2017 W-2 & End of Year Tax Issues Rev. Nate Berneking, Director of Finance and Administration Angela Thomas, Assistant Treasurer

W-2 or 1099

Independent Contract or Employee

Facts & Circumstances Test Behavioral Factors Who controls the schedule? Who supervises? Who provides tools? Financial Factors How is compensation paid? How are worker’s finances managed? Relationship Factors Is there a contract? What does it say? Is the worker doing the work on behalf of a corporate entity? How is compensation paid (i.e. are there benefits)?

No One Factor Determines Church nursery worker? Does he/she bring tools of the trade or does church provide? Does the nursery worker get to set the schedule for opening the nursery or does the church? Does the nursery worker actually work for some other childcare provider with whom the church contracts? Pianist? Schedule? Tools? Contract? How is pay structured As a general rule, many churches are providing 1099 and treating people as independent contractors who are actually employees and should be getting a W-2 with payroll taxes paid.

What about Clergy? Clergy are special. Self-employed for purposes of Social Security/Medicare taxes. They do NOT pay FICA and do NOT have contributions withheld from pay. They pay SECA (self-employment contributions) for social security. BUT, the IRS has long-determined that pastors are EMPLOYEES of the local church for purposes of income tax. This means clergy must ALWAYS get a W-2 This position gained more weight when the United Methodist General Council on Finance & Administration challenged the IRS to allow small church pastors to receive a 1099. GCFA lost. In a case called Weber v. Commissioner, the U.S. Tax Court declared that Clergy must get a W-2.

What About Certified Lay Speakers? You still have to apply the facts and circumstances test. And unless it is for a very short term and contracted duration (i.e. an interim who steps in for a specific purpose), the person serving as pastor, even if actually a lay person, will still be treated as an employee. They get W-2’s as well.

Unfortunately, There’s More Clergy v. Laity and Social Security Taxes

First who is Clergy? Elders Deacons Licensed Local Affiliate Members Check the Book of Discipline for a complete list. If it’s not listed, then it’s not a clergy status.

So What? The Book of Discipline defines clergy very specifically, and the IRS looks to the definition established by the denomination. CLM’s, lay speakers and employees who may be ordained in another denomination are NOT clergy. However, clergy status only changes two things: Housing and Social Security. CLM’s and others without Discipline-defined clergy status may not receive tax-free housing. CLM’s and others without clergy status should have FICA and Medicare taxes withheld and reflected on the W-2.

What’s a W-2 Look Like?

Giving Statements Donors who make a contribution of $250 or more must have a “contemporaneous written acknowledgment from the donor organization.” This written document should include the church’s name (perhaps on letterhead) and provide the following data: The name of the donor. The date and amount of each contribution of $250 or more during the year. A statement that no goods or services were provided to the donor in exchange for the contribution. A description and good faith estimate of the value of any noncash property contributed.

A Brief Update on Housing The Wisconsin District Court Found 26 USC 107(2) unconstitutional (clergy housing allowances), but no remedy was granted. On December 6, the remedy was granted. The IRS was enjoined from enforcing 107(2) — no tax-free housing allowances The Judge stayed her order pending appeal. Appeal will take several months. Housing allowances are still tax free for 2017.