Posted by Tucker Accounting Services LLC

Essential Tax Tips and Considerations for Clergy

Essential Tax Tips and Considerations for Clergy

The same way all workers pay income taxes in the United States, pastors, clergy, and ministers must pay income taxes. However, there are some tips and considerations people in this category need to observe when preparing their tax. 


Travel Allowance 

Some pastors enjoy travel allowance benefits from their church every month. This amount must reflect in the clergy's taxable income, regardless of whether the money was used for travel expenses or not. In this case, the travel expense will be classified as a miscellaneous itemized deduction, which will bring down their taxable income. 

However, in most cases, travel allowances are given as reimbursement for expenses incurred on a trip. Since such reimbursement is meant to reduce the costs the clergy incurred, it provides no economic value or benefit to them, making it non-taxable. 

Miscellaneous deductions, on the other hand, (that is limited to the part that rises above 2% of the AGI) are not allowed anymore. Claiming the standard deduction, however, is a better idea for most people. For 2020, single filers have the value at $12,400, while married couples have the value doubled if filing jointly.

An itemized deduction brings down the value of an income that can be taxed. A clergyman must pay self-employment tax on the money for reimbursement. With this, a church or religious organization (nonprofit) will better off consider travel allowance as travel expense reimbursement. This increases the amount of money the pastor can save from tax. 


Housing Allowance 

Often, clergies get housing allowance as a form of compensation. This is also subjected to self-employment tax, which might not necessarily be added to the income tax till it reaches the fair rental value. 

Housing allowance, however, comes with limits and rules. A few of them are:

  • The limitation applies to 100% of the entire salary.

  • The value must be reasonable. 

  • The value cannot be above what was spent on the house.

  • It cannot exceed the fair rental market value amount. 


Self-employment Tax 

When considering self-employment tax (a combination of the Medicare and Social security tax), pastors and clergymen occupy a unique position. The worker pays half while their employer pays the other half of the tax for people in other fields. 

An ordained or commissioned pastor, on the other hand, is considered self-employed for Social security purposes and an employee for income tax. 

This represents a dual position as a worker, and a self-employed worker has some tax implications. Clergies in this situation can use Schedule SE to estimate their self-employment tax. 

However, they cannot claim business expenses using Schedule C. This, however, does not hold for the specific income they got from performing ceremonial activities like funeral rites, marriage, etc. 


Exemption for Social Security 

There is a provision for ministers to choose not to be subjected to self-employment tax. As long as the wages are for ministerial service and not other self-employment income, this exemption holds

Note: Clergies are allowed to opt-out of Medicare and Social security taxes due to the objection in getting public insurance and ministerial earnings. Other economic reasons or an attempt to escape paying self-employment tax is never enough. 

Opting out will not make your clergy earning count towards Medicare and Social Security benefits. Once this (exemption) happens, reversal is impossible.

Therefore, clergies and ministers might get less in terms of disability or retirement benefits from Social Security because their ministerial wages are classified as exempt. Also, the chances of earning adequate social security credit by other workers during their career period that might qualify them for this is  pretty low. 


Retirement Planning 

An additional income source from a side job like part-time office work gives wage income, subjected to social security tax. This applies even if, for ministry, you already opted out. With this, the clergy can accommodate social security credit that will help when retired. 

A critical financial planning tip is keeping money in a retirement plan like an individual retirement account, especially for ministers that are no longer interested in Social security. Tax-deductible Traditional IRAs allow saving money towards retirement. People with supplement income on their Schedule C might qualify for a SEP-IRA: retirement plan for a self-employed individual

 One of the retirement goals a minister can consider is buying a house. A clergy that stays in a parsonage made available by the church might think towards making a housing plan as one of their goals when they retire. 


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