Simplified Tax Guide for the Self-Employed

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Venturing into a new business can be exciting and fun, but there are certain obligations that you have to fulfill before officially starting this new chapter in your life. Whether it’s a car finance, a car wash, or a new boutique, there are certain steps that you have to follow, especially when it comes to taxes and the government. It can definitely get confusing at times, which is why we are here to guide you through your journey.

Sole Proprietor (Sole Trader)

Every business owner needs to understand that the amount of tax that they pay depends on the business’ structure. As a self-employed individual/business owner, you have to understand that you are liable for your own tax debts. You have no accountant to take care of it, unless of course you decide to hire one, which would only add to your expenses. Note that there won’t be any division between your personal and business expenses, unless you make one, for example, by maintaining a separate bank account for each. This may also help with liability protection however, not being a lawyer this is a general observation and not actually legal advice. If you have the time and you are willing to exert the effort, then you can track and claim a range of deductions and expenses for your business on your personal tax return.

Goods and Services Tax

If you are earning more than $75,000 a year, then you have to be prepared for the Goods and Services Tax or GST. Both companies and sole traders are required to pay the GST, so you should always make sure to have some cash in hand. This does not apply to US based companies at this time, although it has been proposed for future legislation.

Reduce Your Tax Payments

Luckily for sole proprietors, there are certain ways to reduce their tax payments. You can claim a deduction for most of your business expenses, as long as it is strongly and directly related to the generation of revenue by your company. Also, if you are a sole proprietor, then you are entitled to offset business losses carried forward against other income. Please note though that you would not be able to choose which year you can claim your deduction. It would be wise to calculate your own profit and loan too, so you know when to file for a claim and how much you will be receiving. There are specific rules for doing so – you can see these here on the IRS website.

Reportings and Requirements

As a sole proprietor, you will most likely encounter the Business Activity Statement or BAS (outside the US). This needs to be submitted every quarter and must include details on how much money you have made, if you owe any goods and services tax and how much of it you owe, how much the taxation office owes you (if applicable), pay-as-you-go installments (if applicable), as well as other tax obligations your business might have. If you are inside the US you most likely should be making quarterly estimated payments on your income since there is no withholding. You may also have to report sales and use tax which is different for each state. <See: State of MN Sales & Use Tax>

Your FEIN, ITR, and State Filings

When starting your business, you need to file with the state you are operating in for a Tax ID. Go to your state’s Secretary of State page for more details. You also need to file with the Federal Government as well to obtain a FEIN or Federal Employer Identification number. If you are not in the US you must to lodge your income tax return with the taxation office before you even start running your business. To be able to do this, you must use your TFN or individual tax file number.

Pre-Paying Your Tax

You can always opt to pre-pay your business’ tax during its first year. If you cannot pay in full, then paying voluntary installments would be the best choice for you. This way, you would not have to worry about paying hefty amounts of taxes for the next few months.

Reporting Online

Almost everything can be done online today, including business reporting. This is extremely convenient especially to busy business owners, as with just a few clicks, your work will be done. Most state websites are user friendly and will have contact information if you get stuck. Likewise the Federal filings are generally set-up to do it yourself without the aid of a real person. Internationally, reporting your income tax return including your claim expense, superannuation deductions, your BAS, and your business and personal income can all be done online. Tracking your GST and preparing your BAS for lodgment can also be done online.

Starting your own business can be a lot of work, and it can get exhausting at times. However, once you get the hang of it and you start seeing results, you will realize that all of your hard word was well worth it!

How to Reduce Your Investment Taxes in 2018

How to Reduce Your Investment Taxes in 2018

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According to U.S. News, the new tax plan proposed by President Donald Trump may remove the net investment income surtax, which is currently at 3.8 percent. If the surtax is eliminated, the top federal tax rate for long-term capital gains will be reduced to 20 percent for high-income earners. While the proposed tax code may provide some relief, it may not be passed. If you feel that you paid more than you should in investment taxes this year, it is not too early to start planning for your 2018 tax bill.

