Director of Finance and Administration

UNITED METHODIST CLERGY Special

ANSWERS TO 3 KEY QUESTIONS

1. CLERGY PAY WHAT?

INCOME TAX Governed by: Internal Revenue Code Internal Revenue Regulations Revenue Rulings U.S. Court Decision

SOCIAL SECURITY AND MEDICARE TAXES

PAYROLL TAX Governed by either: Self Employment Contributions Act (SECA) Federal Insurance Contributions Act ( FICA) These taxes fund Social Security and Medicare.

PAYROLL TAX Key Point: The Employer Pays FICA. The tax rate for Social Security and Medicare is 15.3% of Wages/Income. In FICA ½ is paid by the employer (7.65%) ½ is withheld from employee paychecks (7.65%) Key Point: The Employer Pays FICA.

They employ themselves. BUT A self-employed individual pays under SECA and is responsible for paying the entire share. WHY? They employ themselves.

AS CLERGY WE PAY WHICH ONE? Most people with an employer pay FICA … But clergy are special so … CLERGY PAY SECA!

2. CLERGY WORK FOR WHO?

Conference, bishop or local church? Conference board of pensions?

At least as far as income tax is concerned THE LOCAL CHURCH At least as far as income tax is concerned

Seriously? What does that mean? 3. EMPLOYMENT STATUS? Seriously? What does that mean?

Clergy are treated as employees of the salary paying unit. REMEMBER Clergy are treated as employees of the salary paying unit.

That was for purposes of income tax.

BUT, REMEMBER, CLERGY ARE SPECIAL … CLERGY ARE ALSO RESPONSIBLE FOR SECA.

WHY?

Churches don’t know squat about tax and finance.

Congress made clergy self-employed for purposes of SECA. Easy, right?

NOPE.

SECA Most people who pay SECA have a particular employment status They aren’t “employees” at all They are “independent contractors” That means they aren’t “employees” of who/whatever is paying them

SO WHAT? When someone is an “independent contractor,” the “employer” will issue a tax form called a 1099 which will list the amounts paid during the course of the preceding year. They do NOT get a W-2.

REMEMBER, WE’RE SPECIAL … SO, CLERGY GET A 1099, RIGHT? WRONG! REMEMBER, WE’RE SPECIAL …

Despite paying SECA, clergy are “employees” for income tax purposes CLERGY GET A W-2

CLERGY THUS … BUT BUT BUT Receive benefits through the administration of the conference Supervised by their bishop BUT BUT Clergy are self-employed for purposes of Social Security and Medicare meaning they pay SECA, which is paid by them individually by April 15 and filed as a schedule SE with the rest of his or her tax return. As employees of local churches they are issued a W-2 by January 31 of each year, reflecting the wages paid by the local church with notes for tax-deferred pension and housing (we’ll get there later). BUT are employed by the local church for purposes of income tax.

CHURCHES SHOULD NOT

CHURCHES SHOULD NOT … Give clergy a 1099 reflecting their salary support; or Withhold and pay FICA from and on behalf of clergy Elder Deacon Licensed Local Pastor

CHURCHES SHOULD

CHURCHES SHOULD … Give clergy a W-2 reflecting the cash support paid during the year Show - 0 - in the boxes for Social Security and Medicare Wages Reflect amounts paid before income tax in the Notes section of the W-2 to make SECA reporting easier for the clergy

In case you’ve never had it explained INCOME TAX BASICS In case you’ve never had it explained

INCOME TAX

TAXABLE INCOME

Getting there is a 4 step process that includes a ton of smaller steps on form 1040.

GROSS INCOME + Box 1 of W-2 Any other income (excluding housing)

From Gross Income you subtract certain “above the line deductions.” STEP 1 From Gross Income you subtract certain “above the line deductions.”

