Clergy Tax Issues – Vol 8 of 8: Common Clergy Tax Errors
Clergy Tax Issues – Vol 8 of 8: Common Clergy Tax Errors
Common Clergy Tax Errors
- Having FICA/Medicare taxes withheld from their paychecks. ALL ministers are self-employed for purposes of Social Security with respect to their ministerial income (except some government chaplains)
- Reporting federal income taxes as a self-employed (1099) worker. Most ministers are W-2 employees for income tax reporting purposes under the common law tests used by the Internal Revenue Service and Tax Court.
- Failure to report “special occasion” gifts (love offerings, bonuses, etc.) Most Christmas, birthday, anniversary, retirement, year-end payments are considered taxable income.
- Failure to claim an “adjustment” for half of their self-employment tax liability. Clergy, like any self-employed taxpayer, can deduct 50% of their self-employment as calculated on Schedule SE on Line 27 of Form 1040.
- Failure to include housing allowance when computing self-employment taxes. Self-employment taxes are paid on salary plus housing allowance.
- 1099-Self-employed Pastor claiming exclusion on benefits that are only allowable for W-2 employees (i.e. church-paid annuity, church-paid health insurance premiums…) These benefits are taxable to a 1099-contractor.
- Inadequate records to substantiate business expenses. Expenses reported under an Accountable Reimbursement Plan are non-taxable to clergy BUT only if they adequately document the place, date, persons included and business reason for the expense.
- Ineligible clergy exempt themselves from Social Security. Several strict conditions must be met to exempt from social security taxes.
- Excluding the wrong amount for housing allowance. Clergy may ONLY report as housing allowance the lowest of (1) church designated housing allowance, (2) actual housing expenses or (3) if they own their own home the annual fair rental value of the home (furnished plus utilities).
- Failure to deducte unreimbursed and Nonaccountable reimbursed expenseses on Schedule SE. Clergy can deduct unreimbursed and nonaccountable reimbursed expenses in computing self-employment taxes on Schedule SE even if they cannot deduct these expenses on Schedule A (because they cannot itemize deductions)
Is your pastor making any of these errors? Be sure to share this list with your clergy and help them correctly file their taxes.
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Please see Clergy Tax related blogs here.