Ordained Minister

[Jesse]

New client coming in and I have not prepared a clergy return before and I don't want to be appear a total idiot.

The housing allowance is what confuses me, I have studied the tax returns for the previous 2 years.

Income of $33,000 is reported in box 1 of W-2 no w/holding or FICA taxes deducted so all income is subject to Self Employment on Schedule SE.

Designated housing allowance of $2,150 was also subject to Self Employment on Schedule SE. So total of $35,150 subject to SE tax and $33,000 subject to income tax.

What confuses me is doesn't designated mean that a certain portion of the salary received is for housing so wouldn't the housing allowance be included in box 1 of the W-2 so all $33,000 would be subject to SE tax and only $30,850 subject to income tax?

[John of PA]

Subect to SE, but not income tax

There is a special provision in the tax law that says the housing allowance of a minister is not subject to income tax, but is subject to SE tax. That is the way I always did it. The way you described the prior year return sounds correct to me.

[joanmcq]

The housing allowance should not be included in the box 1 wages. Your first assumption is correct; $33,000 is subject to SE & income taxes, and $2150 only subject to SE as long as $2150 was used for housing (not difficult to assume!). Don't forget you can reduce SE by the amount of employee business expenses, if he has any.

[Bees Knees]

The instructions for Form W-2 say to report the housing allowance in box 14.

[JohnH]

Technically true

Reporting the H&U allowance in Box 14 is recommended, but not required. It's an informational entry only, so its presence or absence in Box 14 doesn't mean anything insofar as how it is reported may be concerned..

Some churches give the minister a letter stating the amount of the H&U allowance, while others leave it up to the minister to know the amount & report it properly. No hard to do since it's supposed to be recorded in the budget, minutes, or some other form of documentation prior to payment.

The main thing is that, as stated in other posts, the H&U allowance is added to the salary amount before making the entry on the Schedule SE. This SE total can also be reduced by any unreimbursed business expenses, but that amount has to be adjusted by the ratio of taxable vs non-taxable income (ignore the italicized part of this sentence - see post #5 below). Also, if there is any unused H&U allowance, it must be added to line 21 income on the 1040.

[RLymanC]

Minister

Most ministers have opted out of social security by filing form 4361. Has your client filed this form?

If yes he owe no SE tax on all income earned as a minister. All ministers are concidered dual-status ministers for tax purposes, if he has self-employed income reported on Sch. C, that income is also exempt provided he has filed the above from and has been approved.

If no form 4361 income that is subject to Social Security must be calculated, including parsonage allownce, No income tax is paid on parsonage allownace, the allownce should not show up in Box 1 of W-2.

[veritas]

Found this

http://www.brianprucey.com/Top%20Ten%20Minister%20Tax%20Mistakes.pdf

[Bees Knees]

Most ministers have opted out of social security by filing form 4361. Has your client filed this form?

Really? Most?

I thought most paid SE tax so they would qualify for Social Security. Where do you get your statistics?

A minister has to sign under penalty of perjury that the following statement is true in order to be exempt from SE tax:

I certify that I am conscientiously opposed to, or because of my religious principles I am opposed to, the acceptance (for services I perform as a minister, member of a religious order not under a vow of poverty, or a Christian Science practitioner) of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care. (Public insurance includes insurance systems established by the Social Security Act.)

I certify that as a duly ordained, commissioned, or licensed minister of a church or a member of a religious order not under a vow of poverty, I have informed the ordaining, commissioning, or licensing body of my church or order that I am conscientiously opposed to, or because of religious principles, I am opposed to the acceptance (for services I perform as a minister or as a member of a religious order) of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care, including the benefits of any insurance system established by the Social Security Act.

I’ve been to allot of religious services over the years. I attended a Lutheran Liberal Arts College, required to take a certain amount of religious courses to get my BA. I’ve studied the Bible, and I’ve studied a number of religions. I can’t recall any sermon or religious doctrine that teaches it is wrong to accept public insurance. I realize there must be some religions that are against paying Social Security tax, but I don't know which ones. It can't be very many.

This is not just some made up rule you get to do just to get out of paying SE tax. There has to be a religious belief involved here. If you think all you have to do is say you don't want to pay SE tax, that's not enough. The minister has to sign under oath that there is a religious principle involved here.

Anyone know of a particular religious doctrine that teaches this?

[MAMalody]

With the exception of the following statment, all the comments posted above are correct.

<<<This SE total can also be reduced by any unreimbursed business expenses, but that amount has to be adjusted by the ratio of taxable vs non-taxable income.>>>

This is not correct. You are able to adjust the SE income by all unreimbursed professional expenses regardless of the IRC 265 due to non-taxable income. The IRC 265 limitation would come in on the Schedule A, Miscellaneous Deduction.

In reference to the comments on Form 4361, while I have not real statistic available, my practice, with the exception of 6 returns is all clergy and about 1/3 of those have approved Form 4361s on file.

[JohnH]

Mike:
Thanks for the correction on my post regarding the IRC 265 adjustment.

I shouldn't post when I'm away from the office.

[Bees Knees]

In reference to the comments on Form 4361, while I have not real statistic available, my practice, with the exception of 6 returns is all clergy and about 1/3 of those have approved Form 4361s on file.

What religion?

Do they all have some religious objection under some doctrinal belief that they cannot accept public insurance?

Or are they not paying SE tax because some tax preparer told them all they have to do is sign this and they get out of paying SE tax?

My question has to do with the reason why they have opted out of Social Security.

[Bees Knees]

With the exception of the following statment, all the comments posted above are correct.

<<<This SE total can also be reduced by any unreimbursed business expenses, but that amount has to be adjusted by the ratio of taxable vs non-taxable income.>>>

This is not correct. You are able to adjust the SE income by all unreimbursed professional expenses regardless of the IRC 265 due to non-taxable income. The IRC 265 limitation would come in on the Schedule A, Miscellaneous Deduction.

I agree.

TTB, page 14-7 has a good example of this.

[JohnH]

Also agree

Just as a clarification, I prepare several minister's returns and my spreadsheet does the allocations for all elements of the return, including Sec 265, properly. I should have consulted the spreadsheet before making that earlier post.

In my case, out of a dozen or so clergy members, I've only handled one who opted out of Social Security.

[joanmcq]

A lot of those that opt out of SS and Medicare get a big surprise when they decide they want to retire.

I seem to remember that that clause was put in there for some sects such as the Amish, that do not believe in social insurance. But the amount of ministers that truly qualify rather than those that just filed so they don't have to pay as much in taxes is probably quite small IMHO.

[erchess]

A thought

At one time, to be accepted as a Conscientious Objector to War one had among other things be a relatively longstanding member of a Religious Group that is opposed to all war. It was not enough to be personally opposed to all war or to be opposed even with one's Religious Group to the war currently being fought. There probably ought to be a requirement that those exempting themselves from paying Social Security Tax belong to Religious Groups that are so opposed. However, Congress neglected to put this into law and I would guess that a fair number of ministers who sign up for the exemption really do not have the belief they are supposed to have.

Related question - let's assume that a person reaches retirement age without Medicare eligibility because for their whole career they were an exempt minister. Let's also assume that from somewhere they are getting a reasonable retirement income and certainly are not going to get help from Medicaid or private charity. How are they going to obtain medical care without insurance?