by Jim Wilson
Taxation of ministers is a complex area of the tax code. It is important for members of the clergy to comply with federal and state income tax laws. Failure to do so could result in significant problems for the church, church board, and ministers.
Too many times to mention each year, we find that ministers have had their tax returns prepared incorrectly, costing them several hundreds of dollars in additional taxes. Many churches complete the W-2 forms incorrectly, costing both the church and the minister additional tax and penalties. Typically, church workers are just unaware of the correct procedures or just treat the accounting side of a church as if it were a typical business.
The IRS defines ministers as individuals who are duly licensed, commissioned, or ordained. Ministers are considered self-employed and subject to the Self-Employment Contribution Act (SECA) and not subject to the Federal Insurance Contribution Act (FICA) withholding. Although ministers are considered self-employed, they should receive a W-2 at the end of the year because they are considered to be employees of the church. Exceptions would include missionaries and traveling evangelists. Since a minister is not subject to FICA withholding, boxes 3, 4, 5, and 6 should be zero.
Ministers can segregate their income into several categories such as housing allowance, income, and retirement. A ministerial housing allowance is not subject to income tax; however, it is still subject to self-employment tax. The amount that can be excluded from income tax on a minister's income tax return is the lesser of the housing allowance amount declared, the amount actually spent, or the fair rental value of the home fully furnished. Ministers who live in a church parsonage must report the fair rental value of the parsonage plus utilities. The housing allowance portion of a minister's income should be reported in Box 14.
Ministers are required to pay estimated taxes on their salary package. Failure to do so can result in penalties and interest. Ministers can request that the church withhold taxes from their paycheck. This withholding is a courtesy that the church can provide to the minister and this may exempt the minister from the estimated tax payment requirement. The taxes withheld are reported on the W-2 in Box 2 as federal income tax withheld.
To ensure compliance with the IRS and avoid interest and penalties, it is important for churches and ministers to seek professional help regarding their specific income tax and payroll situations.
Jim Wilson is a CPA
in Springfield, Missouri.