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

My goal in this column is to help ministers prepare for next tax season and to light church leaders about how the ts their minister’s compsation.

According to the , a minister is an individual who is “duly orined, commissioned or licsed by a religious body constituting a church or church domination.”
To be considered a minister for tax purposes, these individuals must be hired by a church or religious organization to perform religious duties.

Practicing ministers are considered “dual-status” taxpayers. They are employees of the church for federal income tax purposes but treated as being self-employed wh determining Social Security and Medicare ts, unless they are exempt from these ts.

To be exempt, a minister must have tak a vow of poverty as a member of their religious order, or filed for an exemption. Ministers can file for this exemption (using Form 4361) if they, conscitiously or as a matter of religious principle, are opposed to receiving public insurance paymts.

Salaries that a church pays to its minister are considered wages the church must report each year on form W2 (social security and Medicare es will be blank). Paymts a minister receives directly from individuals (for weddings, for example) are considered self-employmt income. Paymts called “gifts” or offerings are also income if the minister performs a service for it.
In fact, the differce betwe a “gift” and earnings is oft misunderstood. Money is only considered a gift wh the giver has not received and does not expect to receive anything from the minister in return, such as a sermon, a wedding, or a song.

In other words, if any service was performed in exchange for the “gift,” it is taxable income to the minister.
Ministers can receive a parsonage (housing) allowance that is not subject to income tax. Like wages and “gifts,” however, the allowance is subject to self-employmt tax if the minister is not exempt. A parsonage allowance is the rtal value (including utilities) of a home provided by the church, or cash paid directly to a properly orined or licsed minister to rt or purchase a home (including utilities, ts and insurance). If a home is provided by the church, the amount excluded from income cannot exceed its fair rtal value.

If the minister receives a housing allowance in the form 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 rtal value plus other costs such as utilities; 2) The amount of the allowance; or 3) Actual amounts paid for housing (mortgage paymts or rt, utilities, ts, insurance, repa, maintance and furnishings).

Ministers can deduct personal expses they incur in the performance of their duties. A minister who is not paid can deduct these expses as a charitable contribution.
A paid minister, however, must deduct his or her employmt-related expses as a misaneous itemized deduction. Expses incurred in the creation of business income (such as weddings) would be deducted on schedule C. Furthermore, a paid minister who also receives tax- income (such as a parsonage allowance) must reduce these expses by the perctage of total income that was tax .

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

If you find yourself confused by these complexities, please consult a tax professional such as an rolled Agt.

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