Payroll – Tips, Tricks & Traps Presented by: Elaine Sommerville, CPA Sommerville & Associates, P.C.

Worker Classification Volunteers Ministers Independent Contractors Non-Minister Employees Copyright Elaine Sommerville 2017

Volunteers Workers that are not compensated Compensation of $100 or greater must be reported and is subject to FICA/Medicare Inadvertent Compensation Gift Cards Substantial tangible gifts Cash Volunteers Copyright Elaine Sommerville 2017

Ministers Copyright Elaine Sommerville 2017

Classifying Ministers for Payroll Purposes Step 1 - Determine who on staff is a minister – must be commissioned, licensed or ordained by a church Step 2 - Determine if the people identified in Step 1 are performing ministerial duties: Performance of sacerdotal functions Conduct religious worship services Control, conduct or maintenance of religious organizations or Teaching at theological seminaries Classifying Ministers for Payroll Purposes Copyright Elaine Sommerville 2017

TIP & TRAP: Any employee that meets the above two prong test must be treated as a minister for payroll purposes. This is not optional! Copyright Elaine Sommerville 2017

Ministerial Peculiarities Ministers do not have to have federal income tax withheld from their paychecks. They may elect to do so by giving the church written permission to withhold. (IRC 3401(a)(9)) Ministers can never have FICA/Medicare withheld from their paychecks. (IRC 3121) Ministers are subject to self employment tax. (IRC 1402(c)) [May elect out under IRC 1402(e)] Ministers may have a portion of their compensation designated as housing allowance (IRC 107) Ministerial Peculiarities Copyright Elaine Sommerville 2017

Ministers – Two People In One Ministers have dual tax status under the law Self employed for purposes of paying into Social Security/Medicare Employee for purposes of federal income tax Copyright Elaine Sommerville 2017

Non-Minister Employees Copyright Elaine Sommerville 2017

Three areas of consideration: Behavioral control factors – Does the employer have the right to direct and control what work is accomplished and how the work is done? Financial control factors – Does the employer have the right to control financial considerations and must he bear the financial responsibilities of related expenses? Relationship of the parties – What facts exist that demonstrate the intended and understood relationship of the parties? Tip: Rarely is frequency of the performance of services or the amount of the payment a factor in this test. Tip: The cost of misclassifying workers can be 14% to 35% of the wages paid. Who is an Employee Copyright Elaine Sommerville 2017

Common Classification Errors The most common positions misclassified in churches and organizations are: Child care workers Musicians Maintenance workers Workers on a trial run Bookkeepers or others that may work from home Common Classification Errors Copyright Elaine Sommerville 2017

Reclassifications solved quickly, easily and cheaply Voluntary Worker Classification Program Underway File Form 8952* at least 60 days prior to the start of a quarter or a year reporting the groups of workers to be reclassified Reclassify workers for cents on the dollar if: The workers have been consistently treated as independent contractors and all Forms 1099-Misc have been filed The church is not currently undergoing an IRS payroll audit or a DOL audit or a state employment audit TIP Reclassifications solved quickly, easily and cheaply Copyright Elaine Sommerville 2017

Churches may only pay an employee reasonable compensation for their services. Consider the amount of reasonable compensation to be the umbrella. Compensation is everything that is received for the services rendered except for expenses reimbursed under an accountable plan and certain other fringe benefits described in Sec. 132. Does it fit within the umbrella? Compensation Rules Copyright Elaine Sommerville 2017

Trick Trap What is benefiting the employees – consider all* Cash Housing Auto Insurance Medical programs Child care Retirement Tuition Clothing Love Gifts Gift Cards Trick Identify all the benefits – don’t leave anything off the list Trap Don’t forget the noncash benefits! Copyright Elaine Sommerville 2017

Don’t forget to write it down Compensation packages should be documented noting the date it was approved and who approved it. For certain persons, the church must also document the outside sources used to determine reasonable compensation. Trap Don’t forget to write it down Copyright Elaine Sommerville 2017

Determine What’s Taxable Evaluate each element of the package and mark each as either taxable or not taxable for federal tax and for regular employees whether it is taxable for Social Security tax and for Medicare tax. Tip: Many elements are taxable if paid in one form and not taxable if paid in another form Reimbursement for auto expenses based on documented business mileage at the approved rate is nontaxable, but Reimbursement for auto expenses using a flat auto allowance is fully taxable. Determine What’s Taxable Copyright Elaine Sommerville 2017

Automatic Excess Benefit Transactions Failure to report a taxable benefit correctly and designate it as compensatory in nature may create an automatic excess benefit transaction for key employees TRAP Automatic Excess Benefit Transactions Copyright Elaine Sommerville 2017

IRC Section 107 allows a minister to have a portion of his/her compensation designated as housing allowance. The church’s only responsibility is to make sure the allowance is properly designated by the appropriate authority prior to its payment. The amount paid as housing allowance is not reportable on Form 941/944 as wages and it is not included in Box 1 of Form W- 2. Tip: The church should not take steps to determine how much of the housing allowance is taxable to the minister. Housing Allowances Copyright Elaine Sommerville 2017

Report & Pay File all appropriate payroll returns Know the applicable tax deposit schedule and stick to it Report & Pay Trap: The lack of the proper payment of payroll taxes is the number one financial catastrophe that churches face. Errors made due to employee ignorance of the rules or through the embezzlement of the tax deposit money can result in large tax and penalty assessments to the church. Trick: Complete Form 2848 and have someone else, a CPA, attorney or officer, listed to received notices from the IRS. Make sure the notice is sent to an address separate from the organization. Copyright Elaine Sommerville 2017

Independent Contractors Copyright Elaine Sommerville 2017

Obtain a Form W-9 before paying anyone believed to be a contractor Properly designate the vendor in the accounts payable system – this is the number one reason why a church fails to issue a 1099-Misc* to someone Tip: No W-9/No Pay Policy Trap: Waiting until it is time to prepare Forms 1099-Misc to obtain the information may result in penalties to the organization Setting up correctly Copyright Elaine Sommerville 2017

General Rule – File for payments for rents and services that are greater than $600 and royalties greater than $10 File Forms 1099-Misc for payments to individuals, partnerships and LLCs that are not filing as corporations File Forms 1099-Misc by January 31st for those reporting amounts in Box 7 Trap: Not filing brings a penalty of $100 per form and backup withholding of 28%. Forms 1099-Misc Copyright Elaine Sommerville 2017

Elaine Sommerville, CPA Sommerville & Associates, P. C Elaine Sommerville, CPA Sommerville & Associates, P.C. elaine@nonprofit-tax.com Elainesommerville.blogspot.com Thank You! Copyright Elaine Sommerville 2017