TAX WARNING: PASTORS AS EMPLOYEES

TAX WARNING: PASTORS AS EMPLOYEES

By: Aubrey Jayroe

Recently, an appellate clerk of the Internal Revenue Service told me the IRS was examining the status of tax returns of some ministers of the United Pentecostal Church and the procedures by which they filed. She related to me that after extensive investigation across the country, it was determined that some ministers of our organization handle their financial affairs inappropriately. After my conversation with her, there are some points that I feel are very important for our – ministers to know.

Regardless of anyone’s opinion as to whether or not pastors should be considered employees, for income tax purposes the law requires them to be so classified, and we should obey the law. Each pastor should have a specified compensation plan with his church, report his earnings to the IRS, and receive a W-2 form at the end of the year. The church should pay all ministerial expenses by a qualified accountable reimbursement plan that it should establish this year. The minister can also receive a housing allowance, paid by the church, for all household and housing expenses. Churches should pass resolutions each year to authorize these compensation plans and housing allowances, and also a one-time resolution to set up the reimbursement plan.

It is very important that these resolutions be in writing and be approved by the proper authorities in the church. When a minister receives his notice of audit, some of the first things the IRS asks for are the written resolutions authorizing the incomes and benefits that he receives.

If everything is done properly, there will be no adverse tax consequences to the pastor who files as an employee, and doing so will reduce the possibilities of an audit considerably. In fact, the IRS
agent implied that in the future, any pastor who files as self-employed runs a substantial risk of being audited the next year. When the IRS audits a pastor next year and finds that he is filing as self-employed, it will probably do an in-depth audit of him and his church. Other agents have talked with the past few weeks have the same opinion.

A pastor today must be concerned that he does not have control of the funds of the church. The minister must involve other personnel to assist with the records, especially those from which the pastor derives his income. The day of the pastor’s being the only individual knowing what is going on in the finances of the church is over. We must involve competent people to help out in these areas so that the IRS does not come to the conclusion that the pastor has controlled the funds. If and when they conclude that he has, it will cause major havoc in the pastor’s life.

(The above material appeared in the July/September 1992 issue of FORWARD.)

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