Misclassification of employees is a widespread issue, especially among small businesses. Studies in the Obama administration estimate that improper classification may occur in as many as 10-30% of all companies.  However, there’s good news from the IRS. A new initiative, the Voluntary Worker Classification Settlement Program, is in place for a limited time to correct classification without interest or penalties. The only fee will be about 1% of wages paid in the past year to cover payroll taxes. Qualifications for companies to participate in the program are:

-         Treating workers as nonemployees

-         Having filed Form 1099 on the workers for the past 3 years

-         Be free of an ongoing audit regarding worker classification

After the current ‘amnesty’ program, the IRS will be more attentive to the issue of misclassification and there will be penalties and interest to pay. To participate, employers must file Form 8652 at least 60 days prior to treating workers as employees. So, check your payroll and make sure that you are compliant. Because the distinction between the categories can be vague, call your tax advisor if there are any questions.

The IRS’ standard business mileage rate for 2011 was 51 cents per mile for the first half of the year, and 55.5 cents per mile from July 1 through December 31. Many churches reimburse employees for number of miles driven using the IRS rate, but some choose to reimburse at rates higher or lower than the standard. It’s important to understand the differences to remain compliant with the IRS.

Employees must provide adequate logs or diaries to substantiate business miles and submit the records within a reasonable period of time.  This means at least every 60 days of incurring the expense if the employee is being reimbursed.  However, if the employee is given an advance, the records substantiating the expense should be provided at least every 30 days.  Adequate records include the date, place, business purpose and number of miles driven. Parking fees and tolls need to be reported separately.

If reimbursed at an amount greater than the IRS-approved rate: The excess amount reimbursed above the standard is subject to withholding tax and must be reported as income on the employee’s W-2 form.

If reimbursed at an amount less than the IRS standard: The employee is eligible for a business deduction for the difference in the IRS standard and the amount reimbursed.

If employees do not provide adequate records within 60 days, then the church must report the reimbursement as income to the employee. The employee is eligible to claim a business expense deduction on their personal return for the business miles driven, if adequate records can substantiate the mileage.

As a reminder, employee business expenses are deductible only if they exceed 2% of the employee’s adjusted gross income.

Other mileage rates for 2011:

-         Medical purposes and moving: 19 cents/mile (2.5 cents more than in 2010)

-         Charitable mileage deduction (unreimbursed miles while driving for a church or charity): 14 cents/mile (unchanged)

Churches need to be aware of unrelated business income tax (UBIT). Here’s some information about UBIT related to real estate, such as rental income from church-owned property.

One of our accountants, Lisa Potter, works extensively with nonprofit organizations. Her blog post, Maintaining transparency beyond the Form 990, has application for churches and ministries, even though the Form 990 is not required.

A recent article by the ECFA (Evangelical Council for Financial Accountability®), noted that churches will get a free pass regarding the revocation of 275,000 nonprofit organizations.

Reporting on the recent revocation of tax status of 275,000 nonprofit organizations, the New York Times reported the action shrinks the nation’s nonprofit sector by roughly 17 percent, to about 1.3 million charities, trade associations, membership groups and labor unions. The IRS took action against charities that failed to file required paperwork for three consecutive years. Note: Churches are not required to file Form 990 and, therefore, churches were not included in the 275,000 organizations relating to this revocation of tax-exempt status.

Some organizations that identify themselves as churches may appear on the Automatic Revocation of Exemption List (Auto-Revocation List) because IRS records do not identify them as churches, but rather as some other type of organization that has an annual filing requirement. Because these organizations failed to file annual returns or notices for three consecutive years, they appear on the Auto-Revocation List.
While it shrunk the number of nonprofits on the IRS’ list by 17 percent, it certainly did not reduce the number of nonprofits by 17 percent since most of the 275,000 organizations were apparently non-existent for many years. The IRS indicated about one-quarter of the 275,000 received tax exemptions before 1980 and many simply stopped operating without telling the IRS.

Until a change in federal law in 2006, only organizations other than churches with annual revenue of $25,000 or more — roughly one-third of the 1.6 million nonprofit groups — were required to file.

To see if a ministry is an ECFA member, click here.
To see if a non-member is listed as a 501(c)(3), click here.