Since church ministers are in a unique tax situation it is important for all ministers to understand their unique tax situation. When you work and earn an income you will need to pay taxes. We should pay unto Caesar what belongs to Caesar, but if Caesar is offering you a tax break you should be sure you take every tax benefit.
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Housing Allowance:
The biggest tax benefit for ministers is the housing allowance. Every ministers should have a portion of his or her income designated as housing allowance.
In the United States ministers can receive housing from a church which does not require income tax payments.
How Does The Housing Allowance Benefit the Minister?
Essentially, the minister is able to exclude a portion of their income from their gross income calculations. Before a church completes a W-4 they are legally able to exclude compensation that is considered housing allowance.
Housing Allowance Vs. Parsonage Allowance
Housing allowance typically refers to the cash portion of your income that is designated as money to be used for the ministers housing. The Parsonage allowance basically refers to the part of your cash salary used to pay for expenses related to your church-owned home.
Ministers Housing Allowance Year End Tax Considerations:
Review your estimated payments from the previous year. Do changes or adjustments need to be made for the following year? I.e. Do you need to increase your housing allowance for the following year?
The ministers housing allowance declaration must be made before December 31st.
Furthermore, there is no such thing as a retroactive housing allowance increase. To a reasonable limit you should always over estimating your housing allowance expenses. Unused funds that were designated as housing allowance will simply be rolled into your regular taxable salary.
Before December 31st you need to amend your housing allowance for the following year. If you have not been claiming a housing allowance you should designate a reasonable portion of your salary as housing allowance and have the church properly designate those funds as the housing allowance. Again, this must be done by December 31st. Both the church and the ministers should have a written signed record that designates the housing allowance amount for the up coming time period.
How well did you keep records of your allowable housing allowance? Do you need to be finding a better accounting system to track all your expenses?
Self-Employment Tax Payments
If you are considered self-employed your final estimated tax payment will be due January 15th, of the following year. If there has been a significant increase or decrease in your income you may need to re-evaluate your final payment.
Your estimated taxes should equal 90% of your tax liability to avoid underpayment penalties.
This of course, assumes you did not opt out of social security.
Confirm Your Tax Status As Employee Or Self-Employed
If there has been a significant change in your relationship with a church that change may or may not have an impact on your tax status. Most local church ministers qualify as employees for income tax purposes. However, if you are a traveling evangelist or do a ‘non-traditional’ form of ministry you will want to properly confirm your status.
Health Insurance
If you are a minister-employee and the church pays the premiums directly to the insurance carrier this benefit is tax free. The same is also true if the church makes direct payments for disability insurance.
Claim Qualified Deductions
Qualified deductions for minister include:
Books
Business and professions and professions expenses – parking, meals, transportation, subscriptions, cell phone …
Computers
Conventions
Dues and memberships
Ministry related entertainment expenses
Educate Yourself
Develop A Good Accounting System
Ministers have a reputation of being poor accountants. Before you enter the next year you need to discover an accounting system that is simple, but includes enough details to meet your legal requirements. Talk with another minister and ask what they do. Many of these tips for organizing your finances will help the minister. While your spiritual work is important is is also important for you to be a good steward with the resources you have been entrusted with.
Every minister should have the Ministers Tax and Financial Guide on his bookshelf.
What do you think about the housing allowance for minister – is it an unfair tax break or well deserved tax break?
Very interesting article. I didn’t know about many of these until recently when I was talking about taxes with the pastor at our church. He sends his taxes to a tax firm that specializes in taxes for church members. Not a bad idea if you don’t want to do them yourself, and prefer to use a professional who is familiar wit the ins and outs of your situation.
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Craig,
I am not a minister, but this helps me better understand the tax issues my minister deals with. I would like to see a follow up on how some pastors can opt out of Social Security. Who can opt out, what are implications, and when is it advisable?
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As a minister I can say that there are certain benefits that we have come tax time, but there are also some headaches that come with it. For example, if you are given a parsonage to live in, while you do not have to pay income tax on that housing, you do have to pay social security and medicare on the fair rental value of the property. Another headache is trying to figure out exactly how much federal income tax you have to pay the first year of ministry. The IRS website does not give a clear formula, only vague forms that might lead you to a different amount each time.
For those who suggest going to an accountant, unfortunately many accountants do not know how to properly figure clergy taxes because they do not do it that often. In the end, you have to explain how to do it and therefore did not really need the accountant.
Also, when it comes to ministers opting out of social security it has to happen in the first two years of their ministry otherwise they are stuck like everyone else. They can opt out under this stipulation:
“I certify that I am conscientiously opposed to, or because of my religious principles I am opposed to, the acceptance (for services I perform as a minister, member of religious order not under a vow of poverty, or a Christian Science practitioner) of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that, makes payments toward the cost of, or provides services for, medical care. (Public insurance includes insurance systems established by the Social Security Act.)…Under penalties of perjury, I declare that I have examined this application and to the best of my knowledge and belief it is true and correct.”