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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29965
Experience:  Taxes, Immigration, Labor Relations
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I am a pastor. I have a personal insurance policy that I am

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I am a pastor. I have a personal insurance policy that I am converting from term life to universal life. The policy is $125,000. My church is willing to pay the policy premiums ($102/month) directly to the insurance company on my behalf as a fringe benefit to me. Are the premiums paid on my behalf a tax free benefit?

Generally - as a pastor - you are a common law employee of the church.

A fringe benefit is a form of pay for the performance of services.

Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it.

Specifically - the exclusion applies to life insurance coverage that meets certain conditions.

For details - see IRS publication 15B page 12

Specifically - that should be group-term life insurance which your employer (church) directly or indirectly carry.

In your situation - the policy is NOT carried by your church - and the fact they pay for the policy woudl not make any difference.

Based on facts and circumstances you provided - the church may not treat these payments as tax free benefits.

Sorry if you expected differently.

Let me know if any clarification is needed.

Customer: replied 1 month ago.
OK no problem better safe than sorry. Thats why I ask. So can they still pay the premium as a benefit to me? And if so how do I account for it on my taxes?
Customer: replied 1 month ago.
I do not need a phone call. I am fine with this method of communication.

Yes - that is up to your employer to set any fringe benefits.

As an employee - you should receive form W2 reporting your wages - correct?
So that amount will be included into gross taxable wages - box 1.

In additional - they may mention that amount separately in box 14 for reference.

Do not worry about the phone call - we may continue to communicate.

Please be aware if your employer (the church) sets the group-term life insurance under church's name - with some limitations - premiums may be excluded from wages.

Customer: replied 1 month ago.
I get a W2. So I will have the payroll company include that premium amount as part of gross wages. What about gas allowance? The church has agreed to pay uo to a certian amoubt for gasoline. Is that taxable to? Just trying to make sure all my tax liabilities are in order.

In general - if these are allowances which are not reported back - it will be another fringe benefit - and as such will be treated as wages.

However - if that is partly of fully reimbursement for business related travels - it is possible to exclude that amount from taxable wages.

Again - there are certain conditions applies - if paid under an accountable reimbursement plan.

To be an accountable plan, the reimbursement or allowance arrangement must include all of the following rules.

  1. Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services.

  2. You must adequately account to the payer for these expenses within a reasonable period of time.

  3. You must return any excess reimbursement or allowance within a reasonable period of time.

Customer: replied 1 month ago.
OK fair enough.

So - the church may establish such accountable reimbursement plan fro all business expenses - not only for transportation - and for all employees - and account for such reimbursements separately - that will allow to exclude reimbursed amounts from taxable wages.

Customer: replied 1 month ago.
You mentioned that I am a common law employee of the church. I choose to continue to pay social security. If my employment was ever termjbated, am I elligible for unemployment benefits or disability benefits should something ever happen to me while employed as a pastor?

As long as your employer pays unemployment taxes - yes - you are eligible for unemployment benefits.

That is based on your state policy.

Disability benefits are generally paid by the Social Security Administration.

For social security and Medicare tax purposes, regardless of your status under the common law, the services you perform in the exercise of your ministry are considered self-employment earnings and are generally subject to self-employment tax.

So as long as you pay self-employment taxes - that will determine your eligibility for social security benefits and for disability social security benefits.

In additional - depending on circumstances - you might be eligible for workers compensation and for short term disability benefits - if your employer maintains short term disability insurance to cover employees.

Customer: replied 1 month ago.
Unemployment taxes?

Yes - unemployment taxes are paid by employers only - that is included with other payroll taxes.

Those are corrected by the state Unemployment Insurance Agency (state-operated insurance program) - these are named differently depending on the state - but perform similar functions - to provide unemployment benefits to eligible workers who become unemployed through no fault of their own, and meet certain other eligibility requirements.

Customer: replied 1 month ago.
I guess I'm confused here because as a tax exempt non profit organization the church only pays matching social security taxes and they withold my local federal and sate taxes. Not aware of any other tax we pay

As I mentioned above - in most situations churches do NOT withhold and do not pay social security taxes.

For social security and Medicare tax purposes, regardless of your status under the common law, the services you perform in the exercise of your ministry are considered self-employment earnings and are generally subject to self-employment tax.

So - you - not the church will pay social security taxes as part of self-employment tax.

Regarding unemployment taxes - Federal unemployment taxes (FUTA) and your state unemployment taxes (SUTA).

An organization that is exempt from income tax under section 501(c)(3) of the Internal Revenue Code is also exempt from FUTA.

So - if unemployment taxes are NOT paid - you as an employee would not be covered and woudl not be eligible for unemployment insurance.

Depending on your state law - voluntary election of coverage.

For my state MO - for instance - see page 6

In this case employees of 501c3 organization could be covered by unemployment insurance.

Customer: replied 1 month ago.
OK its beginning to make sense. Is there a benefit to me continuing to pay into social security even though I am eligible to be exempt from it? I chose to continue to pay into it in case its around when I retire.

There is no blank exemption from social security.

But - you are correct - you can request an exemption from SE tax if you are a member of the clergy (minister, member of a religious order, or Christian Science practitioner or reader) or a member of a recognized religious sect.

To request exemption from SE tax, file Form 4361 in triplicate (original and two copies) with the IRS.

When you do so - you certify that that you are opposed to, the acceptance (for services performed as a minister) of any public insurance that makes payments in the event of death, disability, old age, or retirement, etc...

So you do that NOT based on possible benefits - but based on your believes.

After approval - that will be very hard to revert back.


As anything else - there are some advantages and disadvantages of such decision.

First of all I personally do not believe that the Social Security program will be eliminated... It must be reformed - that is correct - but one way or another - we still will have such program.

Then - it may be viewed as insurance - which pay back under certain circumstances - and if your church may afford to establish separate retirement plan and medical insurance for you - so you would not need any government coverage - that is something you may consider.

On the other hand - that is very personal decision...

Customer: replied 1 month ago.
OK. You are the first that really helped me understand that. Our church can it afford the types of insurance benefits that public funding would provide. So it works to my advantage to not apply for exemption. Thank you. So to be clear should I become disabked I could still apply for disability under social security as a payee...right?

Yes - correct - as long as you pay enough into the social security system - you are eligible for social security benefits and disability benefits and Medicare coverage.

In additional based on your work record - your spouse will be eligible for spousal benefits - and if you die - for survival spouse benefits.

For many people - that is the only source of income - so in some circumstances that could be very important coverage.

Customer: replied 1 month ago.
OK great. Makes sense. Ive paid into social security for quite a while, left gainful emoyment in on full time ministry and want to make sure that as we grow and make compensation adjustments that I understood the tax liabilties of those adjustments and options should something happen medically or tragically. I turned 41 and started seeing life differently even as a pastor.

Let's say - you have a car insurance in your car - and drive carefully - nothing happened for long time - does that mean you wasted the money on that car insurance policy?
I would say - no - that is the best outcome - and neither you nor I nor the insurance company want anything to happen.

Similar here - nobody wants you to become disabled - so that is JUST IN CASE...

So - if you manage to work till very old age and will not claim any disability benefits - that is the best outcome - win-win situation for everyone including yourself.

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