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Leased Employees

Charities occasionally contract with a third-party leasing organization with the third party providing full and/or part-time staff for the charity. A charity may enter into such an arrangement to reduce administration and human resources expenses.

The employee leasing company may provide a wide range of human resource and personnel management services, such as payroll accounting, payroll tax reporting and filing, benefits administration, recruiting, and labor relations management. The employee leasing company pays wages and employment taxes of the leased employees out of its own accounts. The client organization pays the leasing service a fee and the relevant employee expenses.

Employee leasing may be prudent for small organizations that lack the resources to adequately process payroll and address human resource issues. Also, leasing entities may achieve economies-of-scale for insurance and other benefits.

When a minister is employed by the leasing organization and leased to a charity, care must be taken to preserve ministerial status. For the minister in a leasing arrangement to receive a housing allowance, the leasing company would have to designate the housing allowance because it is the employer.

Internal Revenue Code section 31.3401(a)(9) – 1(c)(2)(i) addresses proper treatment for ministers employed by organizations other than a ministry:

If a minister is performing service for an organization which is neither a religious organization nor operated as an integral agency of a religious organization and the service is not performed pursuant to an assignment or designation by his ecclesiastical superiors, then only the service performed by him in the conduct of religious worship or the ministration of sacerdotal functions is in the exercise of his ministry.

To be eligible for a tax-exempt housing allowance, a minister must be performing ministry activities. Therefore, leased employees whose housing allowance is designated by the leasing company that are ministering through religious worship or sacerdotal functions, may be eligible for a tax-exempt housing allowance.

With proper planning, a church might structure a leasing arrangement as an assignment, so that the minister would qualify on the same basis as if working for the church. The specific format might vary some, since the assignment documents should not contradict or be inconsistent with leasing documents. Generally, however, the church board would assign the pastor to work for the leasing company, to perform services for the leasing company that benefit the church. This should be done at the same time the leasing arrangement is being established, and as new pastors are called, they would be assigned at the same time they start with the leasing company.

 

 


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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