Clergy and Called Worker Services
Oftentimes a religious organization or church will provide a home for their minister and the cost or value of the home is not considered taxable for income tax purposes, even though it is provided as part of the minister’s compensation. Furthermore, if a church does not provide a home or parsonage, the minister can deduct the fair rental value from his taxable income, as long as the value does not exceed the reasonable pay for the minister’s responsibilities.
If the church does provide the minister with a housing allowance as part of his compensation, it is not taxable for income tax purposes. However, the amount of the housing allowance must be specified prior to its being paid.
Ministers may also take deduction for health insurance. As with any self-employed individual, ministers can deduct 100 percent of their health insurance premiums. However, this is only available if the minister is not eligible to participate in a group insurance plan.
Other Minister Tax Considerations
Then Jesus said to them “Give to Caesar what is Caesar’s and to God what is God’s.”
As an ordained minister you may be eligible for a number of tax advantages that you may not be aware of and that are not available to people outside of the ministry. Minister tax benefits were originally instituted to help clergymen as they were originally paid quite poorly. Ministers that are ordained have the option of taking a number of tax deductions and opting out of payments that others are expected to make as long as certain IRS qualifications are met. Here are several such minister tax benefits.
Social Security Self-Employment Tax
According to IRS:
"With respect to Social Security, ministers of the Gospel are self-employed"
Although ministers of the Gospel should be regarded as employees for federal income tax reporting purposes, they are regarded as self-employed for social security purposes. Accordingly, you will pay the "self employment tax" rather than FICA taxes. Because ministers pay a much higher percentage of social security tax than employees, some employers may offer to pay a portion of it for you. However, this form of relief is considered additional compensation for income tax and self-employment tax purposes.
Exempt from Self-Employment Taxes:
A vast majority of employees must pay a portion of their income to Social Security and Medicare; Ministers can opt-out of these. This saves them money on their taxes but they also don’t benefit from these programs later on either (ie.no social security when you retire). And in addition, once a minister has become exempt the IRS does not generally allow a minister to revoke this decision.
The compensation of a minister earned in the exercise of the ministry is specifically excluded by the Internal Revenue Code from mandatory federal income tax withholding. In addition, minister's compensation is subject to self-employment tax which is also excluded from mandatory withholding. Therefore, you should either pay quarterly installments of estimated tax or mutually agree on voluntary withholding with your employer.
Quarterly estimated payments
Your quarterly tax payments (federal and self-employment) are due as shown below:
For the period Due date*
Jan 1 - Mar 31 Apr 15
Apr 1 - Jun 30 Jun 15
Jul 1 - Sep 30 Sep 15
Oct 1 - Dec 31 Jan 15
*due dates falling on a Saturday, Sunday, or legal holiday may be extended to the next business day
An Estimated Taxes Worksheet is provided for you through this link. Or contact Landmark Tax Service and we will help you estimate your tax liability. You should remit your payments on current Forms 1040-ES payment vouchers which can be obtained directly from the IRS or through Landmark Tax Service. Alternatively, you can pay your tax online at www.eftps.gov. The IRS does not send out notices of taxes due. If changes in income or deductions revise your original estimate, that estimate may be adjusted on your next installment of estimated tax.
You will eventually report your self-employment tax liability based on your actual earnings and applicable deductions to IRS. This is done on Schedule SE, "Self-Employment Tax”, and filed with your individual income tax return (IRS Form 1040). The IRS will apply all of your estimated tax payments (including any tax withheld by your employer, if applicable) towards your total tax liability (federal and self-employment). If your Form 1040 reports a "substantial" understatement of taxes paid, the Service will penalize you. However, this penalty is not imposed if your total tax liability, reduced by your estimated payments and any income tax withheld, is less than $1,000. For more information, see IRS Publication 505, Tax Withholding and Estimated Tax.
Housing Allowance Benefits are still considered to be the greatest of ministers’ Three Big Tax Advantages. These versatile benefits have been the bed rock of clergy tax advantages and will likely continue in their historic role for the foreseeable future.
Because Housing Allowance has the potential to be the ministers’ most valuable financial tool for lifelong tax planning if used properly, we’ve devoted years to developing scores of practical strategies that can help you use them more effectively.
Knowing who qualifies and what is deductible is a good starting place. The tricky part is in knowing about all the various opportunities and when they can apply. These are only a few of the reasons why ministers need coordinated tax and financial advice.
Understand three basic principles before setting your housing allowance for the year. Learn strategies for special circumstances or buying or selling a home for greater tax deductions. Planning for major life events isn’t the only time you need a qualified tax adviser, but it certainly is one of them.
There are many myths surrounding the amount you can or should designate and how to use benefits that can cost you exponentially.
Two Big Money Mistakes: Lack of proper tax planning is the number one culprit for most ministers lost opportunities; like paying too much on a house down-payment or even paying cash for a home can result in lost housing allowance deduction opportunities. Number two is the inadequate use of retirement planning strategies using housing allowance that can provide tax-free income for life while reducing Social Security, Federal and State tax now.
→Do you Know? Most ministers believe “fair rental value” to be much lower than it actually is. If this applies to you or you live in a parsonage it pays to have a clergy tax specialist help you figure this out early on.
→Do you realize? Adjust Housing allowance designation proactively throughout the year to compensate for changes or unexpected events; but never after you’ve incurred the expense.
→Are you aware? There are NO limits or percentages of your salary/pay package that you can designate for housing allowance as long as it meets the criteria. Designating up to 100% as housing allowance is acceptable and desirable in some cases.
We welcome any questions or comments you may have. Feel free to contact us at any time
Landmark Tax Service – 99 Tulip Avenue, Suite 201 | Floral Park, NY 11001
Please feel free to contact us directly here.