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Clergy and Minister Tax Questions for 2017

Clergy and Minister Tax Questions for 2017

Are you a member of the clergy?

You are one of the few professions identified in the Internal Revenue Code. You are identified as a “Minister of the Gospel” because of your “sacerdotal” responsibilities. Clergies have a dual status in the tax code being treated as a “common law employee” receiving W-2’s but also as self-employed individuals paying Self-Employment like self-employed business owners. In certain circumstances, pastors can “opt out of Social Security”.

Most Americans spend a third of their income on housing-related costs, and pastors receive a unique tax treatment called Clergy Housing Allowance

What actions must ministers take now to reduce their 2108 tax bill?

To learn more here are the most commonly asked questions clergy and ministers are asking regarding the 2017 tax regulations.

Who is Qualified as a Minister According to the IRS?

According to the Internal Revenue Service, “Minister of the Gospel” includes pastors, ministers, priests, rabbis, cantors, imams and Christian Science practitioners who are duly ordained, commissioned or licensed by a church or church denomination, or other religious body with the authority to designate an individual to perform sacerdotal functions, administer sacraments and ordinances, and to conduct religious services. Chaplains employed by state, federal or local governments are NOT ministers for federal income tax purposes.

How is a Ministers’ Income to be Reported for Tax Purposes?

Pastor’s should receive a unique W-2 from their church or denomination. The pastor’s wage is reported in box 1 of the W-2 with no Social Security or Medicare wages or withholding reported in box 3, 4 5 or 6 of the W-2. The clergy housing allowance or parsonage is reported in box 14 the W-2. If the pastor or employer is on the ball, the W-2 will have Federal Income Tax withheld and reported in box 2 of the W-2 sufficient to the pastor’s self-employment tax.

Ministers may also receive income or “Love Offerings” from individuals or groups that are taxable including honorariums or payments for services such as baptisms, weddings, and funerals. These payments are also subject to self-employment tax.

Only ministers who are morally opposed to Social Security and have received an approved form 4361 back from the IRS are exempt from Self-employment tax. 

What Forms Should Ministers Use to Report Their Income?

Ministers may receive payments reported on a W-2 form, a 1099-MISC, or direct cash payments.  All of the income is considered self-employment income and should be reflected.

  • Form 1040 line 7 should be used to report all W-2 income received as salary.
  • Schedule C or Schedule C-EZ, Profit or Loss from Business should be used to report all 1099-MISC and direct payments received. Expenses such as mileage, office expenses, computers, books, subscriptions and meals related to self-employment income should be listed here.
  • Schedule A/Form 2106 should be used to report all expenses related to salary, subject to the 2% limit of Adjusted Gross Income. If your expenses are related to housing allowances, they may need to be prorated (see section below regarding housing allowance.)
  • Schedule SE should include the wages from box 1 of the W-2, the clergy housing allowance from box 14 of the W-2, the net income or loss from Schedule C or C-EZ less the unreimbursed employee business expenses from Schedule A or form 2106.

Clergy Housing Allowance or Parsonage

Ministers of the Gospel can exclude the parsonage (house) provided by the church or the portion of the pastor’s compensation designated as a Clergy Housing Allowance by the church from their income tax.Not only is the Clergy Housing Allowance is not subject to income tax, the pastor can still itemize the real estate tax and mortgage interest on Schedule A.  (The Clergy Housing Allowance is still subject to Self-employment tax.)

The amount that can be excluded from income is the lower of:

  1. The amount designated by the church prior to being paid.
  2. The actual housing-related expense to rent or own the home
  3. The property’s fair rental value, including furnishings, and utilities.

2018 Tax Cut & Job Act

The December 2017 Tax Cut & Job Act is the largest change in the US tax code in 30 years. The tax treatment of clergy housing allowance did not change but many other tax aspects did.  To reduce taxes or increase refunds in 2018, ministers should:

  1. Submit expenses monthly to the church for reimbursements even if it means reducing the minister's wage by the estimated amount expenses. Ministers will no longer be able to take unreimbursed ministry expenses on Schedule A or Form 2106.
  2. Meet with your tax preparer to manage the Clergy Housing Allowance to maximize the Earned Income Credit (EIC) and the Additional Child Tax Credit, both are refundable credits that can put new money in the pastor’s pocket. The Additional Child Tax Credit doubles in 2018 and the income limit increased to $110,000 per couple.  At certain income levels, as income increases, the refundable credit will increase. In addition, a pastor could increase taxable wage by reducing the Clergy Housing Allowance. In fact, many young pastors with children may benefit by decreasing or eliminating their Clergy Housing Allowance.

Bret Willoughby writes for TaxBuzz, a tax news and advice website. Reach him at [email protected].

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Bret Willoughby

Bret Willoughby

Bret Willoughby is a practicing tax preparer for expats throughout the world. He created Providence Payroll to meet the needs of Churches, not-for-profit organizations and businesses with remote workers. His web-based payroll processing service benefits both employers and remote workers with an easy way to access payroll information. Clergy have unique payroll and tax-related issues, one that Providence Payroll is qualified to manage.

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