The Pastor’s/Overseer’s Compensation Package

Establishing a Tax-Advantageous Compensation Package  Establish the fringe benefits that will be provided  Medical Insurance  Expense Reimbursement  Housing Allowance  Retirement

Medical Insurance  Premiums paid for accident and health insurance by an employer—the church—are not taxable income according to Sec. 106.

Revenue Ruling Pay pastor’s medical insurance as a benefit OR adjust salary to pay premiums. Pay with church check OR pay with personal check and be reimbursed, OR pay by spousal payroll deduction and be reimbursed. Document—furnish clerk with an invoice.

HRA—Health Reimbursement Arrangement, Rev. Ruling  Must be paid by employer  Cannot make a salary reduction election to pay  Any unused portion is carried forward.  Can be reimbursed for out-of-pocket costs—costs not paid by insurance.

Self-Insured Medical Reimbursement Plans  Must have a plan or arrangement uniform to all employees.  Employer pays medical expense directly to hospital, doctor, etc.  When funded by salary reduction, it becomes “use it or lose it.”

Cafeteria Plans  Separate written plan maintained by employer  Employee selects benefits according to Sec  Child care, self-insured medical reimbursement plans, health benefits, etc. Benefits are “use it or lose it.”

Expense Reimbursement  Establish an accountable reimbursement plan for auto and professional employee business expense  Written plan  Employer can initially adjust the salary to fund the plan.  Expenses for a minister are no different than for any other professional.

Accountable Reimbursement Expenses  You must account to your employer:  Account book  Diary  Statement of expense with supporting documentary evidence—receipts 1. Not reported on tax return 2. Employer does not include on W-2 3. Do not have to substantiate to IRS 4. Significantly lowers risk of audit

Professional Expenses IRS Publication 535  Auto Expense:  58.5¢ mileage allowance (7/08)  log mileage  date odometer reading B/E  place/purpose  Lodging/Meals away overnight

Professional Expenses  Record:amount date place traveled to business purpose  Must have receipts for: lodging any other expense over $75.00  You may maintain an account book for any expense under $  IRS rule and “company” policy may differ.

Professional Expenses  Entertainment:  Meals directly related to conducting your job  Education Expense  Computer—percent used in job  Office supplies/postage  Seminars/dues  Subscriptions, books, long-distance phone calls, cell phone

Professional Expenses  Business expense is only allowable for the person earning an income.  Exception: As entertainment expense, spouse’s meals are deductible.

Per Diem Rates  Applicable per diem depends on locality of travel.  Consistently apply in accordance with reasonable business practice.  May use per diem for food.  Actual lodging expense must be used.

Without Accountable Reimbursement Report Employee Business Expense, Form 2106  Subject to:  2% itemized deduction limitation—job expense  IRC 265 limitation  Taxable Compensation divided by Gross Compensation Percentage Ratio allowable deductible Expense on Schedule A  Result in more income tax—Greater chance of audit.

Designate Housing Allowance  IRS Code Sec. 107: In the case of a minister of the Gospel, gross income does not include: 1. The rental value of a home furnished to him as part of his compensation; or 2. The rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home.

Housing Allowance  Must be designated in advance  Must be a specific dollar amount or a specific percent of salary  Minutes of finance committee  IRS will accept a perpetually worded designation. Tax plan annually and increase as needed.

$ 150,000 Home Principal$ 835 Taxes1,782 Interest8,081 Insurance1,340 Repairs793 Furniture1,409 Decorator Items463 Utilities, Telephone3,738 Misc. Supplies642 $19,083

Ministers Who Own FRV Home $18,000 FRV Furniture 6,000 Decorator Items 463 Utilities 3,738 Miscellaneous 642 $28,843  Reduces Income Tax  Does not reduce Social Security Tax

Three Hoops  Must use the smallest: 1.Actual amount spent—$19,083 2.FRV—Fair Rental Value—$28,843  Rule of thumb: House—1% of Market Value per month ($150,000 house = $1,500 per month) Furnishings—1/3 of house value ($150,000 x 33% = $50, % = $500) 3.Amount designated as allowance = $24,000

Ministers Who Rent Ministers who rent their homes will want to designate an amount to cover:  actual rent  cost of furnishings  cost of decorating  renters insurance  utilities, etc.

Your local church EIN # Church of God of Prophecy 125 Main Street Your Town, TN John H. Doe 246 Washington Avenue Your Town, TN $26, E $3, X Not included in Box 1 $24, Parsonage Allow.

Why Consider Investing Now for Retirement?

Jan Couch P.O. Box 2910 Cleveland, TN FAX: