- W-2 Preparation
Business Miles 2011:
- January - June
- 51 cents per mile for business miles driven
- 19 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
- July – December
- 55.5 Cents per mile for business
- 19 cents for medical or moving purposes
- 14 cents per mile for charitable travel
2011 Returns:
Example of Clergy Compensation:
- Cash Salary................................... $40,000
- Housing Allowance.......................... -5,000
- Medical Insurance/FSA.................... -3,500
- UMPIP pre tax................................. -1200
- Non accountable travel allowance......... 3000
- Honoraria (gross).................................500
- Parsonage rental value.....................14,400
- FED Income W-2 Box 1....................33,800
SE Tax Calculations
- W-2 box 1................................$33,800
- Clergy Housing Allowance cash.............5,000
- Fair Rental value.........................14,400
- SE Wage Base.............................$53,200
Example of Form W-2 for Clergy 2011
Rev. Sue Service serves as pastor of a local United Methodist church. During the preceding year, Rev. Service lived in a church parsonage furnished by her church, and:
(1) she received a cash salary of $40,000 from her church; plus $500 honoraria (gross)
(2) her church properly designated $5,000 of her $40,000 cash salary as a housing (or parsonage furnishing, supplies and utilities) allowance;
(3) she made a voluntary, pre-tax, salary reduction contribution of $1200 to the United Methodist Personal Investment Plan (UMPIP);
(4) she made salary reduction contributions of $3,500 through a cafeteria plan for her share of her medical insurance premiums and for a Flexible Spending Account (FSA);
(5) she received a non-accountable (no proof of travel given to church) travel allowance of $3,000;
(6) her church paid $14,000 on her behalf for medical insurance premiums;
(7) she received reimbursements from her church of $2,500 for travel expenses pursuant to an accountable plan; and
(8) her church made a $5,000 contribution to the Clergy Retirement Security Program (CRSP) on her behalf.
The local church should complete Rev. Service's Form W-2 as follows:
Boxes a –f: Self explanatory.
Box 1: (1) – (2) – (3) – (4) + (5) = $40,000 +500 – $5,000 – $1200 – $3,500 + $3,000 = $33,800.
Note: Items (6) - (8) are not included in Box 1.
Box 2: Leave blank. (Here we assume Rev. Service did not request voluntary federal income tax withholding by the church.)
Boxes 3 – 6: Leave blank.
Box 12: Enter E for the Code and $1200 for the amount (reflecting the UMPIP contribution)
Box 13: Check the Box labeled "Retirement plan" (reflecting the UMPIP contribution)
Box 14: Enter "Parsonage Allowance $5,000."
Boxes 15-20: Complete according to your own state's requirements.
The information provided above is intended to serve as general guidance and should not be construed as legal advice. You should consult a tax professional regarding your particular circumstances. In addition, GCFA is not recommending any particular salary or housing allowance. The example here is merely illustrative.
- Reimbersements Explained
REIMBURSEMENTS VS ALLOWANCES
NOT COMPENSATION:
Both reimbursements and allowances are created to cover the costs associated with providing ministerial services to a congregation or other entity. These should not be confused with or seen as a part of compensation. These plans recognize that the expenses that are to be covered are legitimate expenditures that add value to the congregation and enable the clergy to provide the pastoral care and religious leadership that is expected of them.
REIMBURSEMENTS:
An accountable reimbursement plan should be established by a congregation and included in their annual budget as a line item. As the various types of expenditures will vary from time to time and year to year, it is recommended that the Finance Committee focus on the total amount allotted for reimbursable expenditures rather than seeking to control individual expense categories (travel, books, supplies, etc.)
ACCOUNTABILITY & DOCUMENTATION:
As the name implies, an accountable reimbursement plan means that the one seeking to be reimbursed is accountable to the church for providing adequate support according to guidelines that are in keeping with Federal Income Tax standards and/or locally established guidelines.
It is the responsibility of the clergy to provide adequate documentation for all reimbursements. This should include the following: the date of the expenditure, the amount of the expenditure (accompanied by a receipt if possible), and the business purpose of the expenditure. Current Federal Tax guidelines do not require receipts for expenditures less than $75.