Harvest Investment Losses

Harvesting investment losses is something that is normally done at the end of the year, but it can be beneficial to do it at other times as well. Robert Waskiewicz from the Wescott Financial Advisory Group said that a good example of harvesting losses is selling a mutual fund that is losing money before the payment of dividends or capital gains. It is essential that you harvest investment losses in a strategic manner. If you trade frequently to lock in gains and losses, you may experience tax inefficiencies, which can in turn lead to reduced net investment return. Long-term investing should be the strategy used for taxable accounts, because it is intrinsically more tax-efficient.

Before you start to harvest investment losses, you need to calculate the amount of tax offset you can get from the sale of a certain asset. Also, take a look at the track record of the investment. Regardless of whether it is an equity or bond, you should get rid of it if it has not been performing as well as expected. If you think that the investment has a good chance of rebounding in the future, selling half of your shares is an option you may want to consider.

Locate Your Assets in the Right Places

You may have holdings that you trim back as they approach the top limit of their trading range and get back in as they fall back to their normal bottom. In order to minimize the tax friction that comes with this approach, you should locate such holdings in tax-deferred accounts. If you belong to a high tax bracket, it is a good idea to utilize municipal bonds and other investments that are not subject to federal or state income tax. Another strategy for reducing investment taxes is investing in a life insurance policy and using it as a Roth IRA alternative. If you are an angel investor, you may be eligible for federal and state tax breaks if you invest in a startup. According to investor Jason Sugarman, those who wish to remain profitable for a long time should invest in tech-oriented startups, because these startups have a better chance of surviving in the future.

Investment taxes can take a significant chunk out of your profits, but you can keep them at a minimum by following the above-mentioned strategies.

WHICH TAX FORM SHOULD I REALLY USE? 1040, 1040A, 1040EZ

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There are three main forms that US citazens can use to file their annual income tax return. They are the Form 1040EZForm 1040A and Form 1040. Below is a description of each along with all the links that you will need to file your taxes.

1. Form 1040EZ is the easiest and simplest form the IRS will let you use to file your taxes. 

You need to meet the following conditions in order to use this form:

  • Your filing status is single or married filing jointly

  • You claim no dependents
  • You, and your spouse if filing a joint return, were under age 65 at the end of the year
  • Your only income sources are wages, salaries, tips, taxable scholarship and fellowship grants, unemployment compensation, or Alaska Permanent Fund dividends, and your taxable interest was not over $1,500
  • Your taxable income is less than $100,000
  • Your earned tips, if any, are included in boxes 5 and 7 of your Form W-2
  • You do not owe any household employment taxes on wages you paid to a household employee
  • You are not a debtor in a Chapter 11 bankruptcy case filed after October 16, 2005
  • You do not claim any adjustments to income
  • You do not claim any credits other than the earned income credit
  • Advance payments of the premium tax credit were not made for you, your spouse, or any individual you enrolled in coverage for whom no one else is claiming the personal exemption
  • You are not itemizing deductions and claim any adjustments to income tax credits (other than the earned income credit)

If you meet these conditions then file your taxes using the 1040EZ form. It’s the easiest way to do it. Here are links to the forms. Here is the link to the 1040EZ instructions.

2. Form 1040A is the next simplest form allowed by the IRS.

So if you don’t qualify to use the 1040EZ you should check to see if you can use this form instead. The criteria for eligibility for 1040A is listed below.

  • Your income is only from wages, salaries, tips, taxable scholarships and fellowship grants, interest, ordinary dividends, capital gain distributions, pensions, annuities, IRAs, unemployment compensation, taxable Social Security or railroad retirement benefits, and Alaska Permanent Fund dividends
  • Your taxable income is less than $100,000
  • You do not itemize deductions
  • You did not have an alternative minimum tax adjustment on stock you acquired from the exercise of an incentive stock option
  • Your only adjustments to income are the IRA deduction, the student loan interest deduction, the educator expenses deduction, the tuition and fees deduction, and
  • The only credits you are claiming are the credit for child and dependent care expenses, the earned income credit, the credit for the elderly or the disabled, education credits, the child tax credit, the additional child tax credit, the net premium tax credit, or the retirement savings contribution credit

Here’s the link to the 1040A instructions - Form 1040A Instructions

3. 1040 is the most complicated tax form and is used by taxpayers who are unable to file using a 1040EZ or 1040A.

Here is the criteria for using this form.

