Tax time is just around the corner, and for ministers, the preparation is a bit more complex than the average layperson. For those who are new ministers, filing taxes especially can be a daunting and confusing task.
Ministers who serve a church, as opposed to an evangelist, have a dual-tax status — an employee for federal purposes and self-employed for Social Security purposes. Practically speaking, a salary received from a church is considered wages for income tax purposes. Money received from members of the congregation to perform a task such as a marriage or funeral is considered self-employment income.
The Internal Revenue Service (IRS) defines a minister as “individuals who are duly ordained, commissioned or licensed by a religious body constituting a church or church denomination. They are given the authority to conduct religious worship, perform sacerdotal functions and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination.”
Ministers should make note of the following:
- Ministers should receive a W-2 form, not a 1099 form, for their church income.
- Know the difference between taxable and nontaxable income.
Taxable income includes bonuses, love offerings, money paid for performing a wedding or funeral.
“When you perform some kind of service or work and you get paid, it’s taxable,” said Lee Wright, coordinator of the Alabama Baptist State Board of Missions (SBOM) church compensation services. “So a minister who speaks at a revival, a minister who does a funeral or wedding and gets paid, a minister who does some Bible conference and gets paid, that is taxable income.”
The church is responsible to keep up with monies paid to the minister through the church (salary, bonuses, etc.), but it is up to the minister to keep up with the self-employment income. If not properly reported, then under an audit the minister would have to pay back taxes plus a penalty.
Nontaxable income includes those things that are excluded by the IRS. This can include housing allowance, benefits such as heath insurance and retirement contributions.
- Know the differences between a package approach and better methods of planning financial support and how that affects taxes.
Wright explains the package approach as basically a church saying to its minister(s) here are “x” number of dollars and you divide it however you want for business expenses, insurance benefits, salary and housing expenses. As far as business expenses are concerned (car, continuing education, professional books, etc.), an accountable reimbursement plan does not give unspecified money upfront but rather reimburses those expenses to the minister.
The major difference between the two is that everything in the package approach is taxable and therefore “causes ministers to pay more in taxes,” Wright said.
As opposed to the package approach, if a church provides benefits like health, disability and term-life insurance, then those benefits can be provided tax-free. If a minister, under the package approach, is paying for his own insurances then he “is paying for it with money that is taxed,” Wright said. “The basic rule is if he controls the money, it is taxable.”
If the church does not approve a housing allowance, then the money spent on housing is taxable. However, if a church designates part of his or her salary as housing allowance, then it is excluded up to certain limits.
“Let’s say a minister has a $50,000 salary and asks $15,000 to be housing, then the church would report $35,000 as salary and not report the $15,000 housing allowance,” Wright explained. “The minister will pay federal and state taxes on the $35,000 of his salary, but is paying Social Security tax on $50,000.”
In addition to some basics for filing taxes as a minister, there are some new things ministers need to be made aware of for both 2010 and 2011.
- Last year, Congress removed cell phones from being counted as listed property. The law, which is retroactive back to Jan. 1, 2010, makes cell phones for business use a nontaxable item.
“Employers who provide a cell phone for their employees may do so without the complicated record keeping that was required in the past,” Wright said.
“In the past, the IRS wanted you to keep a log of every call … and figure out how many minutes are business related and how many are personal.
“In the past some of the churches didn’t fool with the detailed log and made it all taxable,” he added.
There are some exceptions to this, so ministers need to make certain that his or her situation falls under this new law.
- As part of the Bush tax cuts that were extended for 2011, the government will reduce the Social Security tax by 2 percent for everyone. Because ministers have to pay out of their pockets 15.3 percent in self-employed taxes, which covers Social Security and Medicare, this means they only will have to pay 13.3 percent.
- This year all taxpayers will have until April 18, instead of April 15, to file federal income taxes since a holiday in the District of Columbia falls on April 15.
In addition, while most taxpayers can presently file their taxes, the IRS is asking some taxpayers affected by the recent tax law changes to wait until mid-to-late February to file their taxes. Those who would need to wait include those who itemize deductions on Form 1040 Schedule A.
“The legislation passed by Congress just before their recess for the holidays has left the IRS with work overload at getting the tax aspects of the legislation incorporated into IRS systems,” said Birmingham CPA Don Coxe. “[The IRS] also hinted that the issuance of income tax refunds may be late in recognition of the financial turmoil the federal government has been experiencing relative to funding legislation and the threat of a government shutdown.”
To see if you fall under those who need to wait to file their taxes, visit www.irs.gov.
Like other taxpayers, ministers can choose to have a CPA do their tax return or to do it themselves. But ministers should be aware that not every CPA is familiar with filing taxes for ministers, Wright said. That is why he advises ministers to ask for references from other ministers and research before going to just any CPA.
One program that works well for ministers who want to file themselves is TurboTax, which has the option for filing electronically that ensures a faster refund.
“No one is going to get this stuff on first hearing,” Wright said.
“It’s going to take numerous times. And yet ministers can learn to do their own taxes. Even a minister who doesn’t want to do their own taxes should learn some basics so that they can understand and speak intelligently with their tax preparer.”
Good resources for ministers are “Minister’s Tax and Financial Guide: For 2010 Tax Returns published” by Zondervan and the Minister’s Tax Guide for 2010 booklet that can be found by visiting www.guidestone.org or by calling SBOM office at 1-800-264-1225. The booklet will be available after Feb. 1.
SBOM also is offering three minister tax conferences around the state during the month of February in order to provide the latest updates on tax changes affecting ministers, staff and churches.
“We have an obligation to report properly … (but also) be better stewards and pay less in taxes because many ministers pay too much,” Wright said.
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