STEP 1 Gross Income - Health Savings Account Deductions (if you have one) Unreimbursed Moving Expenses Self Employment tax Contributions to IRAs not PIP — before tax contributions never even get reported as gross income Student loan interest Tuition

ADJUSTED GROSS INCOME (AGI)

Standard Deduction OR “Itemized Deductions” STEP 2 Standard Deduction OR “Itemized Deductions”

STANDARD DEDUCTIONS 2016 SINGLE INDIVIDUALS $6,300 $6,350 IN 2017 HEAD OF HOUSEHOLD $9,300 $9,350 IN 2017 MARRIED FILING JOINTLY $12,600 $12,700 IN 2017

STEP 2 Mortgage Interest (Primary Residence Only) State and Local Income Tax Property Tax Medical and Dental Expenses (as long as they exceed 7.5% of AGI) Charitable Contributions Unreimbursed Business/Professional Expenses (as long as they exceed 2% of AGI)

STEP 2 Taxpayers choose standard or itemized deductions based on which one is larger. For example, if Pastor Jane, a single taxpayer, gave $10,000 to the church she serves last year, she will definitely be itemizing deductions. Why? $10,000 is more than $6,300.

Tax is calculated based on taxable income. STEP 3 Tax is calculated based on taxable income.

INDIVIDUAL INCOME BRACKET MARRIED FILING JOINTLY INCOME BRACKET TAX BRACKETS INDIVIDUAL INCOME BRACKET $0 - $9,225 10% $9,225 - $37,450 15% $37,450 - $90,750 25% $90,750 - $189,300 28% $189,300 - $411,500 30% Top Bracket 39.6% MARRIED FILING JOINTLY INCOME BRACKET $0 - $18,450 10% $18,450 - $74,900 15% $74,9000 - $151,200 25% $151,200 - $230,450 28% $230,450 - $411,500 30% Top Bracket 39.6% These will adjust slightly in 2017.

That amount is then reduced by any “credits.” STEP 4 That amount is then reduced by any “credits.”

Previously paid or withheld tax. (Not really a credit at all) BIGGEST CREDIT: Previously paid or withheld tax. (Not really a credit at all)

CHILD TAX CREDIT – IF YOU HAVE KIDS: $1,000 per child (under 17) Phases out for taxpayers with AGI over $75,000 for individuals or $110,000 for married filing jointly

EARNED INCOME TAX CREDIT Must have children and sufficiently low AGI earned income from work.

HOUSING

HOUSING At least as of today, compensation (cash or in-kind) paid to clergy in the form of “housing” is exempt from INCOME TAX. This is due to an old section of the Internal Revenue Code, and it HAS been and will probably continue to be challenged on grounds of the Establishment Clause of the 1st Amendment of the US Constitution (26 U.S.C. sec. 107) That same compensation MUST be reported and IS subject to SECA.

WHAT IS HOUSING? Parsonages Housing allowances Amounts paid for utilities Amounts paid for “furnishings”

SO … WHAT DOES THIS MEAN?

THIS IS ACTUALLY A BENEFIT Something to remember: THIS IS ACTUALLY A BENEFIT (Even if SECA hurts)

WHAT’S THE RULE? Clergy can exempt from INCOME TAX (not SECA) any compensation (in-kind or cash) paid for housing including Rent Mortgage payments Utilities Furnishings or other expenses related to housing

BUT, THE AMOUNT THAT MAY BE EXEMPTED IS LIMITED TO: The amount set by the congregation in a charge conference Will need some form of housing resolution that states what housing is provided and how much the church intends to pay as ‘housing’ The fair rental value of the pastor’s home fully furnished with utilities paid; and The amount the pastor can actually substantiate with receipts

CASE #1 Factory Worker Jack was paid $45,000 in wages in 2015. He rents an apartment for $500 a month in the small town of Missouri in which he works. His utilities (electric, gas, internet, home phone and basic cable) totaled $4,000 exactly. After housing and taxes, what $ did he have available for the rest of living?

