Reporting The Minister - W-2 or 1099?

Is the Pastor Self Employed, or a Staff Minister.  This is one of the most confusing areas you will have to understand.  The answer to this question – is YES.  He is both Self Employed, and a Staff Minister.  As there are two sides to this issue, we will try to help you understand how he is to be treated.

  1. He is “Self Employed,” in that he is responsible to pay his own taxes.  Just as any other Self Employed person, he is required to file a Quarterly tax estimate, on Form 1040 ES, and pay any taxes due directly to the IRS. The church is not required to withhold, but may do so if they wish, and if so requested by the pastor by filling out a W-4 and giving it to the church..
  2. He is a “Staff Minister,” in that the church is required to report any salary paid him on a Form W-2.  NOT on a 1099 like all other self employed persons. It is NOT required to report any Housing Allowance paid the minister.

In either case, the church is NOT required to withhold taxes. Following are some of the major differences:

THE MINISTER EMPLOYEE 

The IRS, and most tax advisers agree, that this is the proper designation for all ministers. The church should have a signed memorandum, letter of agreement or worksheet in the file of the minister employee detailing the compensation package.  This worksheet would define the amount of compensation, housing allowance, insurance, allowable reimbursements and other benefits. Any earnings [Salary] would be reported annually by the church on an IRS Form W-2. The “Housing Allowance, is NOT required to be reported. The minister will advise his tax preparer how much he has received, and how much he can justify as having been spent. His tax preparer will report any unspent monies on his taxable return.

The following are additional issues to be considered:

  • A minister employee can receive church approved reimbursements.
  • A minister employee can be furnished a car for church business. However, he would be required to give the church an accounting of any personal use of the car. The value of his personal usage must be reported as additional income on the W-2.  The automobile furnished by the church or ministry, is an equally confusing subject, and for the full details on how to handle this, see Chapter 10 in ‘The Church Administration ‘How To’ Manual”
  • The church may provide as a tax free benefit dental insurance, group health and some life insurance (up to $50,000.00), as long as the befits were offered to all full time employees.
  • A minister employee should be covered by Workers Compensation Insurance [the rules vary from state to state], and the church liability insurance policies.
  • A significant portion of the minister employee’s compensation may be received as housing allowance, if so designated in advance, and noted in the church records. If the total amount of his remuneration is paid as, and can be defended as housing expenses, the minister can receive 100% as housing allowance. [See Chapter 10 (A-1) in‘The Church Administration 'How To' Manual" for worksheets] For any monies receives as such, there is no need for the church to report anything other than salary.  It is the Ministers responsibility to convey this information to his tax preparer.
  • The Church furnishing a Cell Phone to any minister or employee should be aware the IRS is taking a hard line on this, and expecting the annual fees paid be reported as additional income. There IS an answer however – see our Cell Phone Use Policy  article about this subject.
  • The church is required to report any salary paid [in excess of the Housing Allowance] on a Form W-2, NOT a 1099 like all other self employed persons.

 THE MINISTER who insists on being reported on a 1099

Not very many ministers can truly qualify as “Self Employed,” in the normal sense, simply because the church furnishes him an office, a computer, and telephone as well as all the amenities that go with the office.  In addition, if the church has the power to direct his work and activities – he is an employee.
Having established that, if the minister is truly self-employed, there should be a contractual relationship, with the church reporting annually all monies paid him on a 1099 MISC. form. He can only receive reimbursements provided for in his contract.  The following issues should be addressed for the self-employed minister:

  • The church CANNOT furnish him a church owned car.
  • He is ineligible for the group dental and health insurance plan, as it is for “employees” only.  If the church pays any premiums for health, life or dental plans for the minister, it must be reported as additional income on form 1099 MISC.  NOTE as a group plan is only for employees – – if it’s for employees only – he may be committing fraud in applying;
  • In rare cases, a self-employed minister may be covered by the Workers Compensation Insurance program depending on the State and other circumstances. Be sure to talk to the Agent about this.
  • He would NOT be covered by the church liability insurance policy, and the church may be in a grey area if a lawsuit were ever brought against him, centered on his involvement in church activities.
  • He CAN receive a portion of his contractual compensation as Housing Allowance if it is designated as such in advance, and noted in the church records.
  • When the self-employed minister reports his taxes, he would use a Schedule C and report ALL ministry-related income and expenses.

There is a significant risk [for him] in his receiving a 1099, that should be noted and pointed out.  A true Independent contractor [self employed person] like a plumber or an electrician, will have a fist full of 1099’s at the end of the year, but this minister will have only one.  And this is like waving a “Flag” to the IRS, “Come and check me out.”

DETERMINING EMPLOYMENT STATUS

Perhaps the best definition of the employer-employee relationship is found in Reg. 31.3401(c)-1(b), which reads as follows:
Generally the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done, but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer.”
Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods of accomplishing the result, he is not an employee.

Chapter 10 in  “The Church Administration ‘How To’ Manual,” is all about how to structure the pastor’s compensation and Housing Allowance – in order to maximize his take home, and minimize his taxes.  We have also printed a 20 point Analysis of Employee vs Self Employed in  in Chapter 12; Pages 12 & 13.  This Manual, endorsed by three CPA’s, an EA and two attorneys, was updated in June, 2007, for the 8th time, since its original publication in 1991.

This information is provided to help you with the process of creating your own materials, for your church or ministry.  When we develop these kinds of policies for ourselves, I often contact our CPA or an attorney before adopting them.  We therefore suggest you do the same.  We are not attorneys, and are not attempting to practice law by making this available to you. We are only providing you with Church Policy samples, in the spirit of developing excellence in Church Administration.

 

The above information is provided as a service to the Body of Christ by ADMINISTRATIVE ASSISTANCE

If you would like more information about similar issues, please consider “The Church Administration ‘How To’ Manual.” This Manual, endorsed by three CPA’s, an EA and two attorneys, was updated again in January 2011, for the 12th time, since its original publication in 1991.

Copyright © 2007 By Administrative Assistance.

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