Posted by Dennis Jao

Tax Implications On Ministers

Tax Implications On Ministers

If you are a minister of the gospel, you are subject to complex tax and social regulations. We will examine: how your income is taxed; how to apply for the tax exemption on self-employed activities; how to obtain a tax-exempt administrative allowance; deduction limits if you benefit from a tax-free deduction; where to report your income; and deductions that you can easily ignore.


How a minister's income is taxed

If you are a pastor in a church, the income of your pastoral service is subject to self-employment tax unless you have applied for and received an exemption. This includes any salary received as an employee of the church, although stated on Form W-2, the church does not withhold Social Security or Medicare taxes, as well as offerings and commissions, such as those for weddings, baptisms, and funerals.

To be considered a minister, you must be duly commissioned, ordained, or authorized by a church or church denomination and have the authority to conduct religious worship, perform priestly duties, and administer ordinances or sacraments. The same is true if you are a practitioner or reader of Christian Science. Your income from the services you have provided is generally subject to self-employment tax, with one important exception, which we will discuss below.


Tax exemption for self-employment for certain ministers

If you knowingly object to public insurance for individual religious reasons or if you object to the principles of the religious denomination to which you belong, you can apply for a tax exemption on your own by filling out Form 4361 with the Internal Revenue Service. If the exemption is allowed, you do not pay Medicare or Social Security taxes on your income. Of course, you do not receive Social Security credits or Medicare retirement benefits. You must complete Form 4361 by the tax return due date for the second fiscal year in which you earned at least $400 in independent income as a minister.

Once you have requested the exemption, you can no longer revoke the election. Although income earned is not subject to self-taxation if the option is granted, you can use the income as the basis for contributing to a qualifying retirement plan, such as an individual 401 (k) plan.


Pastoral allowance

Ministers can exclude from their income a rent allowance or the fair rental value of a parsonage offered to them in payment for their services. This exemption applies to income tax purposes. The exclusion does not apply to taxes on self-employment.

For a payment to qualify for the income tax exclusion, the congregation must officially designate it as a housing or rent subsidy before it is paid. A final quantity must be designated. The value of the allowance cannot be determined subsequently.

If you are receiving a rental allowance, you can exclude it from your gross income if the amount is used to provide or rent a house and does not overpay for your services or exceed the house's rent's fair value, furniture included plus the cost of utilities.

If the church is providing a house, you can exclude from fair income the fair value of the house's rent, including utilities provided to you as part of your income. However, as a rental payment, foreclosure can only be a reasonable payment for services. If you are paying for utilities, you can exclude all charges for designated utilities, up to their actual cost.


Example: Rev. John is a full-time minister. The church allows him to use a rectory with a fair annual rent value of $ 24,000. The church pays him an annual salary of $ 60,000, including $ 7,500 for public service costs. The actual utility cost for this year was $ 7,000. Rev. John excludes $31,000 from gross income ($ 24,000 from the fair value of the house's rental plus $ 7,000 from the deduction for utility costs) for income tax purposes.


Limit deductions for ministers receiving presbytery grants

The downside to receiving a recognized tax-free allowance is that the tax code denies a tax deduction for part of your ministry's operating expenses. The non-deductible amount is the portion of your expenses that goes toward rent or tax subsidy. But this rule does not limit mortgage interest deductions or property taxes.


Example: Rev. John received ministerial income of $50,000, including a scholarship of $ 28,000 for ministerial services, $2,000 for weddings and baptisms, and a canonical allowance of $ 20,000 tax-free. He incurred $ 4,000 in unreimbursed expenses related to his departmental revenues. $ 3,500 out of $ 4,000 is related to his ministerial salary, and $ 500 is related to weddings and christenings he performed as a freelance writer. The non-deductible part of the expenses with the Rev. John's ministerial salaries is $ 1,400, calculated by dividing the tax-free allowance of $ 20,000 by $ 50,000 of total income and multiplying that fraction by $ 3,500. Rev. John's non-deductible portion and the baptismal costs are $ 200, calculated by dividing the tax-free deductible of $ 20,000 by $ 50,000 of total income and multiplying that fraction by $ 500.

If you are affected by this reduction drawback, you will need to attach a detailed income tax return to your income tax return. 

The declaration must contain all of the following:

  • A list of each departmental expenditure item that would otherwise be deductible plus the amount.

  • A list of each item of taxable departmental income by source (such as salaries, wages, marriages, baptisms, etc.) plus the amount.

  • A list of each item of tax-exempt departmental revenue by source (parsonage allowance) plus the amount.

  • A statement that other deductions required in the income tax return cannot be attributed to the income tax exemption.

  • How you calculated the non-deductible portion of your expenses that would otherwise be deductible.


Where to report your income

Report your income in various places on your return, depending on your income (W-2) or self-employment income.

  • Activity income expenses: Before 2018, report the expenses as miscellaneous deductions subject to the limit of 2% of adjusted gross income on Form 1040, Schedule A. As mentioned above, the expenses must be broken down by income W -2 and your housing allowance; some of them are therefore not deductible. As of 2018, non-refundable employee expenses are no longer deductible from federal tax, but some states, such as California, still allow this deduction from income tax.

  • Earned Income: Report this income on Form 1040.

  • Income from offerings and fees: Report as self-employment income on Form 1040, Schedule C or C-EZ Attachment, Business Profit or Loss.

  • Self-employment income expenses: deduct these expenses from Schedule C or Schedule C-EZ. Examples of these costs include office expenses, subscriptions, travel, books, and computers.


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Dennis Jao
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