“Give, and it shall be given unto you; good measure, pressed down, and shaken together, and running over, shall men give unto your bosom…” ~ Luke 6:38
If you attend church on a regular basis or read the Bible often, you may be “extra-familiar” with this scripture. Often quoted during the offertory segment of religious services, churches collect funds weekly to sustain its financial needs. Some of these funds are allocated to support the financial needs of the church’s minister and assist with clergy taxes.
What Your Church Needs To Know About Clergy Taxes
Licensed, commissioned, or ordained ministers are considered to be common law employees of a church, employed to provide religious services.
All earnings, including wages, offerings, and fees received for performing marriages, baptisms, funerals, etc., by clergy is subject to income tax since the earnings are as an employee or self-employed person. The way you treat these expenses differs if the minister earned the income as an employee or as an independent person.
Church Employee vs. Self-Employed
Generally, the clergy is considered to be an employee if the church or organization has the legal right to control what the clergy does and how they do it, even if there are considerable discretion and freedom of action provided.
As a minister, if a congregation employs you with a salary, you are [generally] a common-law employee of the congregation. Income in this predicament is considered wages withheld for income tax.
Amounts of money received directly from members of the congregation are considered to be earnings from self-employment for income tax purposes. These funds include honorariums for performing marriages, baptisms, or other personal services.
NOTE: The salary that clergy receive from a congregation and fees received from members are subject to self-employment tax.
Clergy Tax Deductions
If a minister plans to itemize their deductions when filing, they may be able to deduct certain unreimbursed business expenses that are related to your services as a common-law employee on Form 1040, Schedule A (Itemized Deductions). Other forms utilized when filing include:
- Form 2106 (Employee Business Expenses)
- Form 1040, Schedule C (Profit or Loss From Business – Sole Proprietorship)
- Use this form if you are reporting self-employment income such as offerings or fees received for performing marriages, baptisms, funerals, etc.)
- Form 1040, Schedule C-EZ (Net Profit From Business – Sole Proprietorship)
Housing Allowances For Clergy
For clergy, a housing allowance is indeed a “gift from on high.” Known as the most significant tax benefit made available for ministers, housing allowances are also very misunderstood.
What is a Housing Allowance?
A housing allowance for clergy is simply a portion of the minister’s compensation that is solely designated by the employing church for housing costs.
The best incentive of housing allowances for ministers is the exclusion of this allowance from federal income tax.
Qualifying for this federal income tax exclusion requires two essential conditions that must be in place::
- The board of the church must approve the allowance before paying it.
- The allowance was spent by the minister on eligible housing expenses only during the year.
The church must also designate the housing allowance.
It should be properly documented in church records and reviewed each year before the beginning of a new budget year.
It is the minister’s responsibility to track actual housing expenses and determine the fair rental value of the housing.
Housing Allowance Expenses and Taxes:
The use of a housing allowance is for costs related to renting, purchasing, and maintaining a home. Eligible expenses include:
- Mortgage/Rent Payments
- Mortgage Interest & Insurance
- Home Insurance
- Property Tax
Ministers that live in a parsonage (house provided by the church) is not subject to income taxes on the use of the parsonage.
Housing allowances are [generally] exempt from most state income tax but double-check with your state to be sure.
Reporting Housing Allowances
Churches are NOT required to report housing allowances for a minister to the IRS.
If a church wishes to report this information they can do so in Box 14 of the W-2 Form that is provided to the minister by the January 31st deadline.
Tip: Churches can designate a housing allowance for a visiting minister and include it in the guest speaker’s compensation.
Exemption from Self-Employment Tax:
Did you know that clergy could request an exemption from self-employment tax?
Yes, ministers can request an exemption from self-employment tax for their ministerial earnings, if they are opposed to specific public insurance for religious reasons.
Exemptions claimed for economic purposes will be denied. In order to request this exemption, one must file Form 4361 (Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners). File this form by the due date of the minister’s income tax return (including extensions) for the second tax year that the minister has net earnings from self-employment of at least $400.
As you continue to do the work of the Lord and make a difference in the lives of others daily, utilize this insightful information while preparing your taxes this year!
P.S. We understand that ministry never stops and can be time-consuming. Create a free account with TaxBandits to handle your tax filing needs and get back to what matters most!
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