Snag, Jack, and the Preacherman

[Black Bart]

Say guys, I was thinkin' over that "Small Church" post below and some of the things we talked about in it. I'm still wondering about a few of those points.

It seems to me like there are three ways to handle the preacher:

(1) IRS way: Put wages (less housing allowance) on the W-2 and put it on line seven. Put car expenses applying to W-2 on 2106 and over to A. To get SE, add housing allowance back to wages and subtract off W-2 car expenses. For the rest of the piddlin' stuff (weddings, funerals, etc.) put it on "C."

I'm down to one guy and this is the way I'm doing it except he doesn't break out any "C" stuff separate from the W-2 (doesn't get a W-2--I have to say "No W-2 furnished"), so I don't make a C. This way, as you know, is the costliest one for the client (SE just kills them).

(2) Jack's way: Do it the "old" way and put everything on a C. Best for clients and bad for IRS -- all expenses come directly off without tripping over any deductibles and car expenses kill off most of the SE, etc.

I wonder about the court case you cited -- is IRS following that decision or is it a trench-to-trench fight on each new one that comes up?

(3) Snag's way: (Correct me if I'm wrong on this) A hybrid method combining the "old" way and the IRS way. Put W-2 wages on line seven, but instead of taking the car expenses pertaining to those wages off on Schedule A, put them on "C" creating a loss with them.

What are your thoughts about the car expenses? Should they actually go on C and do they really apply mostly to funerals and weddings or should they be run against W-2 wages on schedule A? The stewpot of various activities in this type of job (who's to say where W-2 works leaves off and C-work begins?) leaves it open to subjective speculation, but I'd like to know what you think about it. Too, the created loss (I assume) increases audit risk. Ever been checked on this? If not, do you think the loss "red-flags" it? I'm thinking about switching to this way (if I had the nerve I'd go Jack's way).

Thanks folks.

[OldJack]

(2) Jack's way: Do it the "old" way and put everything on a C. Best for clients and bad for IRS -- all expenses come directly off without tripping over any deductibles and car expenses kill off most of the SE, etc.

I wonder about the court case you cited -- is IRS following that decision or is it a trench-to-trench fight on each new one that comes up?

I am not aware of the IRS auditing preachers for any issue at the present time. Since the IRS lost the court case I cited, I am not aware of them going to court again on this issue. Obviously they have not changed their publications but in the audit manual the first thing the auditor is to do is determine the facts and circumstances concerning possible employee status or independent contractor status. I doubt the IRS wants to go to court again and lose another case. I would never treat as a Sch-C those preachers that are assigned to the church by a national church organization.

The only other issue in your item 2 way, is that the IRS can try to challenge the tax-free fringe benefits provided by the church such as health insurance and retirement plan contributions. However, I think it has been established in other situations that those benefits can be provided to non-employees such as board of directors, subcontractors, etc.

[Chief]

Preachers

Black Bart you are full of it--questions about the cloth. I would take the approach on the preacher with w-2 income the 2106 approach. On special income take the sch C with the income and expenses broken down as they relate to that portion of his work, The only exception to that would be pastors working for a church owned college or institution and receiving a 1099 misc from that institution. I know that back in 1986 the IRS was auditing clergy but have heard nothing since.

Most of the preachers today are woefully underpaid with no retirement in sight. If any ii is woefully inadequate. They feel that the Lord will take care of them. The fat cat preachers of superchurches are in a minority. They are overpaid and rewarded richly with the world's goods. They should pay the maximun into social security to evenly distribute the wealth. I sound like Karl Marx here. But I would use 2106 for these expenses and file a SE 1040 that reflects it. For the little guy because he needs it and for the fat cat because all can use it.

I had an interesting revelation this past week for the daughter of a Client. She couldn't understand why her paycheck stub total for the year was different that the W2. She mentioned something about health insurance being the reason she was told by her employer. After some research on my part I learned that not only was the income tax exempt from federal tax but from FICA and Medicare taxes as well. I welcome her to the world of expensive lobbying by special interests for special favors. AARP must have been asleep at the wheel when this subsidy came about. Money talks where in church and especially in our government.

I hereby desert the pulpit and take over the kitchen at home.

I must get back to cooking lunch. Having my son over for some catfish fillets coated with cornmeal and baked. He has to get fried fish someplace else. I wont contribute to his early demise. He needs to live a long life so he can pay taxes. What a life! Now back to your Ozarl ponderings.

