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collapsible transaction theory?

by April
(Montana)

This is my first year as treasurer. Last year my pastor went to have his taxes done and was told to get a new W-2 that has his wages on it minus the ammount that he tithed to the church.

His tax preparer called it the collapsible transaction theory.

I can't find any information on the web of what that is or how it works. However, in some of his notes taken from that meeting with the preparer is written "take 10% off (tithe ammount) to go to church instead, that way we are not taxed on self employment and cheritable".

In addition to that, in his taxes last year he was taxed for being self imployed as a minister, even though he is employed by the church. What do I need to do on his w-2, and what do I need to tell him about his tax preparation?

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Comments for collapsible transaction theory?

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Mar 01, 2011
 Potentially Illegal
by: Vickey

Let me answer the last part of your question first. The IRS considers qualifying ministers to have a "dual-status" when it comes to their tax treatment.

They are considered an employee of the church for federal income purposes and self-employed for Social Security and Medicare purposes. The church does not withhold or match Social Security and Medicare taxes on a qualified minister.

See this page on fringe benefits for more details.

Also see this page on minister's taxes.

When you fill out his W-2 (if he meets the IRS definition of a qualifying minister - most pastors do) you will fill out only box 1 and 16 if state taxes apply to report his wages.

Now for the first part of your question: I have never heard of the "Collapsible Transaction Theory". What the tax preparer is suggesting is potentially illegal. You cannot intentionally not report part of an employees wages...that is definitely illegal.

See this article addressing that issue:

Ministers Should Not Deduct Tithes PreTax

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Join in and write your own page! It's easy to do. How? Simply click here to return to Minister's W-2.

If you want to DIY your payroll, I highly recommend you look at using Gusto! It is very user friendly and their support is awesome! Plus they know how to set up and maintain payrolls for churches and nonprofit organizations.

Note: I am a "partner" of Gusto, but as I have told you before ... I never recommend anything that we or our clients have not tried and love =)



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