In Private Letter Ruling 201904008 (Oct. 29, 2018), published on January 25, 2019 (the “Ruling”), the Internal Revenue Service (“IRS”) ruled that the cash value of benefits provided to members of a religious order were not wages for purposes of federal employment tax or withholding requirements under the Internal Revenue Code of 1986, as amended (“Code”).
First, the IRS ruled that a facility for developmentally needy adults, not controlled or supervised or significantly funded by a religious organization, qualified as a religious order under Revenue Procedure 91-20, 1991-1 C.B. 524. Second, the IRS ruled that adults and their families who adhered to certain religious beliefs and lived in the facility assisting the needy residents were members of the religious order. The facility provided the families with meals, lodging, clothing, use of auto vehicles, costs of travel, medical insurance, time and funds for weeks of vacation, covered private school tuition and offered college tuition aid, which collectively were termed “Subsistence” in the Ruling.
Thus, the third issue was, whether the value of these benefits were subject to employee Social Security or Medicare tax withheld at source under the Federal Insurance Contributions Act (“FICA”), or to the employer portion under the Federal Unemployment Tax Act (“FUTA”). The IRS ruled the services were not employment under FICA in Code section 3121(b)(8)(A). Likewise, the benefits were exempt from withholding or FUTA under Code sections 3401(a)(9) or 3306(a)(8), respectively, as remuneration of a member of a religious order for services performed in the exercise of duties required by the order.
Therefore, the cash value of the Subsistence was subject to the Self-Employment Contributions Act (“SECA”). Accordingly, the members of the religious order would have to report the cash value of the benefits on IRS Form 1099-MISC as nonemployee compensation and pay nearly an equivalent of both the employer and the employee portions of the employment taxes on net earnings. The facility could reimburse the service providers for the employer portion equivalent, but the “gross-up” would have been additional taxable compensation to the recipients.
The members could exclude qualified rental value of a home and related expenses from income as a parsonage allowance under Code section 107. Members also could deduct car or travel costs incurred in the performance of any sacerdotal functions outside the facility. By contrast, meals provided at the facility were not deductible expenses of members. Education tax credits reduced taxable tuition. Without further tax planning, the value of clothing, meals, vacation funds, medical benefits or remaining tuition would be subject to tax. However, absent regular pay, overriding concerns, such as compliance with Federal Labor Standards Act (“FLSA”) minimum wage requirements or state labor laws may have diminished the significance of any tax savings for individual members of the order.
The in-kind compensation created a conundrum for the members to determine the value of the benefits for tax purposes. The facility might have avoided liquidity concerns only to meet higher compliance costs. As these potential implications under the Ruling broadly illustrate, advance tax and compensation planning for nonprofits may avoid complex legal issues for service providers who forego cash compensation in their commitment to the exempt purposes.