[outwest]

>>>
I had an interesting revelation this past week for the daughter of a Client. She couldn't understand why her paycheck stub total for the year was different that the W2. She mentioned something about health insurance being the reason she was told by her employer. After some research on my part I learned that not only was the income tax exempt from federal tax but from FICA and Medicare taxes as well.

>>
Just to confirm, she works for her folks operating as a sole proprietor or partnership of only the parents right? Which is only situation where the under 18 kid escapes FICA and MC.

[Black Bart]

Okay,

...I would never treat as a Sch-C those preachers that are assigned to the church by a national church organization.

I misunderstood you -- thought you were doing all of them that way. Instead, are you saying that if the church is formal enough to issue a W-2, then use that on line seven and drop the C except for the incidental income? If so, then would you put the car expenses (the big item) on C to get a loss or would you take it to 2106?

[Black Bart]

>>>
...Just to confirm, she works for her folks operating as a sole proprietor or partnership of only the parents right? Which is only situation where the under 18 kid escapes FICA and MC.

Right. Also, the kid's exempt from FUTA.

[OldJack]

I misunderstood you -- thought you were doing all of them that way. Instead, are you saying that if the church is formal enough to issue a W-2, then use that on line seven and drop the C except for the incidental income? If so, then would you put the car expenses (the big item) on C to get a loss or would you take it to 2106?

For the preachers that I am talking about the church would issue a 1099Misc because the preacher would not agree as an employee with a W2, based upon my opinion and that of his own. With a 1099Misc all car expense would be on the Sch-C.

I have never said that all preachers should or could be a Sch-C filer. Its the IRS, in their publications, that "imply" that all preachers must get a W2 from the church. As a result most tax preparers think that the "Lord of Tax" is demanding they are employees regardless of facts and circumstances.

If the church and the preacher agree to a W2 status, then a portion of the car would have to go as a form 2106 for his church related travel and a portion for his schedule C self-employment travel activities such as weddings, honorariums, etc.

[Black Bart]

Hi Chief,

I hereby desert the pulpit and take over the kitchen at home.

I must get back to cooking lunch. Having my son over for some catfish fillets coated with cornmeal and baked. He has to get fried fish someplace else. I wont contribute to his early demise. He needs to live a long life so he can pay taxes. What a life! Now back to your Ozarl ponderings.

I've gotta quit pickin' Jack's brain (I bet he wishes I'd shut up and go do some taxes) and start cookin' too. Unfortunately I can't do it like you can -- I'm microwaving two chicken pot pies. Very thoughtful of you to keep your son alive to keep paying taxes. How's the weather down there in Florida now?

Jack: Thanks again.

[Black Bart]

Outwest

Beg your pardon. I thought you were asking a question and didn't realize 'til just now that you were replying to Chief.

Oh well, I got in my two cents about the FUTA anyway.

How far out west are you (if you don't mind sayin')?

[Snaggletooth]

Statutory Employee

I take the expenses which apply to a preacher's W-2 and deduct them on a schedule C. I don't use a 2106. I know the IRS would love for me to use the 2106 as Chief suggested.

The special circumstances of a preacher's income have led me to a belief that these expenses should be deducted from income, without losing these expenses to the 2% and non-itemizers. I believe this to be what was intended in the code, and IRS became greedy in their literature.

Additionally many of these preachers turn back much of their pay and drop it into the collection plate. I don't claim these on a schedule C as they are not required to do this.
However, it is a sort of expense associated with their job, and lost on occasions where they can't itemize, or barely eclipse the standard deduction.

I think my method should be fair enough for IRS and results in plenty of tax collected from what these ministers do. As Jack said, the IRS got beat up on this one. If there was a clear mandate for a 2106, I would use it.

Chief, good to hear from you on this.

Regards, Snag

[Black Bart]

For what it's worth,

I take the expenses which apply to a preacher's W-2 and deduct them on a schedule C. I don't use a 2106. I know the IRS would love for me to use the 2106 as Chief suggested.

The special circumstances of a preacher's income have led me to a belief that these expenses should be deducted from income, without losing these expenses to the 2% and non-itemizers. I believe this to be what was intended in the code, and IRS became greedy in their literature.

