Church Tax Conference – Special Tax Rules for Ministers and Housing Allowance

Originally Hosted on February 22, 2021
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– Welcome today. We’re so glad to have you and I hope this is helpful to you. Ask any questions at any time and we’ll be glad to deal with your questions today. Let’s have a word of prayer as we begin today. Father, thank you so much for today. Thank you for your blessings. Thank you for helping us in all that we do and helping us to be wise stewards of all that you entrust to us, and father, this is a busy season. It’s very busy as we finish up and all the deadlines and so many of the deadlines that we have that are January 31st, and so I pray for each person who’s involved in this webinar today that you’d give them wisdom, but also that you would give them that peace that they can do their job with peace and not be very fretful and anxious at this time period of the year. We ask your blessing on this time together and pray for it in Jesus’ name. Amen. All right, we’re going to be talking today primarily about unique tax rules to ministers, and we’re going to be talking about the minister’s housing allowance specifically. So first of all, those of you who are joining in right now I want to call your attention to this resource, alsbom.org/ccs, and then click on administrator resources and that will be a link to a bunch of resources. Some resources that we’ll refer to. These notes are in that website. You can find those there, and so anything that we can do to help we try to provide it and try to make it easily available to you. I hope that you’ll continue to follow us as we do one more tomorrow and then as we go into our minister texts workshops next month. We’ll be doing those by Zoom as well. We hope to get back to live meetings soon and I love the live meeting. I prefer it to Zoom, but right now in this situation this is the best thing for us to do. So let’s get started. There are some key concepts and so we need to understand those key concepts and this is the most important thing for you to grasp today. First of all, ministers who serve a church have a dual tax status. That’s the most important thing for us to know because that makes everything different about a minister, this dual tax status. I think when Congress first started all of these things about the income tax and in the earlier years of the income tax, they wanted to not tax the church, and so the minister is an employee for federal taxes, for our income tax, federal income tax, so of course state income tax. But we are self-employed for our social security taxes. And of course, if they had treated ministers like other employees then the church would have to do FICA and the church would be taxed having to pay the other half of FICA taxes. And so I think that’s the reason that they created ministers with this, tax wise, with this unique dual tax status. The church doesn’t have to pay taxes if they don’t wish to or prefer not to or perhaps for some kind of religious reason, and so they created it that way. Now, many times in the past when all this started, often the minister was, and usually the pastor, was the only employee of the church, and so they were able to create a system in which the church itself did not have to pay any taxes but the minister did. And so we have this weird dual tax status. An employee for federal purposes, self-employed for social security purposes. That’s one of the number one concepts that we in church finances need to understand. Now, the minister is an employee for other reasons too. For example, if you have workers’ comp insurance and most of us should have workers’ comp insurance even if we don’t have five employees, but if you have workers’ comp insurance that minister is an employee that way too. So we are self-employed only for social security purposes. I’ve been dealing with that question for all the years that I’ve been here, and I’m still dealing with that question because it is kind of confusing. Number two, the minister, for tax purposes is entitled to a housing allowance and we’re going to be talking about that today. Number three, the minister must pay his own self-employment tax. And so we have a tax benefit, the minister housing allowance, but we have a tax hit in that self-employment tax that it is both sides of social security and medicare taxes. And so it is 15.3% instead of the 7.65%. So these are key concepts for today. Dual tax status. The minister is entitled to housing allowance. We’re going to talk about who is a minister for tax purposes in a little bit, and then the minister must pay his own self-employment tax. All right, so we’re going to talk right now about questions and answers about ministers’ housing allowance, and you can find this piece at GuideStone.org/compensationplanning. You can find it there. GuideStone has some wonderful materials about ministers and taxes and questions and answers and they are very, very helpful to us. They are a great resource and these are free materials. Very, very helpful to us. So that’s the source that we’re using. In a couple of weeks, we will have out the minister tax guide. That resource is available for free and it’ll be on the GuideStone website. We’ll put it on our website with a link to it and so that resource is written by Richard Hammar, who is the nation’s leading authority on ministers and church and tax. And so that’s a extremely helpful resource to you. So first of all, what is the housing allowance? What is the housing allowance? And it is an exclusion from income. It’s an exclusion from income, not a deduction. Now, that sounds like the same thing, doesn’t it? An exclusion from income or a deduction. It sounds like the same thing, but it’s really not. So for example, it is excluded from specifically ministerial income. So for example, let’s say a bi-vocational pastor who makes $15,000 from the church, and even if he wanted, let’s say, he wants all of it, his housing allowance, $15,000. Let’s say that he has housing expenses of $18,000 for that year. His payment, mortgage payment, his utilities, his furnishings and all the expenses that he has, upkeep and maintenance. Let’s say that that total 18,000, but he can’t exclude 18. He can’t deduct the difference. He can only exclude it from ministerial income and in this case he could only exclude 15,000. He can’t exclude the 18,000 because he doesn’t have money to exclude it from a ministerial source. He’s bi-vocational so he’s got some other job or some other source of income. So it is an exclusion. Now, we’ve seen this in recent years with other things, for example, benefits are excluded from income. Benefits provided by your employer are excluded from income but these days there’s a lot of benefits that if you paid for yourself out of your own pocket a lot of times you can’t deduct those anymore. So that’s what we’re talking about. It is an exclusion, not a deduction. You can only use church related income, church income or church related income or denominational retirement income, for housing allowance. If I’m an ordained minister, but I work at Walmart, I can’t exclude any of that Walmart income as housing allowance. And so also if I worked at Walmart then for my work there at Walmart, I’m treated just like any other employee. I don’t have this dual tax status for that. I’m an employee. They take out federal income tax. They take out FICA and match FICA and so forth. So this unusual thing is only from church or church related income and you can also do it with retirement income. It’s excluded income from federal and state income tax, but it’s not excluded from social security taxes and specifically, since we are self-employed for social security, we have to pay what’s called self-employment tax. Self-employment tax. And that is the full 15.3% on all of our income and our income in the case of self-employment tax, it includes both salary and housing. Now, for federal I’m only taxed on salary, not housing, but for self-employment tax I’m taxed on both salary and housing. So who is eligible? It is the person who is ordained, licensed or commissioned. Ordained, licensed or commissioned who also conducts religious worship, who administers the ordinances, management responsibilities in the church and considered to be a religious leader by the church. Number one is required. So if I did two through five but I’m not ordained or licensed, then I can’t take advantage of the house allowance. I’m not a minister for tax purposes, and also it is a balanced test. So I don’t have to do all of these. Now, a pastor is going to do all of those, but say, for example, a youth minister. Is the youth minister ordained? Yes or no. Now, if the answer’s no, he’s not ordained, not licensed, you can stop right there, but the person is ordained, licensed or commissioned and commissioned refers to missionaries so in our discussion today we’re going to be talking about ordained or licensed. Now, the IRS says you’re not required to be ordained but if you’re not ordained, if you’re licensed but not ordained, then you must be able to do everything, essentially everything, that the ordained minister can do in your denomination. So generally you need to be ordained in order to be a minister for tax purposes. I’ve seen a couple of youth ministers, for example, who did qualify. They were licensed, not ordained, but in one example that I still remember, the youth minister, his pastor was about to retire and so as the pastor was about to retire the youth minister took on more and more. He was baptizing. He was preaching. He was leading worship. He was doing all those things. Now, conducting worship oftentimes, a youth minister for example, oftentimes they’re leading worship with the youth. Do they administer the ordinances? Maybe not. They have management responsibilities and they’re considered to be a religious leader by the church. So it is possible for a licensed youth minister, for example, to meet the requirements. It is possible, but a youth minister who is ordained and doing all the other things definitely qualifies, and obviously the pastor would qualify. So what is the church’s responsibility in all of this? Number one, the church’s responsibilities to designate the amount prior to paying the minister. The church designates to the amount. I have talked with some financial secretaries and one of them, the subject of housing allowance came up and the secretary said, “Oh, we don’t have a thing to do with that. The minister does that.” Well, that’s not true. The minister can’t do that. It is a church designated housing allowance. So we’re going to talk about the steps and how that’s done, but it’s not done by the minister. It’s requested by the minister. So we should be reviewing it