Taxation of Minister’s Income

Preparing a ster’s tax return can prove a challenge for everyone involved: The ster who must keep records, the church secretary who prepares the W2 for, the church leaders who determines ster compensation, and the tax professional who prepares the return and advises for the future.

My goal in this column is to help sters prepare for next tax season and to enlighten church leaders about how the IRS taxes their ster’s compensation.

According to the IRS, a ster is an individual who is “duly ordained, commissioned or licensed by a religious body titng a church or church denomination.”
To be idered a ster for tax purposes, these individuals must be hired by a church or religious organization to perf religious des.

Practicing sters are idered “dual-status” taxpayers. They are employees of the church for federal income tax purposes but tred as being self-employed when deterng Social Security and Medicare taxes, unless they are exempt from these taxes.

To be exempt, a ster must have taken a vow of poverty as a member of their religious order, or filed for an exemption. sters can file for this exemption (using F 4361) if they, cientiously or as a matter of religious principle, are opposed to receiving public insurance payments.

Salaries that a church pays to its ster are idered wages the church must report each year on f W2 (social security and Medicare boxes will be blank). Payments a ster receives directly from individuals (for weddings, for example) are idered self-employment income. Payments called “gifts” or offerings are also income if the ster perfor a service for it.
In fact, the difference between a “gift” and earnings is often misunderstood. Money is only idered a gift when the giver has not received and does not expect to receive anything from the ster in return, such as a sermon, a wedding, or a song.

In other words, if any service was perfed in exchange for the “gift,” it is taxable income to the ster.
sters can receive a parsonage (housing) allowance that is not subject to income tax. Like wages and “gifts,” however, the allowance is subject to self-employment tax if the ster is not exempt. A parsonage allowance is the rental value (including lities) of a home provided by the church, or cash paid directly to a properly ordained or licensed ster to rent or purchase a home (including lities, taxes and insurance). If a home is provided by the church, the amount excluded from income cannot exceed its fair rental value.

If the ster receives a housing allowance in the f of cash, only the actual cost of housing can be excluded from income. The non-taxable housing allowance must be the lowest of one of the following: 1) Fair rental value plus other costs such as lities; 2) The amount of the allowance; or 3) Actual amounts paid for housing (mortgage payments or rent, lities, taxes, insurance, repairs, maintenance and furnishings).

sters can deduct s they incur in the perfance of their des. A ster who is not paid can deduct these s as a charitable contribon.
A paid ster, however, must deduct his or her employment-related s as a misaneous itemized deduction. s incurred in the crion of business income (such as weddings) would be deducted on C. Furthermore, a paid ster who also receives tax-free income (such as a parsonage allowance) must reduce these s by the percentage of total income that was tax free.

The stry certainly has its rewards. It also has its challenges. One challenge arrives each year around tax time. In this article I was only able to highlight a few of the complexities impacting a ster’s tax return.

If you find yourself confused by these complexities, please ult a tax professional such as an Enrolled Agent.

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