Additionally many of these preachers turn back much of their pay and drop it into the collection plate. I don't claim these on a schedule C as they are not required to do this.
However, it is a sort of expense associated with their job, and lost on occasions where they can't itemize, or barely eclipse the standard deduction.

I think my method should be fair enough for IRS and results in plenty of tax collected from what these ministers do. As Jack said, the IRS got beat up on this one. If there was a clear mandate for a 2106, I would use it.

Chief, good to hear from you on this.

Regards, Snag

I absolutely agree with you, as that is my exact same view. If you don't use a C, then the 2% and non-itemizing hurts them bad. And, too, our preachers are expected to set an example and drop several thousand into the plate (at one time I knew a pastor at a small church who routinely gave back almost half of what he made). I also look at that as an expense associated with the job because it's still absolutely expected, but, as you say, it's now lost to non-itemizers and those who barely tip over the $10,300. That part kinda makes me long for the "old" old days; that is, my dad's preacher clients insisted it was part of the job. He agreed and always put their tithes on C; creating a realistic net profit for this particular profession. In fact, I did it once -- I inherited one of Dad's ministers when he retired (late 70s-early 80s). I told preacher about the "new" rules (couldn't put tithes on C) and he said he'd been doing it that way for 30 years, was retiring, "try it this last time" and he'd be responsible (preparer penalties were almost unheard of). I did; he was audited and tried to set a precedent by informing the agent of his 30 years' prior method. They went back six years and wiped him out.

Anyway, I think you're right in that IRS simply got greedy and they don't really care what the guy's real economic picture is; they just want his money, period. It's gutsy of you to go with that C, but, hopefully, Jack's right and they don't want to get into it again unless they have to. I think the only reason my guy can stand my W-2/ 2106 method now is that the congregation probably takes up a collection (one of those ever-popular "love offerings") and pays the SE for him, which, of course, nobody mentions and I don't want to get into.

I'm about out of "old-time" preachers now, except for the occasional factory-hand/cop/whatever who still does some preachin' "on the side." The last one I had after the W-2 "conversion" was racking up annual SE debts of $3K-$4K ($7K-$8K in today's dollars), had a wife and three kids (no help--credits for kids were scarce back then), was paying installments, and suffering. He left me for some Texas outfit specializing in ministers' taxes, but that fell through and he later returned wanting me to go again. I turned him down -- it was just too painful (for both of us) as I had accumulated prior IRS debts of $15K or so for him and couldn't stand it any more. Now there was a good, pious, decent, caring man who was trying to do good work for his community and IRS almost literally "taxed him to death."

[Chief]

Bird Legs

I would be interested in your take on this Sch C versue 2106.

[OldJack]

I would be interested in your take on this Sch C versue 2106.

Well... my take is that you can't have your cake and eat it too with income taxes. Oh, I guess you could say you can with EIC and QPAD but otherwise you have to make a choice.

The question has to be is the preacher and employee or not? The related expenses belong where the income belongs. If he is a church employee, then employee expenses belong on form 2106. If he is not an employee, then professional expenses all belong on a Sch-C with professional income. If he is both, then expenses belong where they relate to the income. This is not rocket science.

Its always been true that Charity Contributions do not belong on a Sch-C under any circumstances for anyone.

[outwest]

Outwest as in...

Beg your pardon. I thought you were asking a question and didn't realize 'til just now that you were replying to Chief.

Oh well, I got in my two cents about the FUTA anyway.

How far out west are you (if you don't mind sayin')?

Idaho. A daughter in school in Pittsburgh cued me in that anything beyond Chicago is the frontier to those back east.

[Black Bart]

Rules are rules, eh?

...you can't have your cake and eat it too...you...can with EIC...

...related expenses belong where the income belongs...if...church employee...expenses belong on...2106. If...not...on a Sch-C. If...both...then...where they relate to...income. This is not rocket science.

Its always been true that Charity Contributions do not belong on a Sch-C under any circumstances for anyone.

Actually my guy that lost the shirt off his back didn't have the cake, didn't get to eat it, and got no (substantial) EIC. I know the income/expense goes where it goes and my clients aren't looking for rocket scientists -- they're looking for somebody to help them keep from going broke. I also know tithes don't go on C, now or then, but it was a true economic picture and my sympathies lie with anyone who could and would take a stand (score one for gentleman Luis Mopeo's philosophy) for what they thought was right and rules be ****ed.