REIMBURSEMENT FOR BUSINESS MILEAEGE:
The Federal Government annually establishes the rate at which business miles are to be reimbursed. This rate is expressed as so many cents per mile. The most difficult area for many clergy is to account for un-reimbursable miles known as commuting miles. The miles between the clergy residence and the church are considered to be commuting miles. However, in the case of a multiple point charge, driving between churches is considered to be business miles.
TAX CONSEQUENCES OF REIMBURSEMENTS:
Accountable reimbursements that are made in accordance within the guidelines are not considered to be income to the clergy and are therefore not reported as such.
EXAMPLES OF APPROPRIATE REIMBURSABLE EXPENDITURES:
This is but a partial list of commonly reimbursed expenses for clergy:
Business Mileage, Office Supplies, Continuing Education Expenses, Periodicals, Books,
Cleaning of vestments, Business related meals.
OWNERSHIP:
It should be noted that any non expendable items such as cell phones or computers that are paid for under an accountable reimbursement plan are the property of the church.
ALLOWANCES:
An allowance is a sum of money paid to a pastor to cover the cost of estimated business expenses such as business mileage and other business expenses.
ACCOUNTABILITY AND DOCUMENTATION:
An allowance is paid without regard to any requirement to document expenses to the church. Though it may be higher or lower than actual expenses incurred there is no need or requirement to provide any documentation to the church.
TAX CONSEQUENCES OF ALLOWANCES:
Though the allowance is paid to provide for legitimate business expenses, it is to be included in the compensation figure reported in Box 1 of the W-2 provided to the clergy.
The pastor may deduct business expenses on Federal Form 2106. However, to do so, they must qualify as an itemizer and be able to use Schedule "A". Also, 2% of the total of the business expenses are lost as a deduction.
- Housing Allowance Exclusion Explained
THE MYSTERY OF CLERGY HOUSING ALLOWANCE EXCLUSION:
Q. What is it and why does it exist?
A. Clergy Housing Allowance Exclusion (CHAE) is an attempt in the Federal Tax Code to be fair and equitable in the tax treatment of clergy. Some clergy have a home and all its utilities and furnishings provided to them by their congregations. Others are simply given a check and are on their own to provide housing. In an attempt at fairness, since it would be difficult assess the value of housing, furnishings and other items provided in kind to some clergy, the decision was made to exclude from Federal Income Tax the amount other clergy spend on qualified housing costs.
Q. Where is it documented?
A. Section 107 of the Internal Revenue Code provides that clergy may exempt from income for Federal Income Tax purposes the amount that is spent to "rent or provide" a home.
Q. How is it established?
A. A congregation must establish a dollar amount of the CHAE prior to the clergy receiving the funds. (see attached sample resolution) As it is an allowance and not a reimbursement, the clergy is responsible for documenting housing costs to the IRS on audit.
Q. How is it reported?
A. As it is an exclusion, it should be excluded from Box 1 on the W-2 that is provided to the clergy. It is the responsibility of the clergy to report any unused portion of the exclusion as "excess housing allowance" when they complete their taxes for that year.
Q. What are the limits on the Exclusion?
A. The clergy is limited to lowest of three ceilings:
• The amount of the resolution passed by the congregation
• The actual total of all qualified housing expenditures of the clergy
• The fair market rental value of the primary residence of the clergy so equipped and so furnished in the particular neighborhood where the clergy resides
Q. Who is eligible to take the CHAE?
A. The IRS has established that "ministers of the gospel" that have been, ordained, licensed or commissioned to perform sacerdotal functions.
Q. What is the responsibility of the church?
A. Once the church has established the pastor's compensation, there should be a discussion with the pastor to determine what portion of the cash compensation should be established by resolution as the CHAE.
Q. What is the responsibility of the clergy?
A. The clergy must account for all qualified housing/furnishing costs and be prepared to submit documentation if audited. The clergy is also responsible for reporting any unused portion of the allowance on their tax return.
