Planning Financial Support Project #14832 Updated 03/26/09 Hidden bookmark slide – not part of the presentation NonRR

Planning Financial Support For Ministers and Church Employees

Welcome to a GuideStone Financial Resources Presentation! Please fill out Section 1 of the Meeting Registration form, and remember to silence all cell phones and pagers.

Free GuideStone Resources Planning Financial Support booklet Mission Church Assistance Fund information Personal and group plans for life, medical and disability coverage 403(b)(9) Retirement Plan for Southern Baptist Churches brochure Church Retirement Plan brochure

Free GuideStone Resources Ministers Tax Guide booklet Ministerial Tax Issues brochure Property, casualty and liability coverage information

The Old Way — “The Package” Package approach dangers: A lump sum is misleading Staff may pay unnecessary taxes Staff person may choose cash over insurance and retirement protection Church may incur a financial burden “We’ll pay you a lump sum of $$ and you can divide it any way you want.”

The Better Way… Planning Financial Support (Page 4) Why is planning financial support important? That God’s Word may be honored To reduce confusion and instability To reduce employee tax liability

The Better Way… Planning Financial Support (Page 4) Why is planning financial support important? To ensure church funds are spent appropriately To clarify true personal income To extend the tenure of church employees

Special Tax Rules for Ministers (Page 5) Who is a minister for tax purposes? How are ministers different for tax purposes? Is a minister employed or self-employed?

Who Is a Minister for Tax Purposes? The IRS answer has nothing to do with theology Three important tax court cases: ◦ Wingo — 1987 ◦ Knight — 1989 ◦ Reeder — 1993

Determining a “Minister for Tax Purposes” Is the person ordained, licensed or commissioned? Does the person administer ordinances? Does the person conduct religious worship? Does the person have management responsibilities in the church? Is the person considered to be a religious leader by the church?

How Ministers Are Different for Tax Purposes Eligibility for housing allowance Self-employment status for Social Security Exemption of wages from federal income tax withholding Use of quarterly estimated tax payments or voluntary withholding Possible exemption from self-employment tax

Employee or Self-employed? Weber v. Commissioner — 1994 ◦ Seven factors identified by court ◦ Ignored 20 factors used since 1987 No one factor determines status Facts and circumstances of each case

Employee or Self-employed? U.S. Tax Court (1994) seven-factor test: The degree of control the employer has over the details of the work Which party invests in the facilities used for the work The opportunity the worker has for profit or loss

Employee or Self-employed? U.S. Tax Court (1994) seven-factor test: Whether the employer has the right to discharge the worker Whether the work is part of the employer’s regular business The permanency of the relationship The relationship the parties think they are creating

Employee or Self-employed? Most ministers have a “dual tax status.” They are always self-employed for Social Security purposes (for ministerial income), but they are usually employees for income tax purposes.

Six Steps to Financial Support Planning (Page 3) Step #1: Determine the needs Step #2: Establish written financial support policies Step #3: Provide for ministry-related expenses

Six Steps to Financial Support Planning (Page 3) Step #4: Provide employee benefits Step #5: Determine personal income Step #6: Complete a financial support worksheet

Step #1: Determine the Needs (Pages 6–7) Identify the categories of financial support Ministry-related expenses Protection benefits Personal income

Step #2: Establish Written Financial Support Policies (Pages 8–9) Policies should cover at least four areas: Ministry-related expenses Employee benefits Personal income Other personnel policies

Step #3: Provide for Ministry-Related Expenses (Pages 10–12) Budget adequately for expenses Avoid payment of unnecessary taxes Establish an Accountable Reimbursement Plan

Church Ministry-Related Expenses (Page 10) Vehicle expenses Work-related meetings, workshops, conferences Ministry expenses Continuing education Hospitality expenses

Key Points to an Accountable Reimbursement Plan (Pages 11–12) The expense must have a business purpose Adequate substantiation of business expenses is required Written record stating amount, date, location and business purpose Receipts required for expenses over $75

Key Points to an Accountable Reimbursement Plan (Pages 11–12) Expenses must be substantiated within 60 days Excess advances must be returned within 120 days Unused money cannot be given to an employee as income or bonus Sample monthly expense report (page 10)

Key Points to an Accountable Reimbursement Plan (Pages 11–12) Church reimburses business expenses from budgeted church funds Caution: cannot be funded from salary Sample reimbursement policy (page 12) Employee issues when writing off business expenses

Employee Issues When Writing Off Business Expenses Can only write off what is above 2% of adjusted gross income Must have enough expenses to itemize and be above the standard deduction of $10,300 Minister must follow the “Deason Rule” and must reduce expenses by % of income that includes housing allowance

Deason Rule Salary + housing total $40,000 Non-taxable housing $10,000 % of nondeductible $10,000/$40,000 = 25% Assume eligible business expenses = $4,000 Eligible expenses of $4,000 reduced by 25% = $3,000 (then reduced by 2% of adjusted income)

