Almost every minister at one time or another has had a committee of some kind offer a lump sum salary with the promise, “You can divide it as you choose.” But the “lump sum” approach is officially dead, according to Lee Wright, coordinator of the office of church compensation services of the Alabama Baptist State Board of Missions (SBOM).
“This kind of approach forces the minister into higher taxes and isn’t beneficial in the long run,” he said.
Wright directed five Minister’s Tax Conferences around the state in February. He said with a little planning, churches can help ministers enjoy legitimate tax savings that can be beneficial for them and their families.
One example is the traditional car allowance.
“If a church gives a car allowance to a minister without business expense accountability the full allowance is considered additional income by the (IRS),” he said.
Reimbursement plan
Wright urged churches to offer a reimbursement plan, paying the 2015 rate of 57.5 cents per mile, and actual expenditures for other expenses involved in ministerial duties.
“This system requires the minister to keep a record of miles driven and the purpose, but the benefit is that the money expended isn’t treated as taxable income,” he said.
Wright also pointed out that other business expenses could be treated in the same way. For example a minister can deduct on IRS Schedule A the amount spent on ministry expenses such as books, but the deductible amount is lessened by 2 percent of his adjusted gross income. An accountable expense plan would give the minister greater advantage since the money isn’t treated as additional income.
Wright said recent rulings also allow a cell phone as a tax-free benefit provided by the church.
“The cell phone should be primarily for business even though the minister may have the phone available for personal use,” he said.
Another tax-saving benefit to the minister is a housing allowance. Wright noted a Wisconsin court ruled recently that a housing allowance was an unmerited preference for ministers, but the U.S. Court of Appeals for the 7th Circuit overturned the decision.
“This case may make it to the U.S. Supreme Court but for now the minister should continue to take advantage of this benefit,” he said.
Ministers may designate a portion of salary as housing allowance and save federal income tax on the amount expended. A housing allowance is subject to Federal Insurance Contributions Act tax, but not federal income tax. And, according to Wright, the minister gets a unique break when itemizing since he can claim mortgage interest and property tax as a deduction on Schedule A.
Wright cautioned ministers to declare a housing allowance as part of their salary before the fiscal year begins since rulings prohibit “backdating” information.
Ministers are employees under federal income tax and self-employed under Social Security, he said. This means a minister pays the full 15.3 percent Social Security tax on income. Accordingly ministers can choose voluntary tax withholding as employees or they can make quarterly estimated payments as self-employed, he said.
“Some churches offer an offset to the minister by paying to him half of the Social Security tax as an employer would ordinarily do for an employee,” he said. “This is a nice thing to do, but the offset is counted as fully taxable income by the IRS.”
Wright said the dual tax status of ministers is the source of most tax problems he has seen.
Health insurance
Another tax concern has come about from the Affordable Care Act (ACA). According to Wright, health insurance has been required of all Americans since 2014 and this year health insurance premiums must be from a group plan (such as what is offered by GuideStone) for the church to offer premiums as a salary deduction or fringe benefit.
“In choosing insurance from the ACA’s Marketplace, a minister’s housing allowance isn’t considered part of income, so this option may be attractive for some ministers,” he said.
Wright leads several other conferences throughout the year dealing with church financial issues, minister’s taxes and retirement.
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