Ministers; The New IRS Bull's Eye
By Raul Rivera
Owing thousands of dollars to the IRS was the last thing on Pastor King's mind. The church he pastored-with its approximate 85 members-was only five years old, and he had never imagined when he began the church that the laws concerning church compensation would be so complicated. When his 2010 tax return was audited, the result was very difficult to accept. Now for the next five years, he would have to send monthly payments to the IRS in order to pay the penalties and back taxes that were assessed against him. He attended our conference as a result, because he knew he needed to get right. His audit was the result of increased IRS attention to people who fall into a special tax category: the self-employed.
When the IRS released the most recent tax gap report, it estimated that approximately 450 billion dollars of tax liabilities went uncollected. The IRS relies on the tax gap report to identify sources of people that continue in persistent non-compliance. High on the list are self-employed individuals such as ministers.
Why ministers are easy targets
Anyone who has been a minister for any period of time knows that the tax laws surrounding a minister's status are often vague and difficult to comprehend. Unbeknownst to many churches, ministers have "dual status" when it comes to taxes. For income and state tax purposes they are employees, but for social security tax, they are self-employed. Let me give you an example of what I mean. Below is the IRS' best attempt to make it as plain and simple as possible. Internal Revenue Publication 517 says the following:
"Even though, for social security tax purposes, you are considered a self-employed individual in performing ministerial services, you may be considered an employee for income tax or retirement plan purposes in performing those same ministerial services. For income tax or retirement plan purposes, some of your income may be considered self-employment income and other income may be considered wages.
Did you get all that? Neither does most of the regular world. At our Ultimate Church Structure Conferences, I tell pastors that Congress writes the law in Greek and the IRS translates it for us to make it easier to understand. The problem is they transalte it to Aramaic. That is why many churches and tax professionals often misunderstand this classification and lead ministers down the wrong path. This causes two issues with ministers.
1. They get the wrong tax form: Many churches are not sure whether the minister should get a W-2 or a 1099-misc. The dual status of the minister often leads churches to incorrectly believe that the minister of the church should get a 1099-misc., when in fact he/she should get a W-2. This leads to another problem, as shown below.
2. They under report self-employment tax: Because many churches give their minister a 1099-misc., they often fail to properly report the housing allowance. For example: If a minister receives a total compensation of $30,000.00 from the church and $15,000.00 of it is housing allowance, the church assumes that because the housing allowance is exempt from federal income tax, then it does not get reported. However, much to the detriment of the minister, the housing allowance is not exempt from self-employment tax. This means that the church in this example underreported $15,000.00 of self-employment income. This is now a big deal to the IRS.
Love offerings: a big problem
To add to the problem, love offerings given to the pastor and guest speakers continue to be a big problem for ministers and churches. Every year billions of dollars of love offerings go unreported, adding to the tax gap. One pastor in Charlotte, North Carolina was sentenced to 9 years in federal prison, because he failed for many years to report the love offerings he received from the church and while traveling as an evangelist. While prison is not an every day happening with pastors, fines and penalties are. The dreaded audit does not only come with sleepless nights, but statistics show that over 75% (higher for ministers) of audits result in fines and interest charges. Imagine what your church would look like if you decided today that your church would be the exception?
New efforts to collect
The 2009 Strategic Plan of the IRS states that self-employed individuals are the largest single contributors to the federal tax gap. These are people that get 1099-misc forms. In the Strategic Plan the IRS says that it will meet the challenges posed by the self-employed by strengthening its enforcement presence and replenishing the IRS workforce. Over the last several years, the IRS has been hiring an unprecedented number of new field agents to reinvigorate its enforcement presence.
Pastor King got it right
Though the lesson that Pastor King learned was expensive, he is now grateful to the Lord that the lesson was not in vain. That is what inspired him to attend one of our conferences. As the day developed, he carefully followed our action plan worksheet and checked off all of the areas that were out of compliance in his church. That day he went home with a plan of action to fix what was wrong and implement a whole new strategy to protect and empower his dream.
Today is the day to get right
Hebrews 4:7 tells us, "Today, if you will hear His voice, do not harden your hearts." The truth about oneself can be very painful. Perhaps you are thinking back on the many love offerings and other transactions that are out of compliance with the law. Fixing them has always felt too heavy and almost impossible. Yet, as you read this article, you may feel a nudge in your heart to get right. I want to encourage you by saying that the toughest part of getting it right is facing the facts. But, once you face them, fixing them is much easier. Imagine how well you will feel, knowing you have it right.