*Will be even less with above the line deductions CASE #1 WHAT’S LEFT? $45,000 -$5,470 -$3,442 -$10,000 $26,088 STANDARD DEDUCTION $6,300 $38,700 of Taxable Income TAX BRACKET 25% FICA 7.65% of wages INCOME TAX OWED $5,470* FICA WITHELD $3,442.50 HOUSING PAID $6,000+$4,000=$10,000 *Will be even less with above the line deductions

After housing and taxes, what $ did he have left? CASE #2 Pastor Jack get’s the Conference minimum for an Elder: $35,000. He also is provided a parsonage with utilities paid by the local church he serves. The fair rental value of the parsonage is approximately $6,000 annually, and his utilities were also $4,000. After housing and taxes, what $ did he have left?

CASE #2 WHAT’S LEFT? $35,000 -$3,884 -$6,885 $24,271 STANDARD DEDUCTION $6,300 $28,700 of Taxable Income TAX BRACKET 15% SECA 15.3% of gross INCOME TAX OWED $3,844* SECA OWED $6,885 HOUSING PAID $0.00 *Will be less because Self-Employment tax is an above the line deduction.

HOW TO PREPARE There are only 2 options.

PREMIUM VERSION OF SOFTWARE I know it’s expensive, but it’s cheaper than a preparer. Just be able to understand your forms and your status as an employee that happens to be self-employed in religious employment as a minister.

TAX PREPARER The safest bet (not that we bet), BUT you will have to tell them: “I am an employee of XYZ UMC, but the IRS treats me as self-employed for purposes of SECA only. I get a W-2.” You will also need to instruct them on anything like utilities, “furnishings allowances” or “additional amounts exempted for the purpose of housing.”

PROFESSIONAL EXPENSES 26 USC sec. 162 allows employees to deduct unreimbursed expenses incurred in business The deduction is “itemized,” and the amount must exceed 2% of Adjusted Gross Income

ACCOUNTABLE REIMBURSEMENT Church must adopt an accountable reimbursement policy (charge conference form in Missouri) Clergy will then account for expenses to the local church, NOT the IRS and reimbursements are NOT considered income (not taxed) BUSINESS RELATED (No personal use) Key rule: ADEQUATE ACCOUNTING Itemized receipts Mileage logs (beginning reading/end reading)

MILEAGE Rate of reimbursement for business-travel: $.535/mile No commuting miles (home office exception) Alternative: Actual costs (reimbursing clergy for gas)

FILING STATUS Single Married Filing Jointly Head of Household Designed for single people caring for disabled children or relatives Married Filing Separate

MARRIED FILING SEPARATELY Not typical, but it can reduce tax liability for some couples who both work and make about the same amount. Might also be needed in circumstances of a divorce or estranged couple. Can also protect a spouse from the other’s tax liability. This is sometimes an issue in the midst of a divorce. HOWEVER, couples filing separately lose the child tax credit, deduction for IRA contributions and other tax breaks.

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QUESTIONS

PAYROLL Clergy Part-Time (time reporting v. salary) No withholding unless W-4 Voluntary Paid with Quarterly Payroll Taxes on Form 941 SECA Savings Accounts Part-Time (time reporting v. salary) Based on Conference Rules

PAYROLL Lay Employer like any other employer subject to all laws EXCEPT unemployment insurance. FICA + Medicare = 7.65% Wage base limits on SS Paid Time Off (Pastor’s may be affected by Conference Rules)

W-2 Sample walk-through here

INDEPENDENT CONTRACTOR OR EMPLOYEE? Determines whether the church gives a W-2 or 1099 Independent Contractor v. Employee Behavioral Factors Who controls schedule? Who supervises? Who provides the tools? Financial Factors How is compensation paid? How are the worker’s finances managed?

INDEPENDENT CONTRACTOR OR EMPLOYEE? Relationship Factors Is there a written contract? What does it say? Is the work done by an individual or a corporate entity? How is compensation structured and what benefits are given?

