Vonna Laue serves as an executive vice president at the Evangelical Council on Financial Accountability. Before coming to ECFA, Vonna spent 20 years, most recently as a managing partner, with a national public accounting firm specializing in service to Christian ministries in the areas of audit and consulting. There she served in organizational leadership as well as providing services to meet clients’ various needs. Vonna earned her B.S. degree from Black Hills State University and her M.B.A. degree in leadership and human resource management from the University of Colorado.
What are the most significant tax issues pastors and churches should know about?
There are a couple of fundamental tax issues for pastors and churches to understand. First, if a pastor is licensed, commissioned or ordained and performing ministerial duties, he or she must be treated as a minister for Social Security tax purposes. This results in the pastor being treated as self-employed for Social Security and Medicare tax purposes. The church should not withhold and remit Social Security and Medicare taxes for the pastor. The pastor can choose to voluntarily have amounts withheld as federal income tax through the church payroll processing rather than paying quarterly estimated tax payments.
Second, ministers may also have a portion of their salary designated as housing allowance. This amount must be designated by the church governing board and can only be done prospectively. The amount the pastor is able to exclude from income tax is limited to the lower of the amount designated, actual expenses incurred, or the fair rental value of the home plus utilities.
What about issues related to the 2017 tax reform?
With no personal exemptions, the increased child tax credit, and the difficulty of qualifying to claim deductions, many ministers were surprised at their amount due or the amount to be refunded on their 2018 federal tax returns, which could have been much lower or higher than expected. Two aspects of tax reform were especially painful for ministers for 2018 taxes: moving expenses and unreimbursed ministry expenses.
In 2017 and prior years, churches could reimburse moving expenses to a minister or directly pay the moving expense with no income tax impact to the minister. Such payments are now fully taxable for both income tax and Social Security purposes.
Previously ministers could deduct unreimbursed church-related expenses on Schedule A. For example, if a church did not reimburse a minister for business miles driven using a personally-owned vehicle and other business expenses totaling $5,000, the amount could have been deducted. In 2018, nothing is deductible for federal income tax purposes. This represents a planning opportunity for churches to reimburse all of a minister’s church-related expenses under an accountable expense reimbursement plan.
Should churches pay the new 21 percent tax on parking and other transportation benefits that nonprofits provide to their employees? What about filing the IRS form 990-T?
In December 2018, the Treasury Department issued some guidance that eliminated the need for most churches to pay this tax. However, many churches will need to make calculations to determine if they are subject to the tax. This may be a painful process due to the complexity of the law and the Treasury’s guidance. If it is determined that a Form 990-T is required, it should be filed and any related tax should be paid. The nonprofit parking tax is confusing and may result in diverting church resources, time and money away from their ministry programs.
What are the prospects for repealing this “parking lot tax”?
ECFA initiated a letter in 2018 with 2,700 organizations signing on, requesting Congress to repeal the tax. Based on this effort and assistance from NAE and other organizations, many members of Congress now agree that the onerous tax should be repealed. With several bills calling for repeal of the tax already introduced in the 2019 session of Congress, there is an increasing likelihood that the tax will be repealed this year. A lingering question is whether repeal would be retroactive to January 1, 2018, when the law first became effective, or a later date.
The 2017 tax bill doubled the standard deduction from $6,000 to $12,000 for individuals and from $12,000 to $24,000 for couples, and lowered tax rates. How do you think this will impact charitable giving and church budgets in coming years?
The short answer is “No one knows.” The long answer is “No one knows.” We do know that the 2017 tax reform bill will reduce the share of itemizers for 2018 and subsequent years from 30 percent to about 10 percent. While the goal of tax simplification seemed like a good idea overall, many are concerned about the long-term ramifications of removing the tax incentive for charitable giving from one-fifth of all tax filers.
There have been some movements of pastors opting out of social security. How is this playing out?
We are not aware of any specific data indicating any change in the pattern of ministers who are staying in or opting out of Social Security. The key issue is whether ministers should even consider opting out. At ECFA, we are continually in communication with ministers who opted out because they didn’t want to pay self-employment Social Security tax and/or believed they could make better use of the money by investing it elsewhere. Opting out for these reasons simply does not comply with the law. The only legitimate basis to opt out of Social Security is if a minister is conscientiously opposed to, or because of religious convictions is opposed to the acceptance (emphasis added) of Social Security benefits.
This article originally appeared in Evangelicals magazine.