1. Rev. Nate Berneking Director of Finance & Administration

2. . United Methodist Clergy Special

3. Answers to 3 Key Questions

4. Clergy Pay What?

5. Income Tax Governed by the Internal Revenue Code, Internal Revenue Regulations, Revenue Rulings and US. Court Decision

6. Social Security and Medicare Taxes

7. Payroll taxes governed by either the Self Employment Contributions Act (SECA) or the Federal Insurance Contributions Act ( FICA). These taxes fund Social Security and Medicare.

8. The tax rate for Social Security and Medicare is 15.3% of Wages/Income. In FICA, ½ is paid by the employer (7.65%), and ½ is withheld from employee paychecks (7.65%). Key Point: The Employer Pays FICA. BUT… A self-employed individual pays under SECA and is responsible for paying the entire share…why? A self-employed individual pays under SECA and is responsible for paying the entire share…why? They employ themselves.

9. As clergy we pay which one? Most people with an employer pay FICA… But clergy are special….so Clergy pay SECA!

10. Clergy Work For Who?

11. Conference, Bishop or Local Church?

12. The Local Church At least as far as income tax is concerned

13. Employment Status? Seriously?! What does that mean?

14. Clergy are treated as employees of the salary paying unit. Remember…

15. That was for purposes of income tax.

16. But, remember, clergy are special… Clergy are also responsible for SECA.

17. Why?

18. Churches Don’t Know Squat about tax and finance.

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

20. Not in the least. 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

21. 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. So what?

22. So clergy get a 1099, right? WRONG! Remember… we’re special

23. Clergy Get a W-2 Despite paying SECA, clergy are “employees” for income tax purposes

24. Clergy THUS a.Receive benefits through the administration of the conference, are supervised by their bishop, but are employed by the local church for purposes of income tax. b.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. c.BUT, 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)

25. Churches SHOULD NOT

26. a.Give clergy a 1099 reflecting their salary support; or b. Withhold and pay FICA from and on behalf of clergy.  Elder  Deacon  Licensed Local Pastor

27. Churches SHOULD

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

29. Housing

30. 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 1 st Amendment of the US Const.  26 U.S.C. sec. 107 That same compensation MUST be reported and IS subject to SECA.

31. What is housing? Parsonages, Housing allowances, amounts paid for utilities, amounts paid for “furnishings.”

32. So…. what does this mean?

33. Something to remember: THIS IS ACTUALLY A BENEFIT THIS IS ACTUALLY A BENEFIT Even if SECA hurts.

34. 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:

35. a.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’) b.The fair rental value of the pastor’s home fully furnished with utilities paid; and c.The amount the pastor can actually substantiate with receipts.

36. Case #1Factory Worker Jack was paid $45,000 in wages in 2013. He rents an apartment for $500 a month in the small town of Missouri in which he works. His utilities (electric, gas, internet—gotta Tweet, home phone and basic cable—gotta have ESPN) totaled $4,000 exactly. After housing and taxes, what $ did he have available for the rest of living?

37. a.Standard Deduction = $6,200 b.$38,800 of Taxable Income c.Tax Bracket= 25% (but they are brackets) d.FICA=7.65% of Wages SO….. 1. Income Tax Owed=$5707* (take my word for it) 2. FICA Withheld=$3,442.50. 3. Housing Paid=$6,000+$4,000=$10,000 4. What’s Left? $45,000-$5707-$3,442-$10,000=$25,851 *Might be even less with above the line deductions.

38. Case #2Pastor 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?

39. a. Standard Deduction = $6,200 b. $28,800 of Taxable Income c. Tax Bracket=15% d. SECA=15.3% of Gross SO... SO... 1.Income Tax Owed=$3,859* (take my word for it) 2.SECA Owed=$6885 3.Housing Paid=0.00 4.What’s Left? $35,000-$3,859-$6885=$24,756 *Will definitely be less because Self-Employment tax is an above the line deduction.

40. Let’s say that Pastor Jack also tells his church before charge conference that he wants to designate an additional $5,000 as additional housing allowance. Over the course of the year he spends $5,000 on household needs, including a couch, a chair, a tv, paint for two rooms, a set of book cases, light bulbs and some flower pots for the front porch. He keeps all his receipts and the total exceeds $5,000. When he files his income tax return, his taxable income will suddenly be reduced to $23,800 and his income tax will be $3,109, almost $800 less. Jack will actually have $25,006 left to live on. And remember, he made $10,000 less than Factory Worker Jack.

41. How To Prepare: There are only 2 options

42. a.Turbo Tax Premium. I know its expensive, but its 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.

43. b. 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.”

44. Income Tax Basics: In case you never had it explained

45. Income Tax

46. Taxable Income

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

48. Gross Income Box 1 of W-2 + Box 1 of W-2 + any other income any other income (excluding housing)

49. Step 1: From Gross Income you subtract certain “above the line deductions.”

50. a.Health Savings Account Deductions (if you have one) b.Unreimbursed Moving Expenses c.Self Employment TAX!!!!! Even more savings for us d.Contributions to IRAs (not PIP—before tax contributions never even get reported as gross income) e.Student loan interest f.Tuition

51. Adjusted Gross Income (AGI)

52. Step 2: Standard Deduction OR “Itemized Deductions”

53. Step 3: Tax is calculated based on taxable income. on taxable income.

54. Tax Brackets Individual Taxable IncomeBracket $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 Taxable IncomeBracket $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

55. Step 4: That amount is then reduced by any “credits.”

56. Biggest Credit: Previously paid or withheld Tax. (Not really a credit at all)

57. Child Tax Credit—If you have kids. It is GREAT!!

58. Earned Income Tax Credit-- -If clergy have kids, have a sufficiently low AGI and earned income from work, they might qualify. Directly offsets tax liability.

59. 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

60. 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)

61. Mileage Rate of reimbursement for business-travel: $.54/mile No commuting miles (home office exception) Alternative: actual costs (reimbursing clergy for gas)

62. Other Tax Situations You Might Face: 1.Capital Gains 2.Rental Income

63. Questions?