Small church starting up-please tell me there are no significant filing requirements

[LCP]

They started in 2006... took in 3000 and paid out 1700. They did get an FEIN.

[Bird Legs]

Small church start up

Did the church apply for the 501(c)(3) exemption with the IRS?If this has been granted by the IRS then no income and expense reporting will be required, except to members of the church.
Technically the only filing required would be any payroll reports, if there are any salaried
employees. The minister should get a W-2 each year, no fica or m/c deducted.
A minister is considered to be an employee for income tax, but self-employed for
social security and medicare taxes.

[Gretel]

Doesn't have a church an automatic 501(c)3 status even if no application is filed?

And besides this I believe the threshold for any filing for an application is $5,000.

Keep in mind that for 2007 every non-profit is required to file a tax return, if under filing threshold a very simple one. Don't know if this also applies to churches.

[Bird Legs]

Every Non Profit must file

Not churches unless it is operating a for profit business on the side.
The only filings that churches are required to file are for payroll reports.
And yes, if this church is an independent church, then it must file for a 501(c)(3)
exemption.

[OldJack]

The minister should get a W-2 each year, no fica or m/c deducted.
A minister is considered to be an employee for income tax, but self-employed for
social security and medicare taxes.

Well... that is what the IRS publications say and what IRS would like everyone to believe, but the truth is that with most churches the minister can be a self-employed business person if that is what he wants it to be so he can deduct business expenses on 1040 Sch-C.

See United States Court of Appeals, For The Eighth Circuit, case No. 96-3287, James T. Alford; Freda Alford, where the IRS tried to classify a pastor at the First Assemblies of God Church in Hampton, Arkansas. The IRS lost the case.

Also the first paragraph of the IRS Ministers Audit Guide acknowledges that it is a factual matter:

Several potential examination issues are prevalent on
ministers’ tax returns:
1. The first issue that must be determined is whether
the minister is an employee or an independent
contractor. This is primarily a factual question.
Professional & Executive Leasing, Inc. v.
Commissioner, 862 F.2d 751, 753 (9th Cir. 1988;
James v. Commissioner, 25 T.C. 1296, 1300 (1956);
Hand v. Commissioner, 16 T.C. 1410 (1951).
.........

[outwest]

Gotta disagree with you on this one Jack..

though some itinerate ministers are truly self employed, the ordinary pastor working at one church should follow the instructions. No harm done. Do an accountable reimbursement plan for expenses. You have to do a Sch C anyway for the weddings ect.

Assuming the church is not completely oblivious, it's easy to structure the expense and compensation to minimize overall taxes. oh yeah, let's not forget the housing allowance.

Besides, it seems easier to do voluntary income tax withholdings instead of estimates for many pastors.

[thomtax]

Easier for who or whom?

Assuming the church is not completely oblivious, it's easy to structure the expense and compensation to minimize overall taxes. oh yeah, let's not forget the housing allowance.

Besides, it seems easier to do voluntary income tax withholdings instead of estimates for many pastors.

I don't think that you have worked with many very small churches. First - the treasurer's job is a voluntary job and usually the one handling it knows nothing about IRS paperwork. They just ran slower than the others when the elections were held. Many would have no idea how to file reports for withholding. Most of the time the Pastor is the "expert" and most of what he knows is wrong. As for setting up accountable expense plans - forget it - they are lucky to be able to get the bills paid and balance the checkbook.

And I'm not picking on you. My wife is the treasurer for our very small church. She was probably the best qualified and she will tell you right up front that she knows nothing about these things. She counts on me to tell her what she needs to do. And the church does not have the funds to hire someone to help.

Don't mean to "Preach" to you, and if it came across that way, I apologize.

LT

[OldJack]

though some itinerate ministers are truly self employed, the ordinary pastor working at one church should follow the instructions.

Outwest you are misinformed.

Many full time pastors, not just traveling ministers, consider themselves as working for the Lord and not for the church leaders. This is very true in churches where the minister is not assigned or sent by a higher church organization. Proof that many pastors consider themselves as self-employed is the inevitable with a church fight when leading deacons want the minister to leave and the church splits because the minister says the Lord is telling him to stay. I have had a Baptist minister client that had such experience in 2 churches where he was a pastor. He left neither because of them trying to fire him, but the church split with about half of the members leaving in each case. In the rural Missouri community where I was born there are 2 churches, of the same denomination, on the same property as a result of such Christian fighting.

BTW: Until this pastor died in 2005 he received a 1099Misc from the churches and I filed his tax returns with a Sch-C for more than 40 years. I never received any audits or correspondence from the IRS for this client.

[Snaggletooth]

For Outwest

I've been enjoying and respecting your posts since you've been contributing to the board, but I think Old Jack and Thomtax have you double-barrelled on this one.

Dealing with small Churches is a lesson in real-world, far from the definitive buckets the IRS would prefer. I don't know how many times the preacher has expected ME to be the one to define his housing allowance, and one church even gave him a multi-carboned W-2 and told him to have his tax man to fill it out (Again, ME).

