Disclaimer: This is general tax advice so don’t sue me. It seems like every other month there’s a government handout for churches. I don’t know about you, but the abbreviations and the paperwork can become overwhelming. Well…here’s another one. The Employee Retention Credit (ERC) is actually an older program that was overshadowed by the PPP Loans. If you never heard it or have forgotten about it, join the club. This is a credit you can receive to help retain employees even though your ministry is being impacted by COVID.
Here’s the gist of it:
Payroll Tax Credit: This is like the FFCRA in that it is a refundable credit to your payroll taxes. That means you applye for it through the Form 941.
$7,000/Employee: For the first half of 2021, you can receive up to $7,000 per employee per quarter. Doesn’t apply to clergy employees though.
Negatively Impacted: You need to have 1)had a 20% decrease in Gross Receipts in a quarter when compared to 2020, or 2)had operations fully or partially suspended due to government orders.
No Overlapping: If you receive a second PPP Loan, the wages covered by that loan aren’t eligible for ERC.
Disclaimer: This is general tax advice so don’t sue me. I personally have been slow about getting the vaccine. I can justify it that I’m relatively young and healthy. I already have had COVID and still have antibodies (verified every two months when I donate blood). But the real reason is I’m not looking forward to getting sick from the vaccine. The listed side effects are: fatigue, headache, muscle pain, joint pain, chills, nausea, vomiting, and fever. A couple of my friends had a harder time with the vaccine than they did with COVID.
But now there is some economic incentive to getting vaccinated! I recently found out that the time you take off to get vaccinated as well as the time you need to recover falls under the FFCRA tax credit. Here’s what you need to know:
Employees: Track any time you had to take off to get vaccinated or to recover. Report it to whoever does your payroll.
Self-Employed & Clergy: Track any time you had to take off to get vaccinated or to recover. Report this to your tax preparer…next January.
Most pastors make a practice of living by faith. So much so that they even take it by faith that they’re getting paid correctly. But pastors should know that payroll is a tricky part of being a church treasurer, and the pastor’s paycheck is the trickiest of the tricky. So how do you know if you are being paid correctly? In the last year, I came across two churches that incorrectly paid their pastors only to find out 12+ months later. Not fun. Even worse, the IRS added to the “not fun.”
I included a quick worksheet that was mainly aimed at helping church treasurers but would be helpful for pastors to verify and understand their paycheck. As President Reagan used to say, “Trust, but verify.”
I’m all for any way to encourage those not giving to give something or those who are giving very little to stepping up in their giving. Giving to the work of Jesus Christ is a life transforming action. I don’t understand it all the way, but I’ve experienced it myself and seen it in others. The CARES Act has given churches and other charities a little gift for encouraging these folks to donate or donate more. Here’s how:
Write off $300 of Charitable Contributions without itemizing: Only about 13% of tax payers itemize their taxes and can therefore claim a deduction for charitable contributions. The CARES act now allows the other 87% to claim this deduction…up to $300. How many of your households give less than $300/year?
For those that itemize, their giving limit was raised: Honestly I don’t know how many people are affected by this. The deduction for charitable giving used to capped at 60% of Adjusted Gross Income. The CARES Act raised that up to 100%.
Keep this in mind: People don’t give because of tax considerations. They give because they want to make the world a better place. People won’t give $300 just to save $66 on their tax bill, but that tax savings may be enough to encourage people who think well of your church to make that first gift.
Being a church treasurer is not a job for wimps. The church is working in the world of faith, but try cutting a check that is backed by faith instead of dollars. Try telling the IRS that the mistake on the tax forms is okay because of faith. Treasurers are the ones in middle trying to advance the work of faith without getting in trouble with the law.
Getting the pastor setup correctly in payroll is a big victory. Most payroll software wasn’t designed with pastors in mind. They were an afterthought so that’s why it’s sometimes tricky. Here’s the big things that often cause issues:
What to do with the Housing Exclusion? The housing exclusion is the part of the pastor’s salary that is designated for housing to reduce taxable income. You usually need to break this out.
Example: Salary of $45,000 with $5,000 housing exclusion: Enter $40,000 for salary and $5,000 Clergy Housing (Cash)
What to do with Tax Withholding? Pastors are employees for IRS purposes but self-employed for Social Security purposes. That means you SHALL NOT withhold for Social Security and Medicare. It’s optional to withhold for income tax.
There is usually a check box or button to make the pastor exempt from Social Security and Medicare. Find that and click it.
Ask the pastor if they want income tax withheld and how much they want withheld per paycheck. They should fill out the W-4 to confirm this by writing “EXEMPT” in Step 1.c…even though that’s not an option. Then enter the amount to withhold per paycheck in Step 4.c.
I’m not a big fan of debt. I’ve been debt free since 2008 and can’t imagine living life any differently. Probably the only “good” debt would be a mortgage where you made at least a 20% down payment. What if you’re stuck in a difficult situation where you need to take out a loan? This video will show you exactly how to electronically apply for and receive a loan from a United Methodist retirement account.
The thing I like about taking a loan from your retirement account is that you’re paying yourself back…with interest. I’ve also played around with the math…which is more complicated than expected. Here’s what I suspect:
Retirement Loan vs Credit Card: Retirement wins. Your interest rate will be much less with the retirement loan. You should be able to pay off the debt quicker and for less. When calculating the effect on your retirement account, it’s not just the interest rate vs the investment returns because you’ll be earning investment returns on every loan payment you make. It looks like it’s a wash.
Retirement Loan to Buy Home: This was also complicated. If you are short on reaching the 20% down payment, the retirement loan could help you avoid PMI and possible get a lower mortgage rate. When I do the math, it looks like you’ll likely have a slightly lower combined monthly payment.
Disclaimer: This is general tax advice so don’t sue me. The question I was left with last week was: Can the church claim a payroll tax credit if their pastor is out because of COVID? After doing much research and calls, I came to the conclusion that the church cannot claim the tax credit.
The primary reason for this is the pastors confusing tax status. The IRS considers them to be employees, but the Social Security Administration considers them to be self-employed. This credit is tied to payroll taxes which are under the Social Security Administration.
This does open it up that the pastor might be able to claim this tax credit on their personal tax return. This could be a nice bonus for pastors…as long as they keep documentation of their time out. My preliminary estimate is that pastors could get around a $2,000 credit on their taxes. Here’s how I calculated it:
$50,000 in Self-Employment Income (Base Salary of $42k + Fair Rental Value of Parsonage of $12k – Salary Withholdings of $4k)
÷ 260 Work Days (The IRS assumes self-employed folks work just 5 days per week 52 weeks a year. Isn’t that cute.)
x 10 Days (if you were out two weeks, you would get 5 days/week.)