FAIR LABOR STANDARDS ACT Governs wage and hour practices: Minimum Wage Overtime Rules

Then a Federal Court set aside the new regulations. COMPLICATIONS In May 2016, the Department of Labor issued new regulations for employers governed by the Fair Labor Standards Act (FLSA). Then a Federal Court set aside the new regulations. Then … the election.

FAIR LABOR STANDARDS ACT Under the old/current regulations, many employers used several different exemptions to avoid paying overtime rates to employees. Without knowing it, churches often excluded employees that should NOT have been. The new regulations were meant to include more people in the requirement, requiring more employers to pay overtime, thereby increasing the rate of pay. Good or bad, it was/is a chance to reset.

AREN’T CHURCHES EXEMPT? NO! “Enterprise” and “Intra-State Commerce” Exemptions likely will not apply.

FIRST, WHO IS COVERED BY FLSA? Everyone. Unless the FLSA or Federal Courts say it doesn’t apply to some group. The FLSA itself provides five exemptions: Professionals Administrative Employees Computer Outside Sales Executive

EXEMPTIONS ARE DETERMINED BY: Job Description Education Requirements Actual Compliance Titles and Descriptions Are NOT Enough

EXEMPTIONS ALSO REQUIRE A CERTAIN SALARY: Until May 2016, the rate of pay was about $23,660 annually. Employees paid less than that in a year still required overtime, even if they were a professional or met the definition of an administrative employee. The new regulations raised the threshold for salary from $23,660 to $43,476.

THE REGULATIONS REQUIRE PAPERWORK BY THE EMPLOYER Tracking of hours Increased pay for employees who qualify and who work overtime. Or, it might mean the employee works fewer hours because the employer prefers not to pay the overtime rate.

BUT, AREN’T CHURCHES EXEMPT? NO! The two exemptions that work for employers are probably NOT going to apply. The only other exemptions apply to individual employees.

AREN’T PASTORS EXEMPT? Probably. ONLY probably. No statutory exemption However, one Federal Court stated that First Amendment provided a “ministerial exemption.”

AREN’T PASTORS EXEMPT? Most full time pastors will qualify under the “professional exemption.” Minimum compensation requirements for full-time licensed, ordained and commissioned clergy set pay above the threshold. Part-time clergy, however, often fall below the thresholds (new or old). We are going to ASSUME a ministerial exemption applies until we are told clearly it doesn’t.

WHAT ABOUT OTHER CHURCH EMPLOYEES? The FLSA has no definite exemption that covers them. Employees doing the work of a “pastor” are PROBABLY exempt IF they have education and ministerial job (i.e. youth pastor). Others might qualify as “professionals” or “administrative employees,” but remember, they now must make at least $23,660.

CAN’T WE JUST PAY A SALARY AND BE SAFE? The amount of salary is irrelevant without a clearly defined exemption. Employees must be professional, administrative and be paid enough. Clergy might be exempt entirely, but anyone else is going to have to be paid sufficiently with hours recorded.

WHAT IF WE DON’T COMPLY? There is no criminal penalty. If an employer fails to comply, an employee is entitled to record his or her own time and pursue the church in federal court for back-pay with interest and penalties.

GCFA CAN HELP YOU Offering a review of job descriptions and related positions to determine if exempt. The cost for this service is $60 per review.  It can be accessed through the Conference Treasurer or GCFA www.umc.org/gcfa.

Check writing/ approving SEGREGATION OF DUTIES Money Counting Depositing Check writing/ approving ≠ Excuses We’re a small church But, we’re like a family Protecting each other from temptation

LEGAL ISSUES Employee Handbook (never older than 5 years old) Volunteer Handbooks Lines of Authority

LEGAL ISSUES Safe Sanctuary and Background Checks Building Use Schedules Indemnification & Insurance Church Contracts Term and Renewal (the curse of copier leases) Cost

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