  • Your taxable income is $100,000 or more
  • You have certain types of income such as unreported tips; dividends on insurance policies that exceed the total of all net premiums you paid for the contract; self-employment earnings; or income received as a partner, a shareholder in an S corporation, or a beneficiary of an estate or trust
  • You itemize deductions or claim certain tax credits or adjustments to income, or
  • You owe household employment taxes
     

Here is the link for the form 1040 instructions - Form 1040 Instructions.

The IRS provides a handy online tool for determining which form you should use when filing your taxes. You can try it out here What is the simplest form to use to file my taxes? 

Below is a list of the many of other often used forms. You can use these resources when preparing your own return.


Form 1040, Schedule A - Itemized Deductions

Form 1040A or 1040, Schedule B - Interest and Ordinary Dividends

Form 1040, Schedule C - Profit or Loss From Business (Sole Proprietorship)

Form 1040, Schedule C-EZ - Net Profit From Business

Form 1040, Schedule D - Capital Gains and Losses

Form 1040, Schedule E - Supplemental Income and Loss

Form 1040A or 1040, Schedule EIC - Earned Income Credit

Form 1040A or 1040, Schedule 8812 - Child Tax Credit

Form 1040A or 1040, Schedule R - Credit for the Elderly or the Disabled

Form 2441 - Child and Dependent Care Expenses

Form 8863 - Education Credits (American Opportunity and Lifetime Learning Credits)

Form 8888 - Allocation of Refund (Including Savings Bond Purchases)

Form 8949 - Sales and Other Dispositions of Capital Assets

If you need help determing which form you need to use feel free to reach out to PJF Tax or just let us handle it for you this tax season.

WHERE THE H*LL IS MY REFUND?

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It’s frustrating, I know. You want your money back from the IRS. After all the IRS demands their money on one specific date each year and if you don’t pay they charge you penalties and interest. If only you could do the same. Instead you have to sit back (try to relax) and wait. The good news is there are some easy ways to check on the status of your refund.

First go to Where’s My Refund?  This IRS web page has the most up to date information available about your refund. You can use it to get your personalized refund status. It’s updated once a day so no need to waste your time checking every hour. You should wait 24 hours after your or your tax preparer receives confirmation that your return was accepted by the IRS. If you paper filed, sorry, but you have to wait at least 4 weeks for your info to show up. Make sure to have your tax return information ready because you’ll need to input your social security number, filing status, and the exact whole dollar of your current year’s refund.

If you really want to talk to an agent (I wouldn’t recommend this) you can call the refund hotline. The number is 1-800-829-1954. Again make sure you have your tax return information. Unless your Where’s My Refund tool tells you to call I wouldn’t as the agent probably won’t be able to give you any more info than what’s online.

If you filed an amended return there is a separate link. Where’s My Amended Return? Just follow the instructions and input the required information from your tax return.

Both of these tools will provide you will the progress of your tax return. These are:

  1. Return Received
  2. Refund Approved
  3. Refund Sent

Refund for e-filed returns generally process within 21 days of the acceptance date. Refunds from mailed returns take anywhere from 6-8 weeks to process from the date the IRS receives the return. Refunds for amended returns can take up to 16 weeks to process. These are just general rules so don’t worry if the 21 days are up and you haven’t received your return. Use the tool listed above to check the status. Sometimes the IRS gets bogged down during busy times of the year.

Minnesota Tax Return Refunds

If you are just waiting on your Minnesota state tax return you can also check the status of this. Go to the Minnesota State Tax Website to do this - https://www.mndor.state.mn.us/tp/refund/_/

You’ll need similar information just like the Federal Refund Checker. Using this tool you can check any return filed within the past 12 months. In general you should receive your refund within 90 days of filing a paper return and 15 business days for e-filed returns. Again, this is a general rule so don’t panic if you still haven’t received your refund. I have seen Minnesota state refunds take much longer to process

You can also call our automated tax service line at 651-296-4444 (Metro) or 1-800-657-3676 (Greater Minnesota). If you have not received your refund and:it has been over 15 days since your electronic return was accepted or more than 90 days since you mailed your paper return, AND neither the online system nor the automated line has any information on your return, then you can call our individual income tax help line at 651-296-3781 (Metro) or 1-800-652-9094 (Greater Minnesota), Monday through Thursday, 8:30 a.m. – 5:00 p.m. and Friday, 8:30 a.m. – 4:30 p.m.

