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TO: Interested Ministries
RE: Clergy Finance and Tax Issues Originated: July 1981
Clergy Finance and Tax issues can be rather complicated; CLERGY working with one Church (or applicable Ministry) are common-law employees, but can become self-employed for Social Security Tax purposes. Please Go Here for more information on these topics. The Clergy usually needs to work with a competent tax-preparer well acquainted with these issues. May I share ....
1. Qualified CLERGY are special taxpayers in the eyes of the Federal and State taxing authorities.
2. Most self-employed people earn their income from a variety of sources, or groups. Example, Dr. Brown, a medical doctor, earns his income from a variety of patients.
3. But CLERGY are different, they usually have taxable income from only one entity/source .... like a Church, or other Ministry..
4. CLERGY self-employed taxpayers pay Self Employment tax (Social and Medicare taxes).
5. At the first of the calendar year, MOST self-employed tax payers are required to estimate their annual amount of Federal Income Taxes and Self-employment taxes; they then pay this combined amount quarterly using a form 1040ES. Example; --- annual amount of Self employment tax is $1,000 plus Income Tax of $3,000; or a total of $4,000. It is paid in equal installments..... $1,000 April 15, June 15, September 15 and January 15.
6. The above $4,000 estimate for the CLERGY can be complicated due to such matters as:
> Some CLERGY choose not to be covered by Social Security, but they must pay Income Tax,
> Other net taxable income issues;
> Authorized CLERGY Housing allowances and Mortgage interest expense long form deductions;
> Plus other allowances received from the Church.
7. The CLERGY working for one Ministry can have the Ministry make requested volunteer withholdings and receive a special Clergy W-2 (although I understand that form 1099 can now involve tax withholding these days. I would prefer this 1099 since it is then clearer that the Clergy are NOT Employees, etc). The Ministry then would withhold the above $4,000 from their pay checks as Federal Income Tax as it goes into the IRS along with the Federal Income Tax withholdings of regular Ministry employees. Please Go Here for another way for the clergy to not see the money.
C A U T I O N: This Special Clergy $4,000 withholding and annual W-2 reporting thereof is in NO WAY connected to the required employee Social Security/Medicare and Federal/State Income tax withholding and their settlement by the Ministry (or Church).
8> As we understand it, the annual Housing or Manse Allowance is to be authorized in advance at the first of the calendar year. This is a significant CLERGY tax benefit; see your clergy savvy tax-preparer to compute the qualified Federal tax free Allowance amount.
9> The Ministry/Church would provide Medical Insurance and Retirement benefits to the CLERGY in the applicable non-taxable manner.
10> (3) After December 31, the CLERGY receives a W-2 (although I understand that form 1099 can involve tax withholding these days) from the Ministry/Church via a covering letter -- Please Go Here for a sample of such a letter.. It is important for the Ministry to clearly indicate to both the CLERGY and the government such information as the following (per sample dollars above):
Stipend (Includes love gifts and/or bonuses)
"Unsettled" Other Allowances like Auto/Expenses
- see comments below
The covering letter above might also reference any Retirement or Medical Benefits, but do NOT include this information within the government form.
11> We 'HIGHLY' recommend that the above 'Unsettled' Other allowances of $3,000 -NOT- flow to the CLERGY. Rather, the CLERGY and the CHURCH work out a process whereby auto and business (Ministry) expenses are reimbursed in the usual taxpayer method. This way, the Church does NOT have to report the "Unsettled" allowances above and the CLERGY does NOT have to appropriately include the allowance income and related expenses within their own tax return. Let us know if you need more information about doing this.
12> (1) Please go to http://www.irs.gov and search for current mileage rate. History is: 36 cents for calendar year 2003; 37.5 for calendar year 2004 year and 40.5 for portions of calendar year 2005
Ask us at Jim@bcidot.org for Clergy Tax resources from fellow CPA Dan Busby on these topics
. This bulk of this publication originated in July 1981 and was UPTD: March 09, 2012
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