| Publication 517 |
2000 Tax Year |
Comprehensive Example
Rev. John Michaels is the minister of the First United Church. He
is married and has one child. Mrs. Michaels is not employed outside
the home. Rev. Michaels is a common-law employee of the church, and he
has not applied for an exemption from SE tax.
The church paid Rev. Michaels a salary of $31,000. In addition, as
a self-employed person, he earned $4,000 during the year for weddings,
baptisms, and honoraria. He made estimated tax payments during the
year totaling $8,400. He taught a course at the local community
college, for which he was paid $3,400.
Rev. Michaels owns a home next to the church. He makes an $800 per
month mortgage payment of principal and interest only. The church paid
him $800 per month as his parsonage allowance (excluding utilities).
The home's fair rental value is $900 per month. The utility bills for
the year totaled $960. The church paid him $100 per month designated
as an allowance for utility costs.
The parts of Rev. and Mrs. Michaels' income tax return are
explained in the order they are completed. They are illustrated in the
order that the Rev. Michaels will assemble the return to send it to
the IRS.
Form W-2 From Church
The church completed its Form W-2 for Rev. Michaels as
follows:
Box 1.
The church entered Rev. Michaels' $31,000 salary.
Box 2.
The church left this box blank because Rev. Michaels did not
request federal income tax withholding.
Boxes 3-6.
Because Rev. Michaels is considered a self-employed person for
purposes of social security and Medicare tax withholding, the church
left these boxes blank.
Box 14.
The church entered Rev. Michaels' total parsonage and utilities
allowance for the year and identified them.
Form W-2 From College
The community college gave Rev. Michaels a Form W-2 that
showed the following:
Box 1.
The college entered Rev. Michaels' $3,400 salary.
Box 2.
The college withheld $272 in federal income tax on Rev. Michaels'
behalf.
Boxes 3 and 5.
As an employee of the college, Rev. Michaels is subject to social
security and Medicare withholding on his full salary from the college.
Box 4.
The college withheld $210.80 in social security taxes.
Box 6.
The college withheld $49.30 in Medicare taxes.
Schedule C-EZ (Form 1040)
Some of Rev. Michaels' entries on Schedule C-EZ are explained
here.
Line 1.
Rev. Michaels reports the $4,000 from weddings, baptisms, and
honoraria.
Line 2.
Rev. Michaels reports his expenses related to the line 1 amount.
The total consisted of $87 for marriage and family booklets and $155
for 477 miles of business use of his car, mainly in connection with
honoraria. Rev. Michaels used the standard mileage rate to figure his
car expense. He multiplied the standