefits. So- properly designated retirement housing may be the only financial salvation for some clergy. Call for further explanation and application of this subject. Other references: Revenue Rulings: 62-117; 72-249 and 75-22 and IRS Letter Ruling 7734028.

Q. How much pastoral compensation can be included in a housing allowance?

A. Section 107 of the IRC uses the language “to the extent used to provide a home” which does not include food, maid, auto, etc. The regulation provides that any excess housing allowance is reported as federal income. We usually recommend that the actual expenses become the guide so as not to create additional taxable income at the point of annual reconciliation. The housing allowance designated should be prudently arranged in that if a clergy only has church income and no other household income, it is not feasible to designate all of the income as housing. The rationale is that there is no other income for non-housing expenses. Therefore 100% housing is not reasonable in this example. However, if the pastor has other income, (i.e. secular; retirement, pension, spousal income, social security, etc.) then the total amount of church income can be classified as housing if it can be absorbed in the allowable expenses.

Q. Are the member churches covered under the connectional church umbrella IRS 501 {c} {3} exemptions?

A. Only if the connectional church has applied for and received an individual exemption, then filed for subordinates in a group exemption under IRC 80-27. Once the group exemption is awarded, the Parent Organization sends a letter to each participating church stating their inclusion in the group exemption. The coverage is not automatic and the subordinate entities may never use the parent 501 {c} {3} or its identifying number. Even in the group exemption process, each individual church must have its own federal identification number (also known as EIN).

Q. Ministers want to know how expenses should be provided when they do not accept a salary.

A. Some ministers have sufficient salary from other sources and choose not to accept “salary” but will accept ministry “expense” money. This is also another “attempt” by clergy to “redefine” compensation for services rendered in hopefully a legitimate tax exempt category. If in fact, the expenses are legitimate, Section 1.162-17 of the IRC defines adequate accounting for accountable vs. non accountable ministry expense plans. All expense plans should be supported by an annual resolution stating the terms of the agreement. {Sample wording and a completed resolution is available.} If it is an attempt to avoid taxable income, it is not recommended.

Q. What is the relationship between the church and the CDC (Community Development Corporation)? I.e. Day care, senior citizen family, etc.
  1. I.e. Day care, senior citizen family, etc. The crucial point being made here is that the church and the CDC are two completely different organizations with separate organizational documents; registrations, bank accounts, etc. They may, however, be housed in the same facility and have some of the same officers, but everything else is separate. If the Pastor happens to be the president of the organization, the compensation rules are different. In most cases, no housing allowance is allowed and he/she is most likely subject to social security and Medicare via the withholding method.

Professional Comment: Each of the foregoing topics deserves much more information than presented here, but it is designed to answer some of the most prevalent questions in church conference settings. It is designed just to give you a sense of direction.

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