Minister's Income?

[Unregistered]

New client comes in with a W-2 from his church, for which he serves as pastor. However, the W-2 only shows wages in box 1, nothing else. I'm thinking that the church meant to issue a 1099. If the IRS is holding a W-2 and we submit a Sch. C won't this create major headaches down the road (assuming the church submitted a W-2 to the SSA)?

Housing paid by the church is taxable for SS purposes, but not income tax purposes, right?

This whole thing is just confusing me, and they always wait until the day before the deadline to come in. Oh well, I'll deal with it on Monday, got too much golf to play this weekend to work on this crap!

JoshInNC

[Bees Knees]

TTB, page 14-4: "Ministers who are duly ordained, commissioned, or licensed by a church are treated as dual-status taxpayers. Income earned by a minister as an employee of the church is reported as wages in box 1 of Form W-2, but Social Security tax and Medicare tax are not withheld. The earnings are not subject to employee FICA, however they are subject to SE tax. Form W-2 issued to a minister should show the wage amount in box 1 with no amounts withheld for Social Security or Medicare. Report a minister's wages on line 7, Form 1040, and also on line 2 of Part I, Section B, of Schedule SE."

[OldJack]

Its too bad TTB does not acknowledge the United States Court of Appeals, 8th Circuit, case of James T. Alford, 1997(attached file), where the IRS lost its attempt to classifying a self-employed ordained clergy taxpayer as an employee of the church. Yet the IRS in its current publication implies that all clergy should get a W2. Just goes to show the decision is actually up to the clergy.

[RLymanC]

Ministers W-2

The church is not required to withhold Social Security or Medicare taxes on the ministers wages......however.........if the minister that receives a W-2 has filed form 4361 and that form has been accepted by the IRS the minister is not required to pay into the social securtiy system.

If no form 4361 has been filed then the minisiter is subject to full social security and medicare taxes. This is caculated exactely the same as self-employment tax.

If there is any amount allocated to parsonage allowance on W-2 box 14, this amount should be included in calculateing the tax. Do not include box 14 as income on 1040 line 7.

The bottom line is that all church employees that receive a W-2 are subject to social security and medicare tax unless they opted out with form 4361.

Some churches will withhold and additional 15% income taxes out for "LAY" employees to help cover their social security and medicare taxes. Lay employees cannot opt out with form 4361

[Bees Knees]

Form 4361 is the application to be exempt from Self Employment Tax. The Code already exempts an ordained ministers W-2 wages from FICA tax [IRC Section 3121(b)(8)]. There is no need to file Form 4361 to be exempt from FICA, as the code already says a minister is not an employee for FICA tax purposes. Section 1402(e) is the code section that allows certain (not all) ministers exemption from SE tax that have religious objections to Social Security tax.

[Bees Knees]

Its too bad TTB does not acknowledge the United States Court of Appeals, 8th Circuit, case of James T. Alford, 1997(attached file), where the IRS lost its attempt to classifying a self-employed ordained clergy taxpayer as an employee of the church. Yet the IRS in its current publication implies that all clergy should get a W2. Just goes to show the decision is actually up to the clergy.

That case dealt with the way to handle expenses. TTB, page 14-5 does show that the minister reports W-2 wages as income with no FICA withheld, but then expenses are deducted against SE taxable income.

Thus for all practical purposes, a W-2 minister is treated as a Self Employed taxpayer. The only difference is a W-2 is issued rather than a 1099. But tax is calculated as if everything went on a Schedule C.

So I don't see anything different as a result of the court case you cited. The calculation is still the same, regardless of whether there is a W-2 or 1099 issued for the income.

[Chief]

Ministers' Incomes

I would encourge all ministers to Pay the self-employment tax for practical reasons. They will need it to supplement retirement incpme when they retire. But the choice is theirs. In their retirement their income will depend upon what they put in during their working years. Sure the Lord will provide ; but they are an integral part of that provision.

[OldJack]

Thus for all practical purposes, a W-2 minister is treated as a Self Employed taxpayer. The only difference is a W-2 is issued rather than a 1099. But tax is calculated as if everything went on a Schedule C.

So I don't see anything different as a result of the court case you cited. The calculation is still the same, regardless of whether there is a W-2 or 1099 issued for the income.

Gees Bees.. how can you say there is no difference between a W2 or 1099 reporting? While it is true that a self-employed minister (1040 Sch-C) and a employee minister (W2) pays the same SE tax, that is not the issue. The issue is deducting the minister's business expenses for income tax purposes (court case cited). The last time I checked an employee's unreimbursed expenses are only deductible on 1040 Sch-A if the Clergy can itemize. Whereas, a Self-employed expenses are deductible in full on Sch-C netting gross income reducing taxable income. On Clergy returns that I have prepared in the past this makes a big difference in bottom line taxes (my last Clergy moved to hell or heaven last year).

