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.
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.
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.