W-2 Vs 1099

<BLOCKQUOTE>quote:</font><HR>Originally posted by ChuckS:
I am a Bivocational Pastor, at my first church they filled out a W-2 but listed no withholdings.
At my current church the CPA we have doing our books says I cant have a W-2, I need a 1099, because the church does not with hold anything.
I have heard that the W-2 is the prefered way for Pastors but I do not have any proof to show the CPA.
If I can have a W-2, is that the way to go? And where can I point the CPA to look in order to show him this?

ChuckS<HR></BLOCKQUOTE>

It comes down to whether you are an "employee" of the church or an "independent contractor".

According to the Tax Court’s “7 point” test, most pastors are considered employees of the church for federal income tax purposes but are considered self-employed for Social Security purposes. Therefore, there should be a W4 form on file for each pastor and he should receive a W2 at the end of the year.

In reality, I have seen it done both ways.

Ron

[ January 20, 2002: Message edited by: trying2understand ]

 

You should be receiving a W-2, not a 1099, regardless of whether or not you are having anything withheld, especially if you meet the Wingo or Knight test as a minister. I strongly urge you to buy a copy of the book Clergy Tax written by J. David Epstein. It is published yearly and is a very understandable treatment of tax law for ministers. Walks you through filling out your forms and how to maximize your salary and benefits. Also, if you are Southern Baptist, Check out the Annuity Board's website for help on tax basics. It's located at www.absbc.org
Your CPA friend would do well to read this book as well. You can point him to this book or to the Annuity Board website. Most of the CPA's I know know absolutely nothing about ministerial taxes because it is such a specialized field. I have gotten some very bad tax advice and learned the stuff myself.

[ January 20, 2002: Message edited by: TomVols ]

 

Q Should churches issue ministers 1099s or W-2s?

A In most cases, churches should issue ministers a Form W-2 because most ministers are employees for income tax purposes. Churches that pay self-employed ministers at least $600 in one year should issue a Form 1099-MISC.

Example: First Baptist Church issues a Form W-2 to each of the six ministers on its regular staff. First Baptist Church issues a Form 1099-MISC to a vocational evangelist who received $750 from the church for preaching a revival.


This is from the Annuity Board website. See the page entitled "Employee or Self-Employed." Your CPA friend is giving you bad advice.

 

A few comments:

1.) As mentioned before ministers (IRS term) are always self-employed for Social Security purposes while most ministers are employees for income tax purposes.

2.) A minister's wages are exempt from income tax withholding whether the pastor reports his income taxes as an employee or as self-employed. Using estimated tax procedures seems to be the easiest way for everyone.

 

IRS Publication 517 may be a wothwhile read for all interested.

In addition, I would recommend 2 great books on the subject: Tax Guide for Ministers and Federal Reporting Requirements for Churches, both by Richard Hammar.

 

Voluntary withholding works well for me. But the treasurer at my church is very competent. I'd recommend this to all my fellow pastors. If you are bivocational, adjusting your W-4 at your other job to cover your total tax burden may be a good move also. Remember: you never want to get back a big refund or have to owe a lot.

 

I would caution everyone agains federal tax withholding if there is no FICA withholding/mathcing.

The IRS is years behind on 941 filings and don't be surprised if your 1995, 1996 filings are questioned within a few years because their system cannot handle such unusal treatment.

I am in the process of resolving a similar matter and it's not an easy process.

NOTE: The burden of proof is always on the taxpayer. Therefore, IMHO, estimated taxes are the best way to handle this.

 

My reasoning on this is based on recommendation from a qualified CPA. I wasn't aware there might be any problems. In fact, he seemed to use your argument against estimated payments.

 

Let me ask this:

I have federal taxes withheld but I also have to make estimated tax payments (ES1040 I think) quarterly because of FICA. Are you suggesting I should stop all church withholding and just up the estimated tax payments?

Last year (2000) I did not know I had to make quarterly payments and ended up with a sizable bill that I had to pay penalties and interest on. This year I have been making estimated payments quarterly based on last years payments.