[Unregistered]

thanks folks!

You cleared up my questions, even thought it seems I opened a can of worms!

JoshInNC

[Bees Knees]

The last time I checked an employee's unreimbursed expenses are only deductible on 1040 Sch-A if the Clergy can itemize.

Maybe you should check again. Ministers are treated differently than regular W-2 employees.

W-2 paid ministers get to deduct expenses as if they were reported on the Schedule C. It is a special deduction against the income reported on the Schedule SE.

The information in TTB page 14-5 is right out of the example presented on page 11 and 12 of IRS Pub 517. Look it up. Ministers are treated as dual status taxpayers. The Pub agrees with the court case you cited.

[outwest]

My speculative take on the W2 issue is..

the IRS figured churches with employees would have easier time sending in a W2 like they do for everyone else, than trying to remember to send a different form, the 1099. Given the way it's filled out, that is debatable. As Bees said, the IRS instructions handle the deductions just as if it's a 1099 at the end.

The one advantage that I point out to ministers is that you can do voluntary income tax withholding on the W2 that will get sent in with the rest of the church payroll tax deposits. For many, this is much easier than doing the quarterly deposits. It also avoids the timing issues of quarterlies.

As far as payroll taxes, in my state they are also exempt from unemployment and state withholding. They only problem is they still have to carry work comp. That's a minor cost.

Doug

[veritas]

Meaning no disrespect to anyone

However here is an excerpt I found while reading about a case Rick Warren pursued in Tax court.

"Ministers of every faith are also exempt from income tax withholding. And they can opt out of Social Security — an exemption that Mr. Hammar said was probably widely abused.

Until 1968, clergy members were exempt from Social Security unless they joined voluntarily. Since then, they have been automatically covered — but, unlike other citizens, they are allowed to drop out as conscientious objectors if they assert, by a certain point early in their ministry, that they have a religious opposition to receiving public welfare benefits.

“Few people, outside of the Amish, could plausibly say that,” said Mr. Hammar, an accountant who also has a law degree from Harvard and attended its divinity school.

Yet his research shows that 3 of every 10 ministers in America have opted out of Social Security. “The only conclusion is that the conscience-based objection is usually really a financial decision,” he said.

Because the exemption is irrevocable, why would so many ministers take such a drastic step? Clergy members are considered self-employed and therefore pay a 15.3 percent contribution to Social Security, Mr. Hammar explained. So young ministers on tight budgets sometimes decide, or are persuaded, to drop out and thereby give themselves a 18.1 percent raise."

Did you read the part about not wanting public welfare benefits? What about putting their kids in public school?

Three out of Ten exempt from FICA taxes? This is clearly wrong. It costs the treasury about 500 Million a year.

It truly galls me when I see how hard people work in say church preschools. Underpaid, no benefits and no HUGE tax loopholes.

[Bees Knees]

The tax laws give the benefit of the doubt to religious views. How are you going to police this? Society says, “OK, if there is a religious objection to this, we won’t force them to do it.”

Well, who is going to decide who is faking and who really has a religious objection? Are you going to go in and audit the religious beliefs of a church?

Either treat all taxpayers the same, or deal with the abuse. Don’t pass tax laws that cater to the religious beliefs of some, and then complain when there is abuse. There are bad apples in all professions, including ministers.

[Bees Knees]

BTW, in my religion, we believe Jesus predicted there would be abuse. We expect to see religious hypocrisy from some claiming to be speaking for God.

Jesus said at Matthew 7:15-20, “Be on the watch for the false prophets that come to you in sheep’s covering, but inside they are ravenous wolves. By their fruits you will recognize them. Never do people gather grapes from thorns or figs from thistles, do they? Likewise every good tree produces fine fruit, but every rotten tree produces worthless fruit; a good tree cannot bear worthless fruit, neither can a rotten tree produce fine fruit. Every tree not producing fine fruit gets cut down and thrown into the fire. Really, then, by their fruits you will recognize those [men].”

Slamming Jets into skyscrapers in the name of God is a false prophet.

Preaching morality while having sex with the alter boy is a false prophet.

Lying about your religious beliefs just to save a few bucks in taxes is a false prophet.

Just because so called religious people do horrible things does not make all religion bad.

[veritas]

The IRS does audit churches who are nonprofit now for political speech.

I would say let's eliminate the housing allowance tax loophole now because it is abusive by anyone who participates.

I also would eliminate anyone exempting themselves from paying fica taxes. And I mean Clergy, public employees, all should participate in our national ponzi scheme.

The alternative choice is give EAs' a housing allowance and let us exempt ourselves from fica tax.

I'm good with either one.