the pastor’s/overseer’s compensation package. establishing a tax-advantageous compensation...
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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 61-146
Pay pastor’s medical insurance as a benefitOR
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 2002-41
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. 125. 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/Mealsaway overnight
Professional Expenses
Record: amountdateplace traveled tobusiness purpose
Must have receipts for:lodging any other expense over $75.00
You may maintain an account book for any expense under $75.00.
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.
www.policyworks.gov/perdiem 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
Taxes 1,782
Interest 8,081
Insurance 1,340
Repairs 793
Furniture 1,409
Decorator Items 463
Utilities, Telephone 3,738
Misc. Supplies 642
$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—$19,0832. 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% = $50,000 - 1% = $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 Prophecy125 Main StreetYour Town, TN 31234
123-45-6789
John H. Doe
246 Washington Avenue
Your Town, TN 31234
$26,582.80
E $3,888.00
X
Not included in Box 1$24,000.00Parsonage Allow.
Why Consider InvestingNow for Retirement?
Jan Couch
P.O. Box 2910Cleveland, TN 37320-2910
423.559.5222FAX: 423.559.5238