UNRAVELING THE COMPLEXITY OF CLERGY TAXES
Clergy Tax issues can be complicated.
Yahr Income Tax is here to serve those who serve the Lord by providing our knowledge and resources to help solve the most common tax-related issues affecting ministers and churches.
The documents below can be downloaded and printed for your use:
Frequently Asked Clergy Questions
According to the legal case of Weber vs. The Commissioner in 1995, ministers are employees for everything except social security taxes. This means that you are considered dual-status and should receive a W-2 form. Please note the W-2 should not have anything entered in Boxes 3 – 6. If you find yourself with an incorrect W-2 or find your church is withholding for social security and medicare taxes, please act immediately and contact us or your treasurer.
If your church is able, you can voluntarily elect to have additional federal and state income taxes withheld so you do not need to send in quarterly estimated payments. Remember, the church CANNOT send in social security and medicare money. We would highly recommend talking to us to figure out how much you should elect to have withheld as the W-4 Form will not calculate the correct payroll withholding.
This question comes up quite a bit. It is important to understand what social security covers – medicare, life insurance, disabiliity insurance, and retirement. If you choose to opt out within the first 2 years of being ordained it will be your responsibility to save your money and invest in these items. Medicare will still be an option but a much more expensive one. If you are second career or bi-vocational you may already have your 40 quarters in to be eligible for medicare so that decision may be easier to make. Once you opt out, the exemption is generally irrevocable. The IRS has only had 2 “open seasons” in the history of the tax law where it was allowed to revoke the original 4361 election.
The answer is yes. However, with the Tax Cuts & Jobs Act the way the deduction works on your tax return is not as beneficial as it has been in the past. Previously, you would take the unreimbursed employee expenses (Form 2106) and that would apply to Schedule A for itemized deductions. You would receive both a benefit in lowering your Self Employment Tax and your Federal and State Income taxes. Under the new law, unreimbursed employee expenses are no longer eligible for itemized deductions. This means that we can still complete Form 2106 and lower your Self Employment Tax, but we cannot lower your Federal and State income taxes. It is highly recommended that your church put an Accountable Plan into place where they reimburse you for expenses you paid out of pocket and it is not included in your taxable income.
We highly recommend the business mileage reimbursement under an Accountable Plan to insure that you are not paying more in taxes. Car allowances are considered taxable income and with the Tax Cuts & Jobs Act taking away the unreimbursed employee expenses it is just not beneficial from a tax prospective.
The best time is in the fall at budget time. All designations must be included in church meetings. We recommend you keep a copy of the housing designation in your records. Additionally, designating this early will give your treasurer time to adjust for payroll if necessary. You can designate housing allowance from your salary if you own or rent a home, or if you live in a parsonage. The housing designation is designed for you to use if you have out-of-pocket expenses in relation to the house you live in.
Yes! The housing allowance designation can be changed or amended at any time during the year, BUT never retro-actively. This means that the new designation applies only to the money remaining to be paid for that year. If you anticipate extra costs in the months ahead for various reasons, adjust your housing allowance designation before you incur the expense. We can’t recommend enough to over designate your housing for the year. If you don’t use the entire amount, it will flow back to taxable income on your Form 1040. This is completely allowable per the IRS.