 

<BLOCKQUOTE>quote:</font><HR>Originally posted by Pastor Larry:
Let me ask this:

I have federal taxes withheld but I also have to make estimated tax payments (ES1040 I think) quarterly because of FICA. Are you suggesting I should stop all church withholding and just up the estimated tax payments?<HR></BLOCKQUOTE>

Yes. I would suggest that you only pay estimated taxes. It will be easier for everyone.

BTW, you as a pastor, are exempt from FICA taxes.

 

<BLOCKQUOTE>quote:</font><HR>Originally posted by TomVols:
My reasoning on this is based on recommendation from a qualified CPA. I wasn't aware there might be any problems. In fact, he seemed to use your argument against estimated payments.<HR></BLOCKQUOTE>

Tom, what's a "qualified CPA"? How is it different from a regular CPA? How does a CPA qualify?

I talked to the IRS last week about this issue and they advised me against withholding.

 

webmaster wrote:

<BLOCKQUOTE>quote:</font><HR> Tom, what's a "qualified CPA"? How is it different from a regular CPA? How does a CPA qualify? <HR></BLOCKQUOTE>

Some CPAs are totally clueless when it comes to clergy taxes. Therefore, you have to delineate between the good ones and the bad ones.

 

Help me understand something: if push comes to shove, how is the W-2 my church gives me which shows my withholding less reliable than my canceled checks that show the estimated tax payments? Tax attorney J. David Epstein, in his book Clergy Tax (2001 edition) seems to argue that it's preferable to have voluntary withholding, then pay estimated taxes (page 42).

 

I have not exempted myself from FICA. So I still have to pay it.

However on the withholding, a business manager at a larger church told me that the church should without taxes for me since I am an employee of the church for federal tax purposes. I thought they had to and file form 941 (I think) for it.

So this is not correct then?

 

Pastor Larry,
Since you are self-employed for S.S., would you not be exempt from FICA and instead have to pay SECA? FICA is the S.S. an employee must pay. SECA is what a self-employed person (like pastors) must pay.

[ January 22, 2002: Message edited by: TomVols ]

 

<BLOCKQUOTE>quote:</font><HR>Originally posted by TomVols:
Help me understand something: if push comes to shove, how is the W-2 my church gives me which shows my withholding less reliable than my canceled checks that show the estimated tax payments? Tax attorney J. David Epstein, in his book Clergy Tax (2001 edition) seems to argue that it's preferable to have voluntary withholding, then pay estimated taxes (page 42).<HR></BLOCKQUOTE>


I'm sorry for the misunderstanding.

When I say it's better if you choose estimated taxes, I mean better for the church (and treasurer). As a taxpayer it makes no difference.

Someone at the IRS told me (as a church treasurer) that their system has a hard time with federal withholding and no FICA taxes.

Hope this clarifies it.

 

Pastor Larry, if you send me a copy of your tax return for 2000, I can tell you if you filed correctly.

Based on what you're saying you overpaid your taxes.

You can amend your tax returns for the prior 3 years, if need be, and can get a refund for the overpayment.

 

<BLOCKQUOTE>quote:</font><HR> When I say it's better if you choose estimated taxes, I mean better for the church (and treasurer). As a taxpayer it makes no difference.

Someone at the IRS told me (as a church treasurer) that their system has a hard time with federal withholding and no FICA taxes.
<HR></BLOCKQUOTE>

How is it better for the church? Does it lower the audit profile?

 

Here are some important points to consider:

#1 - ministerial income is not subject to withholding via the W-4.

#2 - ministerial income should be reported on the W-2 with no deductions reported. If a parsonage allowance is given then in box 14 write the words "parsonage allowance" with the amount.

#3 - ministers are considered self-employed for FICA / SECA (social security and medicare) tax purposes and an employee for income tax purposes.

#4 - a minister's parsonage allowance is not exempt from the FICA / SECA tax but is exempt from income tax.

#5 - a minister who has an approved Form 4361 is exempt from any and all FICA / SECA (social security and medicare) taxes (in relation to his ministerial income only).

#6 - churches should not fill out a Form 941 if the minister(s) is/are the only employee(s) since ministers are not subject to withholding.

[ January 23, 2002: Message edited by: Pioneer ]