5 Most Itemized Deductions You Need to Take this Tax Season (Save Your Money!)

Today let’s talk about 5 itemized tax deductions that can you big money this tax season. But before we get into that we can quickly go over the difference between itemized versus standard deductions.

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Schedule A is the way you itemize your deductions. It’s basically a list of all your itemized deductions for the year. But you only use this form if you are itemizing. You can either itemize or take the standard deduction. The standard deduction is really just that, the standard deduction that the IRS allows you to take each year. The amount depends on your tax status (Single, Married Filing Jointly, Head of Household, etc.) and whether or not you are claimed as a dependent by someone else. You can also get an additional standard deduction if you are blind and/or over the age of 65. You don’t have to track or prove anything. You can take this deduction every year no matter what. Itemized deductions are things like medical costs, long-term care, property taxes, mortgage interest, personal property tax and many others. If you’ve tracked this information throughout the year you can choose whether or not you want to take the standard deduction or the itemized. Basically choose the larger amount as it will give you the biggest tax benefit. You can work it out both ways to see which is best for you. (We do this for you if PJF is preparing your taxes.)

One thing to keep in mind is if you itemize, the alternative minimum tax could kick in if your income is too high. What that means is your deductions are added back to an alternative tax calculation to determine if you need to pay a minimum amount of tax. Basically, you calculate tax two different ways. It’s the IRS’ way of making you pay a minimum amount of tax even if you have a lot of itemized deductions.

So if you are itemizing this year here are the 5 itemized tax deductions to look for to help lower your taxable income.

  1. Sales Tax or Income Tax – If you live in a state like Minnesota with income tax you can deduct all of the income that you pay over the year. If you are using a tax software it will usually take this deduction for you. The thing to look for is if your income is low this year (or there is no state sales income tax) you should deduct your sales tax instead. For example, if you purchased a car you might have paid a large chunk of sales tax on that purchase. As long as you have documentation to prove it you can deduct this along with all of the other sales taxes you’ve paid over the year. Consider calculating both income and sales tax to make sure you are taking the largest deduction possible.
  2. Property Taxes – This is all of the taxes that you pay related to your personal or real property. The biggest one could be your primary residence but could also include your vacation property (assuming you don’t rent it out – if you do then the taxes would go on schedule E). This deduction also includes auto and boat registration taxes. Basically any state or local taxes that you paid throughout the year charged on personal property, based on the value of the property and charged on an annual basis
  3. Mortgage Interest Deduction – This is the mortgage interest paid on your primary interest and vacation/second home. However, you only get to deduct the interest on up to $1,000,000 of mortgage debt. I know this seems like but I’ve seen cases where a primary residence and cabin debt get over the $1,000,000 mark pretty quickly. We love our cabins in Minnesota!
  4. Charitable Contributions – This is any donation to non-profits like cash or non-cash items like clothing and household goods. Keep in mind if the value is over $500 you have fill out the additional 283 Form. And if the value is over $5,000 you have to get the item appraised. Do not appraise it yourself the IRS won’t count this.
  5. Miscellaneous Deductions – Some examples of these things could be safe deposit boxes, estate planning fees,  tax preparation fees, unreimbursed employee expenses, investment management fees, casualty losses, and gambling losses (only to the extent you have gambling gains.  Keep in mind most of these deductions are subject to 2% of you AGI meaning the combined amount of these expenses have to be over 2% of your adjusted gross income in order to be deductible at all.

There you go, the five deductions you need to take this year if you’re itemizing. The 6th item that I left off the list is Medical deductions. I left if off because it is harder to meet the threshold. If you are older than age 65 it is subject to 7.5% of your AGI and for everyone else is 10% of your AGI. If you’ve itemized in previous years you should consider taking a look to make sure you took every deduction on this list. If not you can amend a tax return within three years of the date you filed or within two years form the date you paid the tax, whichever is later.

Do I Really Need to Keep My Tax Return For 7 Years?

