As a minister of the Gospel and a representative of the church where one labors, it is imperative that one maintains his finances above reproach. One of the areas that few elderships understand and sadly many preachers lack understanding is in the area of 1040’s, W-2’s and the like. One who serves among churches of Christ needs to know not only the tax advantages for a minister, but also the rules that govern such advantages. One’s reputation is certainly at stake and there is also that one does not want to start a prison ministry from the inside!
I would encourage elderships and preachers to obtain a tax guide each year to keep up with changes in the tax code. Publication 517 from the IRS is a free publication. I ahve relied on B.J. Worth’s Tax Guide for years. It is very readable, plain, and “user friendly.” It contains sample W-2’s, 1040’s, Schedule C’s, Schedule A’s, etc.
I would also encourage church representatives/elders and their minister to have a written contract that outlines the minister’s responsibility to the church and the church representatives/elders’ responsibility to the minister. Included in this contract would be details concerning the minister’s tax details.
Church of Christ Status
A minister of the church of Christ is a dual-status minister. That means that he is considered an employee of the church for computing income tax to the Internal Revenue Service, and is considered to be self-employed by the Social Security Administration. In view of this status the minister can ask the church to withhold appropriate amounts from his check or he can elect to exempt from withholding. It is to the minister’s advantage to elect to be exempt from withholding because many treasurers do not want to be involved in the complexities of ministers’ taxes. In either case either the treasurer or the minister himself must make quarterly payments. Social Security payments must be made whether he expects to owe income tax or not.
In many church/minister compensation packages there is occasionally a house provided and/or utility allowance. The IRS and the SSA have guidelines governing what expenses can be deductible. When a house/utility package is not provided (such as when a preacher purchases his own house), the minister is usually afforded a double tax advantage if he itemizes deductions on Schedule A and also excludes the Parsonage Allowance from Box 1 on the W-2. This reduces taxable income which provides a great deal of savings in taxes. The SSA says he must also compute the Fair Market Value (rental value) of the house and pay 15.02% of the FMV to the SSA. This applies to the preacher who receives a house provided by the church. The SSA views the housing allowance as income.
For the one purchasing a house, the Parsonage Allowance can include the house payment, utilities, homeowner’s insurance, cost of repairs, yard maintenance, furniture and appliances, household supplies, etc. Records must be kept. (All actual housing expenses may be included in a housing allowance provided they are actually paid, whether the minister is purchasing the house or not.) However, the Parsonage Allowance must be estimated in advance and must be recorded in minutes/records of the church. The best time to create a Parsonage Allowance agreement is at the time of employment or before January 1 of the next tax year. Adjustments to the amount of Parsonage Allowance must always be in advance. The housing allowance can be more than will actually be spent, but any overage must be reported as “other income.”
Ministers who work for congregations (as earlier stated) are considered employees of the church. Money that they receive from that church is considered as income and must be reported on a W-2. The IRS determines with clear criteria whether a minister is dual-status or self-employed. Churches cannot assign a status of “self-employed” unless one meets the criteria established by the IRS. If the church violates this rule, it can be fined and possibly lose its 501(C) tax exemption.
For many years there has been an understanding that the church gives their minister a 1099 and not a W-2. The rule was changed, I believe, in 1975. When I preached in South Carolina, the state began to require a state ID number on the W-2. When I went to inquire at the State Department of Revenue in Columbia, their taxpayer representative told me that I didn’t need this as I should get a 1099. I argued with him that I was a dual status minister and required a W-2. When he went to his supervisor he came back and said that I was right! He had been at this position for eleven years and did not know the requirement. Thank you, B.J. Worth!
The rule is different if one receives compensation from another church. We typically pay ministers to come for various reasons such as gospel meetings, VBS adult class teachers, summer series speakers, etc. The IRS calls this type of compensation an Honorarium. Dual-status ministers record the amount of Honorarium and insert the amount on Schedule C. You might have car expenses, gasoline, airline tickets, etc., that might incur that can offset the amount and lower the Self-Employment tax one might pay.
Miscellaneous Deductions & Business Expenses
Again, let me express to you that a good tax guide that specializes in ministers’ taxes and publications from the IRS are essential for you to take advantage of areas where the IRS and SSA allow. My philosophy about this is that I want to pay the IRS and SSA all that are due them, but not a penny more!
You may be able to deduct/exclude premiums for health insurance, limited amount of insurance premiums, personal liability policies, and business and professional expenses. You may be able to deduct actual expenses you incur in traveling to hospitals, home visits, etc., but documentation is essential for making these deductions. If you are ever audited and you do not have documentation for your deductions and allowances, you may face fines and penalties that may go back three years. Prosecution is not out of the question either. It is possible for these expenses to be excluded from income and not reported as income on your W-2. However, there are rules that apply and both the minister and the treasurer must understand the requirements. Again, it is essential to have professional guidance, such as the book by B.J. Worth mentioned above.
You only have one reputation and trying to “skirt” the rules may have a devastating effect on you and the church you serve.
I had advised preachers to know the “ins and outs” of the tax code that pertains to them just as much as one might study Scripture. Your eternal life and your reputation depends on it.