Step #4: Provide Employee Benefits (Pages 13–14) Medical, life and disability coverage Retirement plan contributions Social Security assistance

Providing a Benefits Plan for Ministers and Church Employees Demonstrates obedience to biblical teaching Saves taxes Provides protection for the church Extends employee service

Life, Medical and Disability Coverage: Personal and Group Term life insurance Medical coverage ◦ Eight PPO plan options ◦ Includes prescription drug coverage ◦ HSA-qualified plan available Long and short-term disability coverage Dental plans Personal accident coverage Long-term care education and insurance

The Church Retirement Plan A 403(b) tax-sheltered retirement plan For all Southern Baptist church employees who receive taxable income

The Church Retirement Plan — Special Features (Page 14) Contribution options Tax advantages Family protection Matching contributions Investment opportunities

The Church Retirement Plan — Tax Advantages Employer contributions not subject to current income taxes Participant contributions not subject to current income taxes Investment fund earnings not subject to current taxes

The Church Retirement Plan — Tax Advantages Retired ministers allowed to designate benefits as a tax-free housing allowance Contributions by ordained ministers not subject to current Social Security taxes Higher contribution limits than an IRA

The Church Retirement Plan Benefits of state convention contributions: Protection benefits ◦ Disability benefits up to $500 per month ◦ Survivor benefit up to $100,000 Retirement benefits ◦ Contributions up to $17.50 per month

State Convention Contributions Matching Retirement Contributions $1 for every $3 contributed Maximum $17.50 Protection Benefits Disability Income Benefit Survivor Benefit Your Monthly Contribution Level $ $52.50 $1.00 The Church Retirement Plan

Investment Risk and Return

You should carefully consider the investment objectives, risks, charges and expenses of GuideStone Funds before investing. For a copy of the prospectus with this and other information about the funds please call GUIDE ( ) or visit to view or download a prospectus. You should read the prospectus carefully before investing.

Financial Assistance for Churches with a Limited Budget (Page 15) Wyndolyn Royster Hollifield Mission Church Assistance Fund Annual church budget less than $75,000 a year Up to $3,000 in matching contributions over five years are possible Contact GuideStone Financial Resources GUIDE ( ) for details

Social Security Assistance (Page 15) Assists ministers who pay self-employment tax Offset is generally half the total self-employment tax Reported as taxable income

Step #5: Determine Personal Income (Pages 16–17) Responsibility and experience Inflation Performance Housing allowance

Housing Allowance If You Own or Rent The maximum amount eligible for exclusion is the lesser of: The designated amount The actual eligible expenses The fair rental value of the home including furnishings plus utilities

Housing Allowance If You Live in a Parsonage The maximum amount you can exclude is the lesser of: The designated amount The actual eligible expenses

Housing Allowance (Page 17) For eligible ministers (IRS Code Section 107) Designated in advance by the church Non-taxable for federal income taxes only, subject to limits Social Security taxes (SECA) payable on the fair rental value of a parsonage and on the housing allowance

Housing Allowance Actual Eligible Expenses Mortgage or rent Utilities Property taxes Insurance Furnishings Repairs and improvements

How to Designate a Housing Allowance (Pages 17–18) Minister provides church an estimate of anticipated housing expenses (form on page 14) Church officially designates and documents housing allowance in advance Action recorded in church minutes and minister is notified (form on page 14)

How to Designate a Housing Allowance (Pages 17–18) Housing allowance may be changed prospectively during the year Minister is responsible for documenting expenses

Step #6: Complete a Financial Support Worksheet (Page 19) Note: It is suggested that the three categories of financial support be placed in separate areas of the church budget.

Pulling It All Together Complete a financial support review annually Put financial support policies in writing Budget for ministry-related expenses separately Establish an accountable reimbursement plan Budget for insurance protection

Pulling It All Together Begin employer contribution to the Church Retirement Plan Consider the Mission Church Assistance Fund Consider Social Security offset for ministers Budget FICA taxes for other church employees

Pulling It All Together Review personal income of all church employees Consider cost-of-living increases Consider merit raises Designate minister’s housing allowance Complete Financial Support Worksheet

Federal Reporting Requirements for Southern Baptist Churches Obtain an employer identification number (EIN) from the federal government Determine whether each church worker is an employee or self-employed Obtain the Social Security number for each worker Have each employee complete a Form W-4

Federal Reporting Requirements for Southern Baptist Churches Compute each employee’s taxable wages Determine the amount of withholding based on Form W-4 information Withhold the appropriate amount for FICA for non-minister employees Deposit withheld taxes (see IRS Publication 15, Circular E for details)

Federal Reporting Requirements for Southern Baptist Churches File Form 941 quarterly Prepare Form W-2 for each employee at end of year Prepare Form 1099-MISC for non-employee compensation of $600 or more

Questions? Contact GuideStone Financial Resources GUIDE ( )

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