The IRS Requirements for Record Keeping

We all have heard that we have to keep our tax returns and pay stubs for X number of years. I’ve heard anywhere from 0 to Forever. (I hope your will doesn’t specify who inherits your lifetime accumulation of tax documents.) Well the IRS actually has very explicit rules on this which you need to follow to avoid the stress other issues that come when you receive an IRS letter or notice in the mail. No need to rely on rules of thumb and hearsay. Here is what the IRS says.

Receipts/Cancelled Checks – These items along with other documents supporting an item of income, deduction, or credit that appears on a tax return must be kept for as long as they could become important in the administration of any IRS revenue law. This generally means until the period of limitation expires for that specific tax return. This is 3 years from the date you filed your return. Keep in mind returns filed early (before the tax deadline) are treated as being filed on the due date (usually April 15th). Conclusion: In general 3 years.

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Fraudulent or No Returns – There is no period of limitations when you file a fraudulent return or if you didn’t file a return. A fraudulent return is when you knowingly filed incorrectly. Examples would be leaving off income or taking deductions/credits you are not entitled to. The IRS rule is that for income you should have reported is not reported and is more than 25% of your gross income shown on the return the time to assess is 6 years from when the return is filed. Conclusion: Unlimited – File your taxes and don’t try to defraud the IRS.

Claiming Credits and Refunds  - If you want to claim a credit or refund on your tax return, the period to make the claim is 3 years from the date the original return was filed (or the due date of the return if filed early), or two years from the date the tax was paid, whichever is later. If filing a claim for an overpayment resulting from a bad debt or loss from worthless securities the time to make a claim is 7 years from when the return was due. Conclusion: In general 3 years. 7 if you claim a loss from bad debt or worthless securities.

Health Care Coverage – Starting in tax year 2014 and later you should also keep records related to yours and your family’s health care insurance coverage. This includes records of employer provided coverage, premiums paid, and private coverage documentation. This is to show that you and your family maintained the required minimum essential coverage as now required by Obama Care. If you are exempt from minimum essential coverage you should keep your certificates of exemption that you receive from the marketplace or other documentation to support the claimed exemption on your tax return. This documentation follows the same rules as receipts and cancelled checks so the statute of limitations is 3 years. Conclusion: In general 3 Years.

Small Business Documentation – If you own a business you need to keep all of your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later. Also, there is no method of bookkeeping the IRS requires you to us but however your account for your financial information it must clearly and accurately reflect your gross income and expenses. These records This can get a little complicated so check out this IRS Publication, Employer’s Tax Guide, for more information. Conclusion: In general 4 Years.

That’s it. Those are the IRS rules. You can shred those pay stubs from your first summer job. Once thing to consider is that you may want to keep your records for non-tax purposes. While there is no law your insurance company, banks, or other creditors may want to see this information.

If you have PJF Tax prepare your tax return we keep relevant documents in digital version for the appropriate amount of years. If you want to learn about all the other benefits of using a professional tax preparer.


TAX CHANGES TO MAKE AFTER YOU SAY "I DO"

Include these Tax To-Do Items on Your Summer Wedding Checklist

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Wedding planning is a stressful endeavor but very important to make sure your big day goes off without a hitch. So focus on each other and enjoying the moment. But after the things calm down you need to do a little tax planning to make sure your tax preparation goes off without a hitch too. Here are a few steps to make your tax day (and your future financial tranquility) a success.

  1. Name Change – When filing your tax return the names and social security numbers must match the social security records otherwise your tax return could get rejected. To make this change you need to report it to the social security administration by filing Form SS-5 Application for a Social Security Card. The best way to get this form is to download it from SSA.Gov. You can also call 800-772-1213 and order the form. The third option is to get it from a local social security administration office.
  2. Withholding Change – After getting married your tax situation changes which means you might want to change your tax withholdings on your paycheck. To do this you have to fill out and provide your employer with a new Form W-4 Employee’s Withholding Certificate. The withholding rates for married people is lower than that of single people so some couples find that they do not have enough tax withheld at the married rate. You can check out this IRS Withholding Calculator to help you figure out how much to withhold and how to complete your new W-4.
  3. Circumstances Change – Now that Obama care is the law of the land you need to report your familial changes to your health insurance marketplace if you are receiving a premium tax credit advanced payment. You also need to report your change in income. By doing this it will help you avoid surprises on your tax return like a smaller refund or owing more than you were expecting.
  4. Address Change – Tell the IRS if you move. You need to file Form 8822 with the IRS. You also need to notify the US Postal Service online at USPS.com. You should consider using mail forwarding to avoid lost tax documents.
  5. Filing Status Change – If you are married on or before December 31st of any given year you should now consider using married filing jointly tax status. This is usually a more beneficial way to file your taxes but depending on your circumstances you should also consider calculating taxes separately to make sure you are paying the least amount of tax. Ask your tax professional for more information about this.