annually. Now, we could do a wording, and that’s number three here, to record it as set until changed by official church action. So that’s the safety net wording that we want to use so that we will have a housing allowance even if we forget to set it for the new year or if we’re just light setting it for the new year, we still have last year’s amount. And so then we have some limits on housing and those limits are really more concerning to the minister than they are to the church. As long as the request is reasonable the church should approve that request. So the minister’s responsibility. It is the minister who is to determine if the minister is eligible. That’s not the church’s place. The minister is responsible for his own taxes, and so it’s the minister’s responsibility and it’s minister’s responsibility before the IRS. So the minister’s responsibility is to determine eligibility, second, to understand the limits and the rules, and we’ll talk about limits in just a moment, and to present an estimate to the church and to maintain the records to substantiate every housing expense. So you need to be keeping those receipts and doing that so that you have those records of housing expense and then report as income any excess. So if I asked for $18,000 as housing allowance and I only spent $15,000 one year, then I would report the $3,000 difference as excess housing allowance and report it as income for federal income tax purposes and state income tax purposes. And then I have to pay the self-employment tax. That’s my responsibility that I need to do. To fill out that form and include it with my taxes. So the expenses that are eligible as housing allowance, remember I showed you GuideStone.org/compensationplanning and that is a wonderful resource, and one of the primary resources there is the compensation planning guide. And there is a form to fill out for a request for a minister housing allowance, and that’s the exact same form that we use at the State Board of Missions. And it has on it down payment, the payment including principal and interest and taxes and insurance, utilities, furnishings, repairs, maintenance, remodeling, homeowners association dues. Anything to provide the home is included in that list. And so you’ll find that list. That’s a good form to use. Now, down payment. What if I had a $50,000 down payment? Can I count that? Well, it would count as housing expenses but you are going to be limited, and so we’ll look at those limits in just a moment. So these are the things that you can include as eligible housing expenses. Now, does the church need proof of all that? No. Do I need to report to the church that I spent $17,923.20? No. You just use the housing allowance as an estimate and you report the difference, any difference, to the IRS. Now, if I asked for 18,000, but I spent 19,000, I’m just out of luck on that other thousand dollars. I can’t go back and change it retroactively. I’ve got to do the house allowance that we set. Now, it can be changed during the year but it cannot be changed retroactively. So here are your eligible expenses. These are expenses not eligible for housing, and so food and domestic help are not included as housing allowance. Those things that you provide for yourself like cleaning products for yourself and shampoo and that sort of thing. You actually could include cleaning products for the home, like some kind of floor product or Windex or something like that you could include. You would have to keep up with those receipts but you could include things to clean the home. But so excluded food and domestic help, excluded is also a second home. Housing allowance is available for only the principal residence, and that was determined by a court case a few years ago. It was a man who actually had a vacation home. Most of us don’t have a vacation home, but I do mention it because sometimes we have not sold the former home while we’re in the new location, and so every once in a while a minister ends up with two houses for a little while. Another way that a minister ends up with two houses is he has a house in a location and he is called to a church where they provide a parsonage. And so he’s got the parsonage and he’s got his other home that he is buying or owns. Now, he can only count the principal residence. So when he moves to that new location and moves into the parsonage or pastorium, then he can only count the parsonage or pastorium as his principal residence. He can’t count housing expenses for the other home. Now, he might be able to deduct some expenses from that other home, like mortgage interest, but he cannot count it as housing allowance. And so a home equity loan is eligible if used for repairs or improvements, but it’s not eligible if used for non housing purposes. So those are the things that are not eligible. Now, before we get into this one I’m going to stop my screen sharing and look at the Q and A. So here we go. We’ve got some great questions. Reggie Quimbee asks, once your mortgage is paid off, what are the options available for the house allowance deduction? That’s a great question, Reggie, and in fact, we’re going to be talking about that because of many reasons ministers have some questions. When their mortgage is paid off or when they retire, ministers think that things work differently and they really don’t. I’m going to go onto the other question and then we’ll start our screen sharing back and do that. Okay, Patty says, if we have a bi-vocational youth and children’s pastor making an estimated 3000 to 10,000 a year, can the church set it all as housing allowance? And the answer to that question is yes. If it fits the situation, you may. The minister may request a hundred percent as housing allowance, and you may do that. Now, I would suggest that they have some money as taxable so that they can put money into their church retirement plan, and there’s some extra benefits that go with the church retirement plan. But the answer to the question though, may they have a hundred percent as housing allowance? Yes. It may be as long as it fits the situation. And then can housing still be set aside if the home is paid off? And the answer to that question is yes. You still have all those expenses for housing except for the mortgage payment and the mortgage interest. I’m goin to stop… I’m going to start sharing my screen again and we’ll go back to where we were. So far example, and I’m going to go back just a little bit. I got to click there. All right, so the minister who’s… They paid for their house in full. So there wouldn’t be a payment. There would not be principal and interest, but there the taxes and insurance. So the minister who has paid off their home they would have taxes and insurance and utilities and furnishings and repairs and maintenance any remodeling. And so there’s still other expenses that could be counted as housing allowance when the home was completely paid for. Now, if a person is in a parsonage or pastorium, I wanted to point this out, you still may ask for a housing allowance, and it’s for the things that you pay. So you’re not paying for the home itself. You’re living in the church’s home. However, you still should have insurance on your contents and on your liability. So you still should have insurance. You’re still gonna have some utilities. Or maybe the church pays some of them, and maybe you pay for the internet service provided to the home, for example, and you might be buying furnishings for that home even though the home doesn’t belong to you. And so anything that you pay for, you may request as housing allowance, and so whatever would fit your situation. Those are the things having to do with housing allowance and when you’re retired, or when you have paid off your home, then you may still have a housing allowance. It’s just going to be different because you don’t have the payment anymore. And retired, you might still have the payment and maybe you’re still using this list, but those are the things that are excluded from income as you request a housing allowance. All right, so I’m going to move. I’m going to do it one more time. I know that’s a big question. And so the… Let’s see, where’d it go? Here it is. It went over here. Okay. Liz says, where can I find the compensation planning guide? And that’s very, very important. You’ll find that compensation planning guide at GuideStone.org/compensationplanning, and that’s where you can find that. You have at alsbom.org/ccs, you have my resources and I’ve got these notes that you’re looking at there on that page. So earlier in this presentation, I listed the website for GuideStone.org/compensationplanning. Now, here’s the question that’s an important question. How much can ministers exclude? And it is the lowest number of three values. Number one, housing allowance designated by the church, number two, actual expenses, and number three, if you’re buying your home, what is the fair market rental value of the home furnished plus utilities? So if you’re in a parsonage, you would exclude any housing allowance designated by the church and compared to your actual expenses. So if I asked for $5,000, I live in a parsonage, but I asked for $5,000 to cover the expenses that I pay but I only spent $3,000, it would be the $3,000 would be what I could actually exclude, and I would have to declare that $2,000 difference as taxable income. But if I’m buying… And so number one and number two are the things that you think about if you rent or you’re in a parsonage, but if you’re buying your home you have to also include number three. Now, when people retire or when they pay off their home, one of those two, it triggers a thought and a lot of people are mistaken by this. They think now I can count the fair market rental value of the home furnished plus utilities as my housing allowance, and that was clarified back in 2002 with a court case that no, you cannot do that. It’s got to be the lowest of these three values. And so I could ask for that much. Let’s say that that amount is $25,000. I could ask for that, but if I only spent 15,000 or only spent $10,000, then the difference I would have to declare as taxable income. So that’s the way that works. It’s the lowest of those three values. Now, number one, housing allowance designated by the church, that is requested by the minister. Filling out that form. You don’t have to fill out that particular form. You could just make a request as a memo and put it in writing, but we like to use that form. We use that form in State Board of Missions for all of our ministers. And so it is at tax time, it is the lowest of these three values. What was designated by the church, I requested it, it was approved. The actual expenses or the fair market rental value of the home furnished plus utilities. One