According to the Christian faith, Jesus responded to a question when asked if it was right to pay taxes by saying, "Give to Caesar what belongs to Caesar, and God what belongs to God." However, with the current complex tax code in the United States, it is difficult to know exactly what is considered "Caesar's."
Since churches and religious organizations are considered tax-exempt organizations in the United States, it can be assumed that clergy and religious ministers are exempt from income tax. But it's not like that. Giving your life to God doesn't necessarily exempt you from giving a portion of your earnings to Uncle Sam. A clergy must pay income taxes like everyone else.
Unfortunately, the rules around clergy income tax can be particularly confusing. Some ministers don't realize that even though they are church employees, they also have to send quarterly payments to the IRS. To prepare for the fiscal year, it is best to understand all of the special rules that apply to clergy under the IRS. It is also up to church administrators and treasurers to understand these special rules to minimize the Minister's tax burden.
One of the essential tax concepts to understand is the difference between FICA (Federal Insurance Contribution Act) and SECA (self-employed contributions act), the two tax payment methods that fund Social Security and Medicare. The average employee of a business pays this tax per the Federal Insurance Contributions Act (FICA), which provides that the employer pays half of the tax. However, the self-employed pay this tax per the Self-Employed Taxation Act (SECA), which provides that the person pays the full tax. As a minister, your ministerial services' income is subject to the SECA (even if you are an employee of your church for income tax purposes).
Also, you may be entitled to a housing allowance, a significant tax benefit. Additionally, because the clergy must pay the SECA for Social Security and are exempt from income tax, you will make quarterly payments throughout the year. You must correctly estimate your tax debts or the risk of incurring an insufficient payment penalty.
Who qualifies as a minister?
Being a "minister," according to the IRS, can affect tax benefits, Social Security taxes, and withholding taxes. Let's take a closer look at IRS 517 for these definitions.
According to the IRS, ministers are "persons properly ordained, commissioned or authorized by a religious entity that constitutes a church or church denomination." Keep in mind that the Minister can belong to any type of religious entity, be it Christian, Jewish, Muslim, or otherwise. It also depends on the functions you are performing. The IRS continues, "Ministers have the power to conduct religious worship, perform priestly duties, and administer ordinances or sacraments per the prescribed principles and practices of that church or denomination."
Confusion can arise depending on the language used by religion to appoint different types of ministers. The IRS seeks to clarify this confusion by saying, "If a church or denomination ordains some ministers and authorizes or assigns others, any authorized or appointed person must be able to perform all the religious functions of an ordained minister substantially to be treated as a minister for Social Security purposes."
As mentioned above, the IRS declares that corporate services are subject to self-tax. Ministerial services refer to "services which you perform in the exercise of your ministry", including "the performance of priestly duties" (for example, weddings, baptisms, and other ceremonies), "religious worship," and "supervision, management, and maintenance of religious organizations." Additionally, ministerial services may include non-total functions for non-religious organizations, like if the services are assigned or appointed by the church. Also, ministerial services may include priestly functions that the church does not designate.
Services that are not considered ministerial services are subject to FICA and not to SECA. An example would be non-sacramental services for non-religious organizations that the church does not designate; for example, an ordained minister teaches local college psychology courses. However, it can also include priestly service as a chaplain in the military or a public hospital.
Tax exemption for self-employment
In some cases, the IRS may grant a self-employment tax exemption if the person conscientiously or religiously opposes public insurance acceptance. After requesting the exemption, you must receive authorization from the IRS and keep it for your records, but this does not apply to income from non-departmental services. Once granted, this exemption is irrevocable, and the Minister will not receive Social Security or Medicare retirement benefits if he does not have eligible credits (for example, from other employment).
The double taxation status of ministers
Clergy may be employees with respect to federal tax on income from church wages. They may also be self-employed under Social Security for income from services in the performance of their ministerial duties. This is called double taxation.
So when does the IRS consider a clergy to be a "church employee"? The answer is dependent on several circumstances. The IRS clarifies that you are an employee "if you are providing services to someone who has the legal right to control what you do and how you do it, even though you have a considerable discretion and freedom of action." (The IRS bases this on "customary law rules," which are laws based on legal and customary precedents, rather than legislative action.) The exceptions would include traveling clergy or evangelists working for various churches, which would make them independent contractors instead of employees.
If you are a minister hired by a church, make sure the church sends you a W-2 after the end of the year instead of Form 1099, which an independent contractor would receive. However, this W-2 will not necessarily include income tax. Ministers are exempt from withholding tax. Instead, the clergy can pay income taxes in quarterly installments. If you make arrangements with your church, you can choose voluntary withholding. In this case, the church should only withhold income tax (not Social Security tax, which must be paid quarterly throughout the year). It is important to remember that all clergies, including Church leaders, must pay SECA Social Security tax on ministerial service income.
Note that clergy who qualify as an employee generally receive additional income in the form of compensation directly from members of the congregation. This is common when ministers preside over weddings and funerals, perform baptisms, or serve as guests at an event or at other churches. These revenues from these services are subject to self-employment tax for federal income tax and social security purposes.
Religious orders
Members of religious orders must pay their taxes themselves if they have not taken an oath of poverty. Members of religious orders who have taken an oath of poverty are not subject to tax on their own because the IRS considers the income to belong to the order itself.
Housing allowance for clergy
The clergy should ensure that their church allocates an adequate share of the salary towards a housing subsidy. This is considered the most significant tax benefit available to the clergy. Housing allowance is not subject to federal income tax but to social security tax under the SECA.
One thing that makes housing allowance a big tax benefit is that you can deduct housing allowance from your gross income, which means it is an "above the line" deduction. In other words, it is not required to itemize your deductions to take advantage of this tax advantage.
Several rules apply to this tax benefit. For example, the church must designate a certain salary for housing allowance in advance of the payment. A good routine would be to ensure that the church designates housing allowance each year before the start of the calendar year in an official form, such as meeting minutes and an official business letter to the Minister.
The clergy can take advantage of this tax advantage whether they own or rent a house or live in a pastoral house belonging to the church. However, whatever the situation, the compensation cannot exceed the "fair rental value," including the payment of the rent or the mortgage and utilities, maintenance, and repair and provided furniture. (Be sure to keep receipts for any maintenance.) However, don't go out and buy a condo right away; the allowance must be part of your salary and therefore, cannot exceed a "reasonable" payment for your services.
Any part of the housing allowance that is not used for housing, utilities, and furniture constitutes taxable income. Suppose a church offers $20,000 per year for housing subsidies, but when the Minister adds all the mortgage payments, utility costs, and maintenance costs, it is only $18,000. In this case, the Minister could only deduct $18,000 from his taxable income, and the additional $2,000 would be counted as taxable income like the rest of the Minister's salary.
In other words, you can deduct from your taxable income whichever is lesser between the housing allowance, the actual living expenses, or the fair value of the rent of your home.
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Carmen Garcia