If you need help making any of these changes or want someone to take care of your taxes for you this year please don’t hesitate to contact us today!

DEFINITIVE GUIDE TO EARNINGS AND TAXES FOR CLERGY

So you are a member of the clergy, either licensed, commissioned, or ordained minister, which means you have a special tax situation but are not sure how it works. Well then this guide is for you. We are going to lay out everything you need to know about your taxes and how to properly prepare your taxes.

First of all you need to be a common law employee of the church, denomination, sect, or organization that employs you to provide ministerial services. There are a few exceptions for traveling evangelists who are self-employed or independent contractors. So if that’s you then let’s continue. All of your earnings which includes wages, offerings, and fees for services like marriages, baptisms, funerals, etc. are subject to income tax. This is regardless of whether you earn this as an employee or contractor. But, the treatment of the expenses related to performing these services is different depending on whether or not it is self-employment income. Staying with me so far? Ok let’s continue.

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Regarding social security and Medicare tax, the services you perform in duty of your ministry are considered self-employment earnings and are subject (generally) to self-employment tax.

The circumstances of your personal situation are what determine if you are considered an employee or self-employed in the eyes of the IRS. In general, you are considered and employee if you’re church where you perform your services has the legal right to control both what you do and how you do it (even if you have a lot of discretion around your actions). If the church pays you a salary that is a good indication you are an employee and your salary is considered wages for income tax purposes. Alternatively, amounts received directly from members of the congregation are likely subject to self-employment tax.

How to Report your Income and Expenses

If you itemize your deductions you most likely can deduct certain expenses related to your services. This is done on Form 1040, Schedule A, if you are an employee, but are subject to the 2% of your AGI (adjusted gross income) limitation. This might also require you to fill out Form 2106, Employee Business Expenses. If the income and expenses are related to your self-employment status you need to use Form 1040, Schedule C, Profit or Loss From Business, or Form 1040, Schedule C-EZ, Net Profit From Business, to report both your earnings and expenses that relate to the income.

Your Home

As a member of the clergy you might be able to exclude the fair rental value of your home from income or a housing allowance provided as part of your compensation package (as an employee). This includes a parsonage and utilities for the home. However the amount that you exclude cannot be more than reasonable compensation for your ministry services. If you receive a housing allowance you may be able to exclude the allowance to the extent it is use to pay the expenses of a home. These expenses can be repairs, rent, mortgage interest, utilities, and other expenses to upkeep and maintain the home. If you own your home you can claim deduction for mortgage interest and property taxes just like other taxpayers using Schedule A. If you’re housing allowance exceeds either reasonable compensation, the fair rental value of the home, or your actual expenses you have to include the excess in income

If you own your home, you may still claim deductions for mortgage interest and real property taxes. If your housing allowance exceeds the lesser of your reasonable compensation, the fair rental value of the home, or your actual expenses, you must include the amount of the excess in income. Also, your employing organization/church must officially state that the allowance is actually a housing allowance before paying it to you. And even though the housing allowance is excludable you still have to include the amount for self-employment income purposes.

Ok not back to social security and Medicare taxes. An ordained, licensed or commissioned minister (IRS Terms) performing ministerial services is considered to be self-employed. This means that your salary on Form W-2, the net profit on Schedule C or C-EZ, and your housing allowance less your employee business expenses are all subject to self-employment tax on Form 1040, Schedule SE. However, you can request an exemption from this self-employment tax for your ministerial earnings. If you are opposed to certain public insurance (like social security and Medicare) for religious reasons. It can’t be for economic reasons. This also means that you won’t have access to social security and Medicare down the road so be careful if you want to be exempt.

There you have it. I know this stuff can get a little complicated so if you need a little more help with your personal tax situation feel free to reach out – contact us.