Retirement Plans For Clergy
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While not all clergy receive retirement plans, those who do need to understand how they can impact federal taxes. Much like employees in secular organizations, clergy people are subject to standard IRA limits and other restrictions when it comes to retirement savings.
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W-2 Wages Subject to FICA – For wages paid by the church that are subject to FICA withholding (the clergy did not claim the vow of poverty election) the minister may contribute to an IRA, or where the church has an established 401(k) or 403(b) plan, the minister can contribute to that plan based on the W-2 wages.
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Self-Employed Income - Amounts the minister receives directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services that are reported on Schedule C, are earnings from self-employment for all tax purposes. Thus, the minister could set up a retirement plan, such as a SEP, SIMPLE, 401(k), Traditional and Roth IRA, based upon the Schedule C self-employment income.
However, the usual IRA limits will apply to the combination of wage and self-employment income.
California Differences - Clergy Compensation
Although California conforms to federal law allowing clergy members to exclude rental allowances received as part of their compensation, California does not conform to the federal provision that limits the exclusion to the fair rental value of the home, including furnishings and appurtenances, plus the cost of utilities. (R&TC 17131.6) Consequently, clergy members that are required to limit the amount of their exclusion for federal purposes are allowed to exclude an additional amount on their California personal income tax returns.
Itemized Deductions - California conforms to federal law as it existed on January 1, 2015, with specific significant differences, so most of the TCJA changes, including the suspension of Tier 2 miscellaneous itemized deductions for 2018-2025, won’t apply for California purposes absent conforming California legislation. If California continues to allow employee business expenses as a miscellaneous itemized deduction, adjustment (increase in this case) to federal itemized deductions would be made on California Schedule CA.
Renter’s Credit – If the minister resides in church property that is exempt from real property tax, the minister is not eligible for the CA renter’s credit.