Q. What effect does the CHAE have on Social Security?
A. All clergy are considered to be self-employed for Social Security Purposes. Therefore, the full amount of the CHAE as well as the fair market value of any housing items provided in kind (utilities paid by the church, rent free parsonage, furnishings, etc.) must be included in the Self-employment wage base when the clergy computes their Self-employment tax.
Q. What types of expenses qualify as CHAE?
A. Whatever is necessary to rent or provide a home. Some examples are: rent, utilities, home or renters insurance, furnishings, cleaning supplies, lawn care, decorator items, linens, snow removal, etc. The only two items specifically not allowed are food and domestic servants.
- Section 125-Umbrella Plan Explained
What is a cafeteria plan?
A cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements of and regulations of section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pretax basis. Participants in a cafeteria plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit.
A qualified benefit is a benefit that does not defer compensation and is excludable from an employee's gross income under a specific provision of the Code, without being subject to the principles of constructive receipt. Qualified benefits include:
• Accident and health benefits (but not Archer medical savings accounts or long-term care insurance);
• Adoption assistance;
• Dependent care assistance;
• Group-term life insurance coverage;
• Health savings accounts, including distributions to pay long-term care services.
The written plan must specifically describe all benefits and establish rules for eligibility and elections.
A section 125 plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing the benefits to become taxable. A plan offering only a choice between taxable benefits is not a section 125 plan.
How does a cafeteria plan work?
Employer contributions to the cafeteria plan are usually made pursuant to salary reduction agreements between the employer and the employee in which the employee agrees to contribute a portion of his or her salary on a pre-tax basis to pay for the qualified benefits. Salary reduction contributions are not actually or constructively received by the participant. Therefore, those contributions are not considered wages for federal income tax purposes. In addition, those sums generally are not subject to FICA and FUTA. See Sections 3121(a)(5)(G) and 3306(b)(5)(G) of the Internal Revenue Code.
The above discussion provides only the most basic rules governing a cafeteria plan. For a complete understanding of the rules, see the Proposed Regulations under Code section 125.
What is a flexible spending arrangement?
A flexible spending arrangement (FSA) is a form of cafeteria plan benefit, funded by salary reduction, that reimburses employees for expenses incurred for certain qualified benefits. An FSA may be offered for dependent care assistance, adoption assistance, and medical care reimbursements. The benefits are subject to an annual maximum and are subject to an annual "use-or-lose" rule. An FSA cannot provide a cumulative benefit to the employee beyond the plan year.
- Sample Forms
SAMPLE RESOLUTION
Umbrella Plan - Section 125
The____________________________________ Church of
____________________________ has established the cash
salary for the Rev. _________________________________
to be $___________ for the period from __________ to
__________. In addition to the cash salary, the church will
also provide a parsonage located at ____________________
___________________________
and all utilities.
Whereas Section 107 of the Internal Revenue Code of 1986
has provided that a minister of the Gospel may exclude from
gross income the rental value of a home provided and any
allowance to provide a home;
Therefore be it resolved that the use of the parsonage located
at _________________________________, plus all utilities, and
$ _______________ of the cash salary of
$ __________, provided to Rev. _____________________
to the extent it is used to provide a home, be considered to
be Clergy Housing Allowance Exclusion and excluded from
reportable compensation under Section 107 of the Internal
Revenue Code of 1986.
(Signed and Dated by Board Chair and Secretary)
SAMPLE CLERGY HOUSING ALLOWANCE
RESOLUTION
The____________________________________ Church of
____________________________ has established the cash
salary for the Rev. _________________________________
to be $___________ for the period from __________ to
__________. In addition to the cash salary, the church will
also provide a parsonage located at ____________________
___________________________
and all utilities.
Whereas Section 107 of the Internal Revenue Code of 1986
has provided that a minister of the Gospel may exclude from
gross income the rental value of a home provided and any
allowance to provide a home;
Therefore be it resolved that the use of the parsonage located
at _________________________________, plus all utilities, and
$ _______________ of the cash salary of
$ __________, provided to Rev. _____________________
to the extent it is used to provide a home, be considered to
be Clergy Housing Allowance Exclusion and excluded from
reportable compensation under Section 107 of the Internal
Revenue Code of 1986.
(Signed and Dated by Board Chair and Secretary)
.
