Steward Leaders: [Non-profit Myths 2] Taxes

Posted by Matthew Thomas

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Over the last two weeks, we have looked at non-profit basics and dug in to one of the six myths that are common confusions for non-profit leadership.

 

The first myth is about non-profits that make money.

 

Today, we look at the second myth: that non-profits don’t pay taxes.

 

Where does this myth come from?

 

The myth that non-profits don’t pay taxes is based on the well-founded fact that non-profits do not pay federal corporate income taxes in the United States. In other words, unlike regular businesses, non-profits do not pay the (as of 2015) 15% to 35% on the net of revenues over expenses. Businesses call this "profit" while non-profits call this "surplus". In other words, if a non-profit takes in $1 Million and spends $990,000.00, then their surplus is $10,000, which would be taxable to a business, but is not to a non-profit.

 

Like what you're reading? Subscribe Now! Non-profits are also exempted from FUTA (and the state equivalents): Federal Unemployment Taxes.

 

So no, non-profits don't pay those taxes.

 

However, those aren't the only taxes that affect non-profits. In many cases, these other taxes can be waived, but some get paid no matter what.

 

Income taxes on "unrelated business income": non-profits can still pay some form of income taxes if a non-profit engages in what the IRS deems to be "unrelated business." Once again, this isn't a tax on the total revenues, but only on the net revenues less expenses for the portion of the non-profit considered to be "unrelated business."

 

Property Taxes: Property taxes are levied by municipalities, and administered by the counties and the states to which the municipalities belong. School boards, cities, townships, park districts, etc., all typically have taxing authority based on the value of real estate owned by individuals and corporations, including non-profits. Different exemptions from property taxes apply for some organizations. For instance, most churches holding regular services of worship are exempted. However, other religious organizations often pay property taxes. Since taxes are assessed by real estate parcel, sometimes one parcel of land is tax-exempt, while another parcel is not, depending on usage.

 

Payroll Taxes: FICA and Medicare. For non-profits with employees that are not exempt from FICA and Medicare (and pay Self-Employment Tax instead), employers pay half of the FICA and Medicare taxes due based on the employee's compensation. Employers are also responsible to deposit taxes withheld from their employees' compensation - and subject to penalties and interest if they do not. So while the employer is only responsible to pay 6.2% of employees' compensation for FICA (up to a dollar limit) and 1.45% for Medicare, employers, even non-profit employers, are responsible to deduct payroll taxes from employees' paychecks, file an employer payroll tax return (typically quarterly, or at least annually) and deposit all their employees' deducted taxes.

 

Sales Taxes: Since sales taxes are administrated locally, most non-profits can receive exemptions from sales taxes, but must fill out a form at each vendor to receive tax-exempt status. Sales taxes are typically collected by the vendor on behalf of the purchaser, so each vendor must keep a file of those non-profits who have exempt status.

 

Excise Taxes: Taxes on gasoline, beverage alcohol, tobacco, etc., are levied per unit (e.g., 25 cents for each gallon of gasoline), and embedded in the retail price. Therefore, non-profits pay excise taxes regularly in the course of business. Unless these things are purchased at "duty free shops", no one is exempt from them. And crossing an international border to be free from them is probably not worth the hassle for most of us.

 

So do non-profits pay taxes? Most do - in some form. Non-profits certainly pay less in taxes than other businesses. No non-profit pays income taxes on its charitable work. So while grounded in truth, it is a myth to say that a non-profit never pays taxes ever at any time. For some non-profit leaders, this comes as a surprise, and often at a time when it has grown to a place where penalties and interest are already involved.

 


 

Financial Roles Get the map! Design Group International provides a tool to help determine what financial roles your organization has covered, and where it may have some gaps. Click the button to the left to get your free roles tool today!

 


 

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Topics: nonprofit sector, Tax Filing, steward leaders, Matthew Thomas, steward leader, tax, Tax-Exempt, payroll taxes, non-profits, non-profit

Steward Leadership: Clergy and Taxes

Posted by Matthew Thomas

There is an IRS publication just to deal with how clergy and other "religious workers" deal with Social Security and other tax matters. This reflects both the uniqueness of the clergy tax position and the confusion that surrounds it.

There are really only five main items that clergy, board members and other steward leaders of congregations need to pay attention to.

  1. The clergy tax benefits only apply to licensed, commissioned or ordained ministers performing ministerial duties. The "ministerial duties" must fit within the usual and customary understanding of what clergy do: which, while broad, does have limits.
  2. Clergy are considered Self-Employed for tax purposes, but typically considered employees under the law. Therefore, most clergy do not pay FICA (social security / medicare) taxes, where the employer withholds a portion and the employee withholds a portion. Instead, clergy pay the full Self-Employment tax themselves.
  3. Clergy may be granted an income-tax-free housing allowance or parsonage - that is not exempt from Self-Employment taxes - up to the fair rental value of the house, plus utilities. This must be declared in advance by the employing organization or church. While this has been challenged recently in court, it seems that this exemption will continue to hold. However, it still only applies to just one residence.
  4. Clergy are exempt from federal withholding, and instead make their own estimated tax payments, unless they formally elect to do otherwise. This exemption from withholding does not indicate an exemption from payment, nor does it necessarily extend to other taxing bodies, such as states and municipalities.
  5. The honoraria a minister receives for weddings, funerals, special speaking engagements, etc., that are not a formal part of the minister's compensation, must be reported as self-employment income.

Steward leaders who pay attention to these issues will assist both their ministers and their organizations to take full benefit from the tax code, as well as save their organizations time in paperwork and administrative issues. Even with these tax advantages, clergy typically are paid less than other professions with equivalent education and experience. Churches and church organizations should take these tax advantages as an opportunity to be generous to those who work for them, rather than stingy - for instance, using the tax advantages to justify lower salaries.

For help working through clergy tax issues, contact Design Group International at the link below. We'd love to help!

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Topics: Matthew Thomas, Design Group International, steward leader, clergy, tax, minister, housing allowance