Discussion:Small business healthcare tax credit for a small church

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Discussion Forum Index --> Advanced Tax Questions --> Small business healthcare tax credit for a small church

Discussion Forum Index --> Tax Questions --> Small business healthcare tax credit for a small church

Robertsfd2002 (talk|edits) said:

23 March 2011
I'm working with my church to file for the small business healthcare tax credit. There are two full-time pastors, and some part-time employees too. We meet all three tests to claim the credit. My question is about how much we can claim.

The credit is limited to the lesser of 25% of premiums paid or the amount of federal income tax withheld + employer and employee portion of Medicare tax withheld.

Both pastors are considered SE for federal purposes, thus are not subject to federal tax withholding. However, both have elected to have the church withhold tax so they don't have to mess with making quarterly estimated tax payments. Thus, the amounts they have withheld are reported as federal tax withheld.

QUESTION: Are the pastors federal income tax withholdings included in the computation mentioned above? Or are they excluded since those amounts are really so they don't have to make estimated tax payments to cover their SE tax?

I've searched everything I could find and haven't found a definitive answer.

Thanks in advance.

Robertsfd2002 (talk|edits) said:

24 March 2011
Rephrase of the question I am trying to answer:

For purposes of calculating the credit, does federal income tax withheld include anything listed as federal income tax withheld from box 2 of the W-2, including that for ministers (who aren't subject to federal withholding as they are considered self-employed for federal tax purposes, but may request the employer to withhold tax so they themselves do not have to do it through estimated tax payments).


Captcook (talk|edits) said:

24 March 2011
My understanding of this is that federal withholding does impact the limitation as you have described it. It doesn't make any sense that what an employee puts down as allowances on their W-4 would impact the calculation for a health insurance credit, but it apparently does. It looks to me as though you are on the right track.

R2 (talk|edits) said:

24 March 2011
No to all questions. See IRC 45R which talks about "required withholding".

R2 (talk|edits) said:

24 March 2011
Also see extract from Notice 2010-82 below.

A minister performing services in the exercise of his or her ministry is treated as self-employed for Social Security and Medicare tax purposes. See §§ 1402(c)(2)(D) and 3121(b)(8)(A). However, for other tax purposes, including § 45R, whether a minister is an employee or self-employed is determined under the common law test for determining worker status. If, under the common law test, a minister is self-employed, the minister is not taken into account in determining an employer's FTEs and premiums paid because § 45R(e)(A)(i) excludes a self-employed individual from the term "employee" for purposes of the credit. If, under the common law test, the minister is an employee, the minister is taken into account in determining an employer's FTEs and premiums paid by the employer for the minister's health insurance coverage can be taken into account in computing the credit, subject to limitations on the credit. (Note that, under § 45R(f)(1)(B), a tax-exempt employer's § 45R credit cannot exceed the total of the tax-exempt eligible small employer's income tax and Medicare tax withholding and its Medicare tax liability for the year). Because compensation of a minister performing services in the exercise of his or her ministry is not subject to Social Security or Medicare tax under the Federal Insurance Contributions Act (FICA), a minister has no wages as defined under § 3121(a) for purposes of computing an employer's average annual wages.

Robertsfd2002 (talk|edits) said:

25 March 2011
Thanks CaptCook and R2.

Reading through the Code and other RIA resources, I'm to conclude the word "required withholding" is key and exclude the minister's federal withholding since he requests the amount to be withheld and it is not required.

However, I have another question (which need not be answered), which I am just curious about. If an employee requests additional federal withholding beyond the published withholding tables, is this "extra" amount considered to be part of the calculation for line 24 of Form 8941 (amount paid for payroll taxes for purposes of the credit) since it is not "required" withholding? I would interpret it as not being included, but I would guess that in reality it is included because many systems might not keep required withholding and extra amounts requested separate.

Thanks again.

Captcook (talk|edits) said:

25 March 2011
My interpretation of this provision as it relates to withholding is this: the employee completes their W-4 based upon their own circumstances. The employer is required to withhold taxes based upon the information provided on the W-4. If an employee has stated on their W-4 that an extra $50 of federal withholding needs to be withheld, the employer is required to withhold that $50.

That's my take, anyway.

Robertsfd2002 (talk|edits) said:

26 March 2011
I can't argue with that. And I can't find any support against it.

Back to my original question about ministers who are considered self-employed for federal income tax purposes: a true SE individual would not file a W-4 as we'd send them a 1099. A minister who is not truly SE (under the common law test) but only deemed SE for fed tax purposes, does receive a W-2. I had them fill out a W-4 but I'm not sure if they HAVE to. So if they fill out a W-4 saying to withhold an extra amount (remembering that nothing will be withheld otherwise due to how they are viewed as SE), is that considered "required" withholding?

Anyone else want to chime in?

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