For my pastoral customers, I take their expenses on a Schedule C, period. And show a loss every year, because their honoraria, weddings, funerals, etc. never outstrip their work expenses. Then I show his W-2 amount as salaries and wages. His SE tax base is a combination of three factors: W-2, housing allowance, and the loss from Schedule C.

I do not consider their contributions as an expense, except on Schedule A. It is not unusual for a small church to have a pastor who will put 70-80% of his entire pay back into the collection plate. These are the preachers who have other jobs Monday-Friday.

Not exactly everything the IRS wants, but as Jack says, this is good enough, and by all means fair.

Having to pay both ends of social security when nothing has been withheld almost always means the preacherman ends up with a heavy tax bill. Some of the larger churches are now electing to incur payroll tax expenses so as to save this misery for their preachers and employees.

[Black Bart]

Bird

...if this church is an independent church, then it must file for a 501(c)(3) exemption...

Does this mean that if they're Baptist, Methodist, Moonie, or Catholic, then they don't have to file for the exemption because the home office already has?

But if some traveling evangelist like Robert Duvall stops in Podunk Junction, revovates a shotgun house, and opens up the "Full Gospel Apostolic Prophecy Healing Hands Living Waters Missionary Worship Chapel of the Lord Jesus Christ," then they have to apply for an exemption?

Thanks.

P.S. I'm just curious whether or not they're supposed to apply for one, because it's not like they ever will apply for one. I think outwest is right about how IRS wants it done and Snag and Thom and Jack are right about how it actually is done (at least in smaller "country" churches).

[LCP]

Not churches unless it is operating a for profit business on the side.
The only filings that churches are required to file are for payroll reports.
And yes, if this church is an independent church, then it must file for a 501(c)(3)
exemption.

Thanks for the input. My reading of Pub 557 suggests that

1. "Churches" are not required to file Form 1023 although they may wish to.

2. The status as a "church" is facts and circumstances test

3. Despite that, a "church" is still not required to file Form 1023.

[outwest]

Sure I see what you describe all the time..

but some clarification from my experience.

One, we all know that the IRS does not waste time on two bit items. A small church with one pastor is just not worth the time if the only item is w2 issued vs a incorrect 1099.

That said, where the church has other employees, say a secretary, custodian, worship leader or whatever, they already are doing payroll. I contend it's just as easy to add the pastor with the box 1 wages only and offer to do withholding to make it easier to meet that tax liability you mentioned. Also, note that the clergy salary is not subject to payroll taxes, not FICA, FUTA, or SUTA (in my state). So there is no extra cost to the church. We do have Work comp due but the rate is next to nothing.

Church governence seems to have little to do with tax status as near as I can tell. The church splits I've had the painful experience of watching had more to do with personalities and theology than employee status. Of course it eventually became a battle over the property and the pulpit, but with the typical rough balance of the camps, a determined pastor could stay put whether employee or contractor. Anyway, it see the W2 issue is a mechanical way to handle tax reporting, not necessarily as indicator of direction and control.

One last observation, I've always used a rule when dealing with the IRS: Pretend you are dealing with a 6th grader. Write letters that a 6th grader can follow. If a procedure doesn't hurt the client and keeps the IRS from being confused, whatever....

I guess this is one of those to me. Now off my soapbox. (No way anyone would let me on a pulpit.)

Now, back to the clergy return on my desk I need to get out with 1099 reporting.

[OldJack]

>>Anyway, it see the W2 issue is a mechanical way to handle tax reporting, not necessarily as indicator of direction and control. <<

I agree that in many cases the W2 way is desirable mechanical way, but some churches do not want to reimburse the pastor for all of his professional business expenses and provides little or no fringe benefits that are available if the pastor files a Sch-C business. Some church members also believe that reimbursing the pastor for his professional expenses is considered a part of his salary or compensation and therefore is a disadvantage to the minister and his family. I have seen full time pastors that make less than a trash worker in the community, but the church considers them as making much more since they provide health insurance and parsonage yet they expec,t if not demand, that the pastor give a large portion of his compensation back to the church.

[Gretel]

I am very interested in a response from Bird as well. Until now I thought every church is exempt from filing for 501(c)3 status and was wondering how the IRS is protecting themselves from cheaters.

[outwest]

I appreciated this discussion.

>>Anyway, it see the W2 issue is a mechanical way to handle tax reporting, not necessarily as indicator of direction and control. <<

I agree that in many cases the W2 way is desirable mechanical way, but some churches do not want to reimburse the pastor for all of his professional business expenses and provides little or no fringe benefits that are available if the pastor files a Sch-C business. Some church members also believe that reimbursing the pastor for his professional expenses is considered a part of his salary or compensation and therefore is a disadvantage to the minister and his family. I have seen full time pastors that make less than a trash worker in the community, but the church considers them as making much more since they provide health insurance and parsonage yet they expec,t if not demand, that the pastor give a large portion of his compensation back to the church.

for those that haven't done much clergy work, I think we've aired some of the real world considerations. Once people get into this area, you find that even "clergy" is not as well defined as they might imagine. Anyway, I appreciate the lively discussion.