are the lowest of those three. So I said just a moment ago, what about down payment? What about a down payment of $50,000 buying a home? Well, you could include that as housing expenses but I’m probably only going to be able to count some of it because this number three number the fair market rental value of the home furnished plus utilities. Let’s go back to my example. What if I asked for 25,000? What if I asked for $50,000, but the rental value of the home was only 25,000? Then that would be all that I would be able to exclude from income. Is there a percentage limit or a dollar limit? No. It’s whatever fits your situation. And, you know, that goes back to two things. Number one, many of our bi-vocational pastors do ask for a hundred percent as housing allowance. The average bi-vocational pastor in Alabama makes about $19,000. There’s tremendous range there but that’s about the average. So there’s no percentage limit and then there’s no dollar limit because of an interesting… I heard in a tax session led by a tax attorney. He said that there is a… He gave an example of a rabbi in Manhattan and you know that’s extremely, extremely expensive real estate and his synagogue he is in Manhattan. He must walk to church, but he’s only allowed a certain number of steps, and so that causes him to live in some very, very expensive real estate. And so there’s no dollar limit and there’s no percentage limit. It’s whatever fits your situation. And of course it has to be coming from ministerial income. And that’s where it kind of… We even have a Southern Baptist example of that from years past. If any of you have ever been to Charleston, South Carolina, that is a beautiful, beautiful city, and down near the water, there are some beautiful, beautiful old homes that have been refurbished in recent years and they’re just absolutely gorgeous. First Baptist of Charleston used to have a parsonage that was in that area and the parsonage was provided by the church to that pastor and a recent pastor in recent years said, “I don’t feel right about this and I would like for the church to sell this home.” because the home was valued at over a million dollars. And that pastor recommended that they sell it, but you know, what else about that expensive home? He had to pay self-employment tax on the rental value of that home. So we do have not just a rabbi, but we do have a Southern Baptist example of how the housing allowance works. And so after that… And that was a wise recommendation by that pastor, and then after that, pastors were able to have a housing allowance and to purchase their own home if they wish to in that church. So it is the lowest of these three values, and it’s the lowest of those three values, whether you’re during your career, whether you have your house paid off or not or whether you’re in retirement. It works the same way. And we get really confused by that thinking that it works differently after paying off the house or after retirement, but it doesn’t work differently. It works the same. All right. Now, so if I’m in a parsonage or renting a home it would be the amount designated by the church and the actual expenses. Now, if you are in a parsonage be sure to include the rental value of the parsonage in the calculation of self-employment tax. And of course that hit that pastor in past years. That hit that pastor of First Baptist Charleston in a very hard way for many years. Okay, is the housing allowance counted for self-employment tax? Yes, but also is the parsonage counted for self-employment tax? The answer is yes. So for example, if a pastor was paid $40,000 plus the use of a parsonage and let’s say that that would rent for $10,000 a year. I’m just making that number up. And let’s say he asked for $5,000 to pay for things that he was responsible to pay for. So now he has a $35,000 salary, and that’s the part that he would pay federal income tax on, but for self-employment tax, he would pay self-employment tax on 35,000 plus the $5,000 housing allowance, plus the rental value of the house and utilities that the church paid and say, that’s 10,000. Then he would be counting all of that for self-employment tax, and in my example, he would be paying self-employment tax on the full $50,000. Are bi-vocational ministers eligible? Yes, they are, and on their church income. So if I have two jobs, I have a secular job and church income, then I could have housing allowance on my church income. And many of those bi-vocational ministers make from 15 to $20,000, and it might perfectly well fit to have a hundred percent as housing allowance. But again, I would recommend that they have some to go into their church retirement plan and had have some taxable income. Just from a pure tax-wise standpoint, putting money into the church retirement plan is even more tax advantaged than putting money into a house allowance. So in the housing allowance I’m not paying federal income tax but I am paying self-employment tax. Money that I put into my church retirement plan, I can tax defer that money. I put it in the traditional way, and so that saves me on taxes. Now it saves me on federal income tax, on Alabama income tax and it saves me on the self-employment tax, and then that money can grow and then sometime in the future, when I really do retire, I can take that money out. Some of it or even up to all of it as a tax-free housing allowance. So the church retirement plan contribution is even more tax advantaged than that housing allowance, but many bi-vocational ministers do ask for a hundred percent as housing allowance and I would suggest that they put some of it as taxable so that they can put it into their retirement plan. Can I deduct mortgage interest and taxes? Yes, I can deduct mortgage interest and taxes on my tax forms, and this is known as the double deduction. This is in fact, about the only double deduction that I’m aware of. So the minister’s counting it once as housing allowance and counting it and again as mortgage interest and property taxes deducted on schedule A of their income tax. So that’s a wonderful tax advantage, but 95% of Americans these days cannot itemize. They just don’t have enough to itemize. Back in 2018 the standard deduction was doubled. The standard deduction for a married couple right now is $25,000. $25,100. And so most Americans are not able to itemize. And so these ministers are only able to count it one time as housing allowance. They’re not able to count it a second time as a deduction for those two items, mortgage interest and property taxes. Is the down payment eligible? Yes. And so in this example, Reverend Black made a $50,000 down payment. Church designated 55,000 as housing allowance. Other housing expenses of 10,000. So he had well more than the amount of housing expenses, but in this example, the rental value furnished plus utilities was 25,000, so he can only exclude 25,000. What about a debt-free home? Everything on the chart is eligible, except of course, in this case mortgage interest and the mortgage principal payment and interest payment would not be eligible because it’s all paid for. With no mortgage payment expenses most likely will be less and something they can exclude the fair market value. You could ask for that but you can only exclude the smallest of those three numbers. When can churches designate? It should be done before the beginning of a year. However, it can be changed at any time, and it can only be done looking forward, never retroactively. And so the church, not the minister, must designate the housing allowance, and that’s the way that that works. It’s requested by the minister, approved by the church and then that becomes the housing allowance. What if the church forgets? Then the housing allowance is zero, and I’ve taught just some small churches and I’ll almost always ask them the question of a very small church. Do you provide housing allowance for your minister? And some of them tell me no. And I say, well, why not? That’s so easy. All you have to do is have the minister requested and y’all approve it and that becomes the housing allowance. But in their situation that minister has zero housing allowance and he can’t deduct housing expenses, except for if he’s able to deduct mortgage interest and property taxes just like any other American. But these days, of course, many ministers don’t have enough to do itemized deductions. So the church could change that amount at any time and can change it from zero to a house allowance that’s requested by the pastor. So we need to do this and we can also use that safety net wording. That safety net wording says this housing allowance is in effect for now and all future years until changed. And I think that pastor search committees can do a great service to a perspective pastor when they make the proposal to the church, including the housing allowance and the proposal, the followup proposal to the church, and, you know, they would ask that perspective minister, you know, we’re going to bring you in view of a call and they could ask that minister to give them a figure for housing allowance and then they could put that in the final proposal that’s voted on by the church of housing allowance and they could use the safety net wording, this housing allowances in effect from now and all future years until changed. I’ve known of some pastors who had a discussion with the search committee but it never was actually officially done by anybody, by an official committee of the church or the church in voting on it or voting on a budget that showed housing allowance. It’s got to be done in some way in writing. And so we use that safety net wording for the current year and all future years until changed. This safety net language should not be viewed as a substitute for designating housing allowance, but you should use the safety net wording. It’s very helpful to you. Is there a limit? Can be even a hundred percent of income, but remember the rules. Even if a hundred percent is appropriate the minister should have some taxable so that he can participate in the church retirement plan through GuideStone. You have to have taxable income to be able to participate in any retirement plan, and so that would be very helpful to that minister. What if the designation exceeds the expenses? Then the minister is responsible to report the excess as taxable income. I’m gonna stop sharing for just a moment, and I’m going to go back to the question and answer, and I think we have perhaps some more. Okay. Here we dealt with that one. All right, can housing still be set aside if the home is paid off? And that one is true. You still can do that. All right. Okay. When I retire, how do we designate an amount for house allowance? That’s a great question, Randy. You will be able to