Giving to Caesar: Taxing Ministers

Written by Peter Tran

June 30, 2017

Preparng a mnster’s tax return can prove challengng for everyone nvolved: The mnster who must keep records, the church secretary who prepares the W2 for, the church leadershp who determnes mnster compensaton, and the tax professonal who prepares the return and advses for the future.  My goal n ths artcle s to help mnsters prepare for next tax season and to enlghten church leaders about how the RS taxes ther mnster’s compensaton.

Accordng to the RS, a mnster s an ndvdual who s “duly ordaned, commssoned, or lcensed by a relgous ttutng a church or church denomnaton.” To be dered a mnster for tax purposes, these ndvduals must be hred by a church or relgous organzaton to perform relgous dutes. 

Pracng mnsters are dered “dualstatus” taxpayers.  They are employees of the church for federal ncome tax purposes but treated as beng selfemployed when determnng Socal Securty and Medcare taxes, unless they are exempt from these taxes.  To be exempt a mnster must have taken a vow of poverty as a member of ther relgous order, or fled for an exempton.  Mnsters can fle for ths exempton (usng Form 4361) f they, centously or as a matter of relgous prncple, are opposed to recevng publc nsurance payments.  Generally, a mnster has untl the due date of ther tax return for the second year they are compensated for mnsteral dutes to fle Form 4361 and clam ths exempton.

Salares a church pays to ts mnsters are dered wages and must be reported each year on form W2 (socal securty and Medcare boxes wll be blank).  Payments a mnster receves drely from ndvduals (for weddngs, for example) are dered selfemployment ncome.  Payments called “gfts” or offerngs are also selfemployment ncome f the mnster perfor a servce for t. 

n fa, dfference between a “gft” and earnngs s often msunderstood.  Money s only dered a gft when the gver has not receved and does not expe to receve anythng from the mnster n return, such as a sermon, a weddng, or a song.  n other words, f any servce was performed n exchange for the “gft” t s taxable ncome to the mnster.

Mnsters can receve a parsonage (housng) allowance that s not subje to ncome tax.  Lke wages and “gfts,” however, the allowance s subje to selfemployment tax f the mnster s not exempt.  A parsonage allowance s the rental value (ncludng utltes) of a home provded by the church or cash pad drely to a properly ordaned or lcensed mnster to rent or a home (ncludng utltes, taxes and nsurance).  f a home s provded by the church, the amount excluded from ncome cannot exceed ts far rental value. 

f the mnster receves a housng allowance n the form of cash, only the aual cost of housng can be excluded from ncome.  The nontaxable housng allowance must be the lo of the followng: 1) Far rental value plus other costs such as utltes, 2) The amount of the allowance, or 3) Aual amounts pad for housng (mortgage payments (or rent), utltes, taxes, nsurance, repars, mantenance and furnshngs). 

A mnster can dedu personal expenses they ncur n the performance of ther dutes.  Mnsters who are not pad for ther servces can dedu these expenses as a chartable contrbuton.  A salared mnster, however, must dedu hs employmentrelated expenses as a mscellaneous temzed deduon whch wll not be benefcal untl the deduon exceeds 2% of Adjusted Gross ncome (AG).  Expenses ncurred n the creaton of busness ncome (such as weddngs) would be dedued on schedule C.  Furthermore, a pad mnster who also receves taxfree ncome (such as a parsonage allowance) must reduce these expenses by the age of total ncome that was tax free. 

The mnstry certanly has ts rewards. t also has ts challenges.  One of these challenges arrves each year around tax tme.  n ths artcle was only able to hghlght a few of the complextes mpang a mnster’s tax return.  f you fnd yourself confused by these complextes, please feel free to conta our offce to ult wth a tax professonal.

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