receive housing allowance after you retire from your denominational retirement. It’s called the church retirement plan. It is actually a 403, b, 9 and your 403, b, 9 is your church retirement plan through GuideStone. That is almost the only answer. Now, a church could provide a plan that would include you after retirement but that would be extremely difficult to do. It would involve a lot of legal hassle and the GuideStone is the best answer and that’s the way that you want to do that. And so GuideStone, when you sign up to begin to receive your retirement benefits, one of the questions in the application for your retirement benefits is how much do you want for housing allowance? And you can designate a dollar figure or you can designate a percentage figure, and you said it. GuideStone approves your housing allowance and they are the ones that do that. You can change your house allowance with GuideStone. They have a form to fill out if you ever want to change your housing allowance but that’s how you designate your amount for housing during your retirement years. That’s a great question, Randy. Thank you so much. All right. And lets see. Okay, Barbara joined like two questions. Can we get a copy of the slides? Yes, they are my notes and these slides they are at alsbom.org/ccs and then you go to administrator resources, and then if you want to reach out to me, yes, you can. My number is on all of these different resources that we’ve got at alsbom.org/ccs. I’ve got in several places my cell phone number which is 334 549-1383. And so I’d be glad to help at any time. Let’s see if there’s others. All right, Whoops. Okay, John Stone. How is the housing allowance reported on the W-2? That’s a great question. I’m going to show you later on a sample copy of what a minister’s W-2 should look like. And housing allowance is not required to be on the W-2. It’s not required to. Now, when the church does not put it on the W-2 then we would recommend that the church give you a memo. Let’s say you have on your W-2 $40,000 salary, and then they give you a memo that says for 2020, you received $15,000 in housing allowance, and so they would give that to you and that would help you to prepare for your SE tax. Got a question over here. Okay. And I think this is an interesting… It wasn’t really a question, but interesting situation. My housing expenses in California were over $50,000 while living in California. Now I’m in Kentucky. My expenses are about 20, and so is a $50,000 housing allowance appropriate? And that was not actually a question asked, but I think that it’s an interesting thought. You could request it but it’s not likely that you’ll be spending that much here in Alabama. And so I’m going to go back to my screen sharing. And so what house would rent for… What house would rent for $50,000 a year in Alabama? Not very many of them and not very many of them in which we as ministers live. So you’re going to eventually be limited to those three questions and the fair market rental value furnish plus utilities, you know, and the houses that we live in they’re probably not going to rent for that much. You know, that would be about a 35, $3,800 rental payment per month plus the utilities. That’s not very likely in very big places. Now, I know there’s some million dollar houses here in Alabama, but not very many of us live in those houses. But is a $50,000 housing allowance reasonable somewhere? Well, yes, of course it is. You take someplace like California where, you know, 500,000, 600, $800,000 will buy you an 1100 square foot house built in the 1950s that’s falling apart. And you know, and if you want it to be fixed up you’re, you know, you’re going to be talking about more money than that. So obviously a $50,000 housing allowance could be possible in a place like that, but it’s just not very often that you would see a tremendously expensive house here in Alabama. Although I see more of them than I used to and sometimes we see a bunch of them, and we wonder where did all those people come from that can afford that house? But that’s not our community for the most part. Okay, the minister is responsible to report the excess as taxable income on their federal income tax. All right, is it required to report on the W-2? It’s not required by the IRS. In fact, here is the language that the IRS says. It says it may be reported in box 14, labeled housing allowance. You notice the word may, so it’s not required, and box 14 is just simply an information box. So box 14 does not affect your federal income tax. Box 14 is an information box and so it would be used by the minister to report. That salary plus housing would be reported in the calculation of self-employment tax, which is social security medicare. And so it should never ever be included in box one. If your church mistakenly puts housing allowance in box one then you’re going to have to do a corrected W-2. Remember, that minister cannot just simply deduct it. That minister cannot change what’s on the W-2. The minister would just have to come back to you and ask for a corrected W-2. So make sure that your W-2 is correct, and we’re going to look at a copy of a W-2 in just a few moments. What about retired ministers? The church retirement plans, such as GuideStone, can designate housing allowance. It is a special church retirement plan called a 403, b, 9. The rules are the same as when you were working, and now this is a really neat tax thing that we don’t think about until we start to receive it, but now retirement income is not subject to self-employment tax. Self-employment tax is when you’re working, when you’re serving a church. And so during retirement, you’re only going to pay federal income tax on any salary type income, not from your retirement, but you’re not going to pay any kind income tax or SE tax on the part that’s designated housing allowance during those retirement years. Now, let’s say that I still do some supply preaching or I’m an interim, and so that is income from working and that income would be subject to self-employment tax, but my retirement income would not be. Do the retired ministers pay self-employment tax? Not on their retirement income but they would own any other thing like light supply preaching. Now, one thing that is confusing, is when am I really retired? So retirement, the IRS says that you can take housing allowance from your denominational provider when you retire but they don’t define what retirement means. So there’s been some discussion about, well, perhaps you could still be doing supply preaching. Maybe you could be doing brief interims and still be considered retired. But if I am serving in a bi-vocational role rather than a full-time role, that’s not retirement. And I’ll just tell you I’ve been retired for about a year and a half, but I’m still working three days a week serving the State Board of Missions and so I take my housing allowance, not from GuideStone, but I take my housing allowance from the State Board of Missions because I’m still working even though part-time. So when you are serving a church or in my case, State Board of Missions, then you should take your housing allowance from that church, as long as you are serving that church. And then when you fully retire or you’re getting down to where you’re only doing some supply preaching, that would be the point at which you could list GuideStone retirement income as housing allowance. And of course, let’s say that I’m semi retired and I begin to take my GuideStone retirement but I’m still serving at church. Well, then I would not put retirement housing allowance on that application form. Then later, when I do fully retire, then I could ask for my retirement income to be housing allowance at that time and GuideStone has a form for that. Now, can my surviving spouse receive housing allowance? And the answer to that is no. And they are not the one. They are not the minister and so they cannot receive housing allowance. Only a minister can receive housing allowance. However, I will tell you that I’ve had a few of these cases. IMB missionaries are both commissioned and so the spouse in that case could receive housing allowance. They are, in that case, they are both ministerial employees of the IMB. Now, is it reported for a retired minister? It shown at the bottom of copy C of the 1099-R, and so it is shown so that you’ll be able to know how much it was but it’s not included as taxable income. All right, I’m going to stop and we’re going to deal with some questions then we’re going to come back to this one. I’m going to pause my screen sharing for just a moment and go back to the question and answer. All right. What are the options available for housing allowance deduction? And actually remember it’s an exclusion, not a deduction, but you still, once your mortgage is paid off, you still can include all those things such as your taxes and your insurance and your utilities, your furnishings that you might buy, any remodeling that you might do, things like internet to the home, things of that nature you could include all of those things as housing expense once your mortgage is paid off. And so you still have a fair number of things. And Reggie, I don’t know what y’all are, but I know that my wife will be able to think about things that she wants to do to the house. So I’ll still have plenty of housing expenses as she wants to fix it up and all that sort of stuff. Now, fair market rental value of your home. Now, this one is tricky, and I’m glad that you asked that, Reggie. How do you determine that? And so the easy way to do that is to find a real estate friend and a real estate friend, and a real estate agent who is familiar with the rental value market and maybe they are involved with some rental homes. And so that rental value the person could say, well, yes, I’m familiar with that area and I’m familiar with the homes that are in your area and with your square footage it would probably rent for X number of dollars a month. And then you’re going to say, well, how much would it rent for furnished? And that agent’s going to say, I don’t know. The ones I deal with are empty, but y’all could talk about a guesstimate about what it would cost. Let’s say that in an area that the house would rent for a thousand dollars, and maybe it might rent for furnished 1500, $1,700 a month. I know of one discussion where some administrators were saying, well, I just call up the furniture rental place and say how much would it cost me to rent a whole house full of furniture? And I think that’s really stretching it to do that, because if you had a home that was fully furnished you wouldn’t pay that much to be able to rent that house. So I think going to a real estate agent and just having them give you their best guess as being experienced in that area and familiar with the area. All right, that’s a great question. And I think another thing that is sort of a ballpark, if we were… Let’s say that a house… I’m going to use the number a hundred thousand dollars. I’m just using that because if it’s a $200,000 house, you could multiply by two and so forth, but let’s just use a hundred thousand. I could buy that house. Let’s say the… Let’s say that the interest rate is 3% right now which is less than that right now. So 3%, it would cost me $3,000 in interest the first year. And so that would only be $3,000 divided by 12. Would be less than 300. It’d be $250 a month in interest per a hundred thousand, and that I would probably add some for the payment. Let’s say $350 a month, plus taxes and insurance. I mean, you know, even if you’ve got it way up to $500 that’s a cheap payment, but you could probably rent that house for maybe seven, $800 and then renting it furnished might be somewhere around $1,200. And I’m just making these up. All of that’s going to be determined by your location. Remember, in real estate it’s location, location, location, but that would be a way that you might get an idea. Kind of an idea of what it might be. And so somewhere around 1% of the homes value per month, 1% of a hundred thousand would be a thousand dollars a month. Just somewhere in that ballpark. Somewhere in that ballpark I think would be a fair rental value of your home furnished, and so then you’d add to that the utilities. So the best way is to go to a real estate agent. All right, if we have bi-vocational youth children’s pastor can we set it all as housing allowance? And yes, yes, you can. Let me see, let me move on down and see if there’s some others. Okay. All right. And I think that we have answered all the questions. Okay. All right, here’s a new question. Brad asks, on the W-2 I have boxes three and five blank for the pastor. And that is true. That’s exactly right. Since housing allowance is taxable for self-employment should it be included in boxes three and five? And Brad answers no, it should not be included in boxes three and five. Boxes, three, four, five, and six should be blank for the pastor’s W-2. And that’s how you do the W-2. We’ll look at that sample in just a few moments. And I think that is all the questions for right now. Okay. Okay, we’re still talking over here about… Okay. All right, I’ll check that after that. Okay. I’m going to go back to screen sharing and here we are. Now, I think this is very important. I’m often asked about this and I often have churches who want to ordain and I’m going to talk about a youth minister, for example. Obviously your pastor is going to be an ordained minister, but for say, youth pastor, I’ve had some churches say we want to ordain our youth minister so that he’ll get housing allowance. And their thinking is that would be wonderful. It’d be wonderful tax advantage. It’d be wonderful for him and it would be great to save all that money, but these days it’s not quite the same as it used to be and so do not ordain for tax reasons. Ordination is all about calling and that youth minister should be ordained or not ordained about… And that’s all about his calling to ministry. And if he feels called to ministry and to ordination do it for that reason. Do not do it for tax reasons. And in fact, a lot of these young ministers who are starting out, they’re in these days of tax situation, they’re going to come out worse. So the non ordained youth minister, married, and in both cases we’re going to compare these two, makes $45,000. Total of $45,000. And so over here, the non ordained youth minister married he would subtract $25,000, which is the standard deduction. Actually this year it’s 25,100. Then that would leave 20,000 as taxable income. The federal tax on $20,000 for a married couple is in the 10% bracket, married filling jointly, and so the 10% bracket that’d be $2,000. Then his portion of FICA, you would take the 45,000 times 7.65%. You’d get $3,442. So his grand total of taxes, this would be federal income tax and it would be his portion of FICA, would be $5442. Now, he wouldn’t do that on his form 1040. The church would have already done his portion of FICA taking it out of his paycheck each week. So he wouldn’t have to even calculate that but that would be the portion of FICA and his grand total of taxes would be 5,442. His federal income tax will be 2000. Now, the same minister ordained this time, same amount of money, $45,000, and he requests $15,000 housing allowance. So 45 minus 15 is 30. Minus $25,000 standard deduction for a married couple. And so the federal income tax on that would be $500. 10% of $500. And so that would be the federal income tax, but his self-employment tax on the full $45,000 would be 6358. It’s calculated on 92.35% of the total of 45,000 times 15.3% and that’s what you get. And so his grand total federal taxes, including the self-employment tax, would be 6858. So he would be paying actually more money, $1,400 more, this way than if treated like a regular employee. So don’t do it about tax reasons. Now, of course, in this case, the non ordained minister the church would be paying the other part of that FICA, but for the minister, and here on this example of being ordained, you could give a social security offset. You could give that minister more money to help make up the difference, but I’m just comparing apples to apples. The exact same amount of money to the exact same amount of money. And so the ordained minister in many cases comes out worse financially, but the ordained minister, it’s all about calling and so if that’s what happens then so be it. Now, this minister over here, the ordained youth minister making $45,000, he obviously does not have enough to itemize deductions. He’s going to have to take the standard deduction and so he won’t get any advantage of what we talked about a few minutes ago about the double deduction. He’s only going to be able to use that $15,000 as housing allowance. He’s not going to be able to deduct mortgage interest and he’s not going to be able to deduct property taxes because he just doesn’t have enough to itemize. So things have changed in recent years and the key point here of this slide is don’t ordain for tax reasons and do it about calling. Okay. Now… So the house allowance is not what it used to be. The doubled standard deduction, especially like for a married couple, it prevents most ministers from being able to count mortgage interest and property twice once. Once as house allowance and once as a deduction on their schedule A, itemized deductions. These days, another thing that’s different, we have extremely, extremely low interest rates and so there’s less to exclude as housing allowance and less to deduct on schedule A. You know, when Lynette and I first got married and we rented for several years until we could afford our first home and our first home we bought owner financed to get us a wonderful interest rate of 11%. And that was at a day where interest rates for about 15 to 18% and so we thought we were getting a deal at 11% interest. I can remember when they went to 9% and how wonderful. I remember when it went to seven. How great. Down to five. That would be great, but 5% interest rates right now would crash the market because people would quit buying. So it’s a matter of perspective, but these days it’s about as… Well, it’s historically low. It’s never been any lower than interest rates are right now. So there is less to exclude that way. And then the advantage of the house allowance often is overshadowed by this self-employment tax. Now, obviously, if you are buying your home you want to get everything that you possibly can, and so obviously you’re going to, if you’re an ordained minister, obviously you’re going to take advantage of the housing allowance to the best of your ability. But what I’m saying here is it’s not as advantageous as it used to be, so definitely do not ordain, and I’ve used an example off a youth minister, definitely do not ordain that youth minister just for tax purposes. And the IRS even says that. They say that you’re not supposed to ordain someone just for tax purposes. All right, now we’re going to get into some just basic things that are not about housing allowance but just some of the things that we need to know these days and especially in 2021. First of all, the business rate for business mileage for 2021 is 56 cents per mile. And I will tell you that early in December I recorded it incorrectly. We had seen it somewhere as 58 cents but that was incorrect. It was 56 and they did not announce the official announcement until, I think December 22nd so it was a late announcement this time, but 56 cents per mile. There are three new IRS forms. And so the W-4 is a new form for federal withholding and it now works with the new doubled deduction, works with the child tax credit and the lack of deductions for most Americans. I will tell you that at that same website, www.alsbom.org/ccs, and click on administrator resources, you will find a form for ministers to calculate their withholding. Let’s take my example of the ordained minister that I used just a moment ago. Makes 45,000, asks for $15,000 housing allowance, and let’s just go back to that form just real quick. Here it is, okay. So makes 45,000, asks for $15,000 housing allowance and so that’s going to make his taxable income 30,000. Less this standard deduction of 25,000. So taxable is going to be 5,000, which is 500 in income tax, but he’s going to owe 6,800 as self-employment tax. So he could ask for, say, $7,300, $7,500 taken out as federal income tax. Now, you can’t do FICA on an ordained minister but he could ask for that divided by the number of paychecks taken out as federal income tax. The other way he could do it. He could take $7,500 somewhere in that range and divide it by four, and so he could send in an estimated quarterly tax payment of one fourth of that each time each quarter, but today the easy way to do it is to ask the church to withhold it as federal income tax. They would send it in as they send in the 941 and perhaps the church has to make monthly deposits or if it’s a very small church maybe they just do it once a quarter, but they would send it in as they send in other income tax and FICA. They would send in the amount of money as federal income tax and then when you do your form 1040, it all works out there. So I do have at the website, I have a forum for a minister to calculate their self-employment tax and their federal income tax, so that you could have that amount either sent in as a quarterly estimate, or you could have that amount sent in as federal income tax withholding from your church. And I will tell you that that form is slightly high. There is a 10% tax bracket. So the first tax bracket really it is not talked about, but your standard deduction, the first tax bracket is zero. That first $25,000 for a married couple is not taxed at all. Then the second, and I’m going to use just some round numbers here, about the second $20,000 for a married couple is taxed at 10%, and then the third group is there’s another amount taxed at 12%. And so for a minister with a housing allowance they could make about, say, $115,000 family income before they would get into the 22% tax bracket. So I used 12%, skip 10 and went on to 12. The two are similar. And so my estimator will estimate just a little bit high. A little bit high, but it’ll get you close. And so that will help you in terms of the new W-4. 941, there’s some additional lines for family medical leave act, 2020. And I will say that we were supposed to… If we had somebody who was quarantine because they had COVID or they had to care for a family member who had COVID or they had been ordered to quarantine, that there’s certain situations where we as employers were supposed to pay for their income for two weeks and then beyond that up to 10 additional weeks at a certain percentage of their pay. I think it’s two-thirds, I believe, and we were supposed to do that and then on our 941 form, you can claim that amount that you paid that employee for family medical leave act, 2020 and you would get some of that money back. So this is additional… The 941 form, that’s the only thing really that amounts to much in terms of different… If you took those lines out it’ll look just like it did last year. Now for 2021, you’re not required to do the family medical leave act, 2020. It expired at the end of 2020. However, you may voluntarily do it. If you have somebody who has COVID and they miss work. If you have somebody who is caring for a family member who has COVID or there has been an order to quarantine or if a child of yours, their school or daycare has been closed due to COVID, then you are supposed to pay them and then you can claim that as a credit onto your 941 so that it’ll help you financially. The government is wanting people to… There’s really two goals of this. One goal role is to keep people employed and keep them receiving their paycheck so that the economy keeps going and people are able to live and the other goal of this is that if somebody does get sick, that they won’t be tempted to come into work sick and that they will stay home. And so this payment is intended to help people to stay home if they need to be home. So that’s a new thing that a lot of our churches didn’t pay attention to. You were supposed to do it in 2020. To pay that person two weeks and then a additional 10 weeks possibly at a reduced pay and then claim it on your 941. And again, for 2021, you’re not required to do that, but you may voluntarily do it and you would be able to claim it on your 941 still for 2021. Another new form is the 1099 NEC non-employee compensation. Do not use the 1099 miscellaneous. The 1099 miscellaneous doesn’t even have non-employee compensation on it anymore, but the 1099 miscellaneous had a lot of boxes on it and there were some boxes that sometimes people would get mixed up about. And so the 1099 NEC, which is the most form that a church would use for a person who does some work for you but they’re not your employee, and so it’s the 1099 NEC non-employee compensation and that’s new for 2020. And those people that you’ve paid in 2020 that is the form that you should be using as you report it this month. 1099 NEC. And so for each employee, now that was talking about a non-employee 1099 NEC, but for employees you need these four forms; W-4 form which is federal withholding, Alabama withholding which is A-4 and I-9 immigration form, and then if they’re a brand new employee those three are just on file, and then number four and five you would only do those for a brand new employee. One is E-Verify, which is required by Alabama law and then the NH 1, which is a now Alabama new hire form and that’s required by Alabama as well. So those four forms are needed plus E-Verify and that would be on a minister also. Now, for the minister of the W-4 form they could just calculate how much their withholding needs to be and down there in box four you could add an amount of additional withholding to do what I described just a few moments ago about you withhold extra federal withholding so that when you do your 1040 form that it all comes out okay. The new W-4 form. Now, this would be primarily for a done minister. And so your other employees at the church… Now, your minister is still gonna use that form but they should put some extra withholding in box four to help have enough withheld. And so for most people there’s really only three considerations. Filing status and married filing jointly, filing separately, head of household or single standard deduction and child tax credits. It’s a much easier form for the employee and if you’re using a computer software then it’s going to be real easy for you as the treasurer or financial secretary. It’s very simple. It is going to be a little more complicated if you’re doing this all by hand and that’s going to be more complicated. If you look at my form for the minister at that website www.alsbom.org/ccs, if you’ll look at my form for the minister, the form that you would be using for other employees, the worksheet it’s going to be similar to what I did for ministers except for you wouldn’t deal with housing allowance issues and you wouldn’t deal with the self-employment issue like there is for a minister. So for the employee it’s simple. For those using software it’s going to be pretty easy. And then for those doing it by hand it’s not going to be so easy. So there’s five steps. Step one, personal information and filing status, like married filing jointly, and then step two is an extremely important step. You check the box, and this is the easy answer in step two. If there are multiple jobs in the home, this could be that both husband and wife work, it could be one spouse has two jobs. If there’s multiple jobs in the home, you check that box. And so what it does is… I told you that the standard deduction for a married couple is about 25,000. So the first 25,000 won’t be taxed. And so if that box is not checked then the W-4 form is assuming that this is the only job in the home. If it’s married filing jointly then it’s going claim the full $25,000, or with the box checked then it will only claim about 12,500 as being not taxed and then taxed beyond that. So it’s a claim… The form is thinking that you have more jobs or that you’re single. So getting this wrong will cause a severe underpayment of taxes. The easy thing to do is check if there are multiple jobs in the home, check that box. If you want to… Let’s say that one spouse makes a hundred thousand dollars and the other one makes 15,000. Well, then there is a worksheet for that which will divide the standard deduction in a different way, but the easy answer is just check that box if there are multiple jobs in the home. Then there is a $2,000 child tax credit. Now, this is last year, 2020. $2,000 child tax credit for each child under age 17. Now, for 2021 that might change. The child tax credit might be more. The child tax credit might include age 17 instead of being only under age 17. There’s different proposals out there, but those are only proposals at this time. And so we’re talking about a W-4 for the information that we have right now and this is the way it stands so far. Then step four, you can have additional withholding if you wish to. Step five, sign and date. Now, I’m going to stop right here. Some of you, I’m sure you need a stand up break. I’m going to stop the share and I’m going to see if there’s any more questions, and there are. Okay. What about opting out of social security? I’ll tell you, David, you should go to GuideStone.org and type in the search box, “Opting out of social security.” If you don’t find it there, email me and I’ll find the link and send it to you. This is an important question. What about opting out of social security? The reason that you would opt out of social security is that you conscientiously object to receiving government insurance. That’s the way that the IRS says it. And so there are Southern Baptist ministers who’ve opted out. There’s a lot of advocacy right now to opt out of social security and our position has been not… We recommend not to, although we fully realize that there are a number of ministers who have opted out. There are some key things here. And I’ll tell you I’m just thinking about this question. I’ve listened to Dave Ramsey. I’m a big fan of Dave Ramsey but I don’t agree with him about this one. First of all, I could not opt out for the reason given by the IRS. That was one thing. Now some can and some think that that’s fine, but that was one. But the other one is, if you do opt out of SE tax, opting out of social security, then if you become disabled, you would not get disability. You might get social security because you have 10 quarters worth of work. Well, not ten quarters, 10 years worth, 40 quarters worth of work, or you might get social security because your spouse has worked 10 years worth, but your social security is going to be very small but even more important than social security, are you going to have medicare? 64 year olds who are not yet medicare eligible and they’re looking for, say, a couple looking for medical insurance at that age, I’ve heard of some people who they were offered medical insurance for like $27,000 a year. You know, gosh, how can anybody afford that? So if you do opt out, you must make sure that everything is taken care of. That you have plenty of retirement, that you are a really, really great saver, and the average American is not a good saver. The average account balance at GuideStone is about $50,000. Unfortunately the average account balance for people who are about to retire is, you know, a hundred to $150,000 and so you need to really be a great saver. You have to have disability insurance all of your working life until you can support yourself. Disability insurance usually ends at age 65. So by 65, you need to be in good shape financially. You need to provide eight to 10 times your income and life insurance always to provide for your family if something should happen to you because of some of the things that social security does. Now, I know the advice, but yet most ministers and most Americans are really not very good savers and so you’d need to have that money. I know we have a lot of people and a lot of ministers who aren’t going to live primarily on social security alone because they just don’t have enough saved and that’s going to actually be a problem not just for ministers, but in our country. But look at the GuideStone website. They have a very, very excellent piece about why we should not opt out of social security. Now, the other thing is that you can only opt out during your first two years of ministerial service. So if you are considering it, there’s a short time window in order to do that, but if you’d like to talk with me more, give me call but that’s kind of a basic answer on the idea of opting out of social security. And just sadly most Americans are not good enough savers to be that that well-prepared. Okay, Michael Brooks, our student pastor, was ordained a deacon years ago before calling to church ministry. Does the IRS quibble over his ordination though as a deacon? Yes, the IRS would quibble over that. They would not allow that as we’re talking about ordained and it is something that we’ve done by tradition but the form that we used to use, and I guess it’s still being used, we used to get it from LifeWay and it says ordained to the gospel ministry. And then of course that same kind of form that we used to get from LifeWay about deacon ordination it would say that we were ordaining any deacon and it would be a different kind of description. Now, those are not any kind of official kind of form that, you know, the Southern Baptist convention puts out there as this is the official document. You could make up your own if you wanted to but that’s the one that we’ve traditionally used through the years and it’s the one that says ordained to the gospel ministry. That’s the one that we’re talking about. That is the process more important than the form. That’s the process that we’re talking about. So your church would need to ordain that student pastor. as ordained to the gospel ministry and that’s what the IRS would be talking about. That’s a great question, Mike. I appreciate that question a lot. All right, let’s go on down and… All right, Anita. Don’t know why it’s going back to… There we go. Social security offset. Okay, good question, Anita. I appreciate that. Social security offset is an additional amount of money provided to the minister so that it helps him to pay his social security taxes. So for example, let’s take an example of $50,000 and that’s for a youth minister for example. If for the youth minister himself, if he’s not ordained, he would be paying about $3,800 in social security taxes out of his pocket and the other 3,800 would come from the church. If he’s ordained, he’s going to be paying both halves of that. If he makes $50,000 total, then he’d be paying about $7,500 in social security tax self-employment tax. So many churches will say, and this is the thinking behind the social security offset, you are our employee and for all other employees who are not ordained we’ve got to pay half of their social security tax, and it’s called FICA. But since we can’t do that on you we’re going to give that money to you. And so typically, a church will have the social security offset set at 7.65%. That’s typical. Now, you don’t have to. You can do anything you want to. I’ve heard of some churches who paid that minister 9% because the social security offset itself is taxable. So we’re going to give you even more than the 7.65% to help you with those taxes, but it’s anything that you want to do but it’s typically 7.65% given to the minister to help with their taxes. And so that’s the way that that works. It’s a great benefit and it’s really, really well, you know, well for you to do that as a church. So I think that’ll be very helpful to you. Okay, I think that’s all the questions right now. We’re going to go back and finish up on a few things. Some of you may want to take a final stand up break and I am going to keep going to finish these things but if you need to stand up, if you need to move around, that’s fine. And we’re about to get started back. Okay, right. Checked out. I was just looking over in the chat section. Okay, and Jeffrey says, I opted out first year of ministry and I’m now getting social security at age 64 because I had 10 years of paying in and I will get medicare. So that is good. That is good. It’s good that you’re going to have social security Medicare. There are some situations where a person is called to ministry and ministry is all they ever do and even if they get married, they marry somebody who does not work for 10 years worth of work and then they, in that particular situation, they would not have social security and would not have medicare. And you can actually buy… You can actually purchase medicare if you are in that situation but it’s very expensive to do. I don’t really see how a retired couple would do it. I do know of some ministers who are in their early sixties and they’re doing some part-time work somewhere else because they don’t have 10 years worth of work in having social security and so they’re working part-time somewhere to get that done so that they will have social security and medicare. All right, we’re going to go back to sharing my screen and we’ll finish up some things. Now, here’s where you can find that form. Estimated tax for ministers. Find it alsbom.org/ccs and that’s where you’ll find a lot of the resources that I’ve talked about today. Click on administrator resources and one of them is 2021 estimated tax for ministers. And like I said earlier, it will be a little bit high but it will be helpful to you. All right, another thing that is brand new is there’s new stimulus for December. Now, notice that I’m saying December. There’s some things that are probably coming in the next month or so so you’ll have to watch for additional things coming out. There is a $600 stimulus check. It was was probably electronically deposited into your bank account per adult, and an income up to $75,000 for a single or up to $150,000 for a couple. And so it was $600 each. There’s a proposal out there for an additional 1400 and we’ll see what Congress does with that in the coming weeks. There are new unemployment benefits. An extra $300 for unemployment and person for up to 11 weeks. And so it’s not the extra $600 as it was last late spring and early summer, but it is an extra $300 in this round. And there is a new round of PPP loan for small businesses and churches do qualify and then it can qualify for loan forgiveness. I have heard from some churches that they went through the process in one of the earlier go rounds and that they received their PPP money and then they also received the forgiveness for that PPP loan. So I have heard from some churches who went through the entire process and it also have forgiveness. So there’s a new round of that. Now, in the coming weeks, we will see Congress take up new stimulus and see what happens with that but none of that is actually done yet. Now, I did have a question that came up about President Biden. He, in one of his executive orders, one of his executive orders was about the $15 minimum wage. And what his executive order was about was promoting it, number one. Number two, it was to check government employees to see how many government employees were under the $15 pay. And then third, it was to require government contractors to the $15 minimum wage. So that’s what his executive order was all about. It does not affect us at this time and so we’ll see what Congress does. If Congress does increase the minimum wage they will probably do so over a period of time. Maybe a couple of years that they would increase it maybe to 12 and then to 15 or something of that nature. So we’ll be watching these things in the future and see what happens but if you see something about new $15 minimum wage, don’t worry. Nothing has been done for, you know, for the general workforce yet. It has been done mainly about government contracts. So those are some things that are new right now. And I promised y’all that I would show you a minister’s W-2. This is what the minister’s W-2 should look like. And so this particular minister in this example had a twenty five thousand dollar income. Out of the $25,000, he requested 15,000 as housing allowance. That left taxable income of $10,000. Out of the $10,000, He requested $2,000 to go into this church retirement plan and that goes here in box 12 with code letter E. Code letter E. So that left is taxable income as $8,000. He did have some group term life insurance that was above $50,000, so there’s a little taxable amount in his case. That taxable amount was shown in the IRS tables to be $12 and that’s included here in box 12 with code letter C and $12 as shown here and also you see the same amount $8,012 down here under state wages. So the minister ended up with a taxable income of $8,012 for federal income tax. Now, for his social security taxes, his self-employment tax, he’s got to use the $25,000 less the $2,000 that he put into his retirement account. That 2000 is not subject to the SE tax and so that’s the way that this works for a minister’s W-2. Now, this is extremely important. Talking about a minister who serves the church. Now, there are some other ministers out there, say a chaplain, serving a hospital. That might be a different looking W-2, but for a minister serving a church, boxes three, four, five and six are always blank. They’re always blank. And then on this W-2 we could have put federal income tax withholding up here in box two if that minister had wanted federal income tax withholding. But notice that three, four, five, and six having to do with social security wages and medicare wages, those are always blank on an ordained minister serving a church. And then this minister received health insurance and I did put that in box 12 but it’s not required unless you have 250 employees which I’m not aware of any church in Alabama that does. And so it’s optional. And I suspect that 99.999% of all the churches won’t do it because they’re not required to. Now, one of the questions we had, is housing allowance, is it required on the W-2? And it’s not required. If you did put it on the W-2, it would be here in box 14 listed as housing allowance, but it’s not required and we’ve suggested through the years that you don’t include it. That’s what a minister’s W-2 looks like. So I think that that is… Oh, we’re gonna talk just briefly about charitable contributions and then we’ll be done. And I’ll be talking in depth tomorrow about charitable contributions since we report those. But the main thing about charitable contributions is they are a gift of cash or property and these are six IRS requirements. A gift of cash or property claimed as a deduction in the year in which the contribution was made. Number three, the contribution is unconditional without personal benefit to the donor. Number four, it is to and for the use of the qualified charity. And a church is a qualified charity. So it’s to and for the use of the church. And then a contribution is within allowable legal limits and that is now 60% of your adjusted gross income but within the allowable legal limits. That’s not a concern for most of us taxpayers most of the time and the time when that might happen might be when a person receives an inheritance and they want to give a percentage of it to the church and that percentage would be greater than 60% of their income. And then they can carry it on over to the next year and the next year. So they might still be able to take advantage of that. And then the contribution is properly substantiated. Those are the six IRS requirements. They’re very, very important for us. So it is a gift of cash or property. That means cash checks and bank transactions. Could be even a credit card transaction or something of that nature. Property would be any non-cash. It is recorded separately from the cash gifts. Time and labor are not deductible. So it’s got to be under church control and any designated gift must be to a pre-approved fund. That’s the only way we can do designations. Is that the church first approved it. You cannot designate to an individual and so you can’t say to a, for example, to a benevolent case. I want all this money to go to the Smith family. It can’t be to a staff member unless the church establishes the love offering and controls the love offering and how that love offering is distributed. So the church makes those decisions. And so the church sets policies and conditions for designated offerings. These are the things about offerings. I’m just going to go briefly to a couple of things about substantiation, and then we’ll talk in depth about this tomorrow. Less than $250 the IRS will accept a canceled check or recept or letter from the church, but if it’s $250 or more, the IRS will only accept a receipt from the church. They could have all their canceled checks that are $250 or more, but the IRS would still require that receipt from the church, that statement from the church. And then it must say… You know, I want to say this ’cause I want y’all to double-check your statements that are going out, you know, right about now. And that it says, “No goods or services were provided to the donor in exchange for the contribution.” Or an alternate wording, “Only intangible religious benefits were provided to the donor in exchange for any contribution.” And that’s what it’s got to say. And of course that needs to be a true statement. If we had a quid pro quo situation that that could be recorded. Thank you for your donation of a hundred dollars for the youth supper raising money to the mission trip and in exchange for your donation you received a dinner with an approximate value of $10. So something of that nature could be said, but for most of the regular giving that people do, it must stay whether it’s a statement, whether it’s on church letterhead, whether it’s just a one gift that one person made and we’re going to write them a letter about that. It’s got to say that no goods or services were provided to the donor in exchange for the contribution. Okay, I’m going to stop right there. Tomorrow we will pick up. We’re going to pick up about contributions. That’s what we’ll be talking about. And so let’s go back to… I think we’ve got a few more questions. Talked about that one. Do that when it’s done. Okay, done. Here, okay. Michael, I hear the legislature is going to consider making stimulus not taxable. What about the federal government? Now, the stimulus, the $600 that were received just in the last few weeks, the $1,200 that we received earlier in the year, that is not taxable to my understanding. That’s not taxable for federal and so what Michael is referring to is Alabama legislature not making that taxable for state of Alabama and it’s not taxable for federal government. Now, any kind of future stimulus they might do, you know, when they do the law they could talk about how want to do that whether it’s taxable or not. So far the stimulus is not taxable and just kind of stay tuned and we’ll see how that goes. All right, Amy says I had an x-marked retirement plan on the W-2, but there’s not an amount in box 12, a. Should there be an amount listed? What you’ve done is possible. And so what happens is the church when it has a retirement plan, you should be marking that, and we do. We as Southern Baptist churches we do have one, the church retirement plan, and you should be marking that retirement box when a person is participating in that plan. However, the money can come from the church, the employer, or the money could come from the employee out of their paycheck. That’s one of the things. That money can come from both employer and employee into their retirement plan. So if the money is coming from the church only you would not have an amount in box 12. There’ll be no amount in box 12 and yet the box 13 would be marked. If the employee is taking out money to come out of their paycheck going to retirement then there would be, and this is an employer plan. That’s what the church retirement plan is. Then there would be an amount in box A, that amount that came out of their paycheck and you would have code letter E. So what you’ve got… I mean, you need to check this and make sure that this is correct, but what that’s indicating is that the church is making contributions but the employee is not making contributions to the retirement plan and that would be the most likely scenario for there to be no money in box 12. I would encourage you to have a situation where there’s perhaps some matching going on and you could start with a small amount and the church could increase that match so that, you know, they could provide the first dollars and then in addition to those first dollars, the church could say for every dollar past this we’ll match with 50 cents for each dollar or something like that. That gets the employee involved and a lot of people will get the match and that would increase their amount going in to their retirement plan. I think we have covered all the Q and A. All right, great question, David. Can the church set up their own 403, b, 9? Not a denomination plan. It’s possible to do but you would spend a ton of money on attorneys. I did have a couple of guys come to my office and they wanted to set up their own church retirement plan. They were financial advisors and they wanted to do that for some of their clients. And I told them about and show them all the information I knew about a 403, b, 9 and they were going to look into it but I didn’t hear back from them. I think they gave up. I think it was too complicated and probably too costly. So for a church that’s a Southern Baptist church they would want to be in the GuideStone church retirement plan. There is not a cost to that church and now that’s amazing. I told you all that I listen to Dave Ramsey a lot. He talked about that their retirement plan at his work, which they’ve got thousands of employees, it costs him, you know, just thousands and thousands of dollars each year to maintain a employer retirement plan. And so the GuideStone retirement plan has done for us. And then not only Southern Baptist, but also like-minded churches who do not have their own plan available to them. That would not be the church retirement plan that we have, but it would be a church retirement plan that is pretty much the same. There’s a couple of… It doesn’t have the benefits that are available for Southern Baptist and it does not have the opportunity for taking your money and annuitizing that money. But other than that, it’s pretty much the same. And that’s available to like-minded churches. Maybe that church is completely independent or perhaps that church is a part of a small group of churches. For example, Bible churches. That would be one example of a group of churches that might qualify for being involved at GuideStone. And I think it’s a wonderful benefit. I think that any kind of independent church that is like-minded to Southern Baptist, I think that GuideStone is the easy answer. And in fact, one of my favorite tax attorneys who is not anything related to GuideStone or in fact I don’t think he is Baptist. I think he grew up Baptist, but I think he’s a part of an independent church now, but he is often advocated to churches that are independent and like-minded to Southern Baptist that they go with GuideStone. All right. I think that’s all the questions. That’s a great question, David and GuideStone is the easy answer, and GuideStone is the good answer. They do a great job with our money. They provide us some things that don’t cost the church but yet they provide a retirement plan. They provide medical insurance. They’re a group medical insurance these days. It’s oftentimes, not always, but oftentimes beating Blue Cross Blue Shield of Alabama and it is a Blue Cross Blue Shield company and so it works the same way. And you’re in the Blue Cross network just like you would be with Blue Cross of Alabama. They do a great job with that. They do a great job providing other kinds of insurance like disability insurance, which every minister still working should have disability insurance. That is the most neglected insurance at all. So they have some other insurance products as well. Group term life insurance. And so they do a great job for us and independent churches can get involved who are like-minded to Southern Baptist. Great question, David. I appreciate that question. Many planners want to start a 403, b, 7 plan, not a 403, b, 9. Okay, now, when you start talking about those kinds of numbers, 403, b, 7 and everything you can easily lose me, but there’s a key difference. 403, b, 9 is a church retirement plan. It is a denominational retirement plan. And the key difference is that’s where you can receive housing allowance from the retirement plan. I’m not sure if it’s possible to do so in other retirement plans. So that’s a great question. Okay. I think that’s all the questions. And so it is right at noon. I’m sorry. We try to get out just a little bit early. and so for me, a little bit later than what I wanted to be. If you have any questions, feel free to hang around and we’ll deal with any questions that you may have. And also I hope that you can join us tomorrow. Tomorrow we’ll be talking about contributions. Same time, 10 o’clock in the morning and I hope that you’ll join us then. Gonna have a word of prayer and then we’ll be dismissed. Father, thank you for this morning. Thank you for all of our blessings and for this day. Help us to be very wise in all that we do and thank you for all the participants that we’ve had today and for their excellent questions and good discussion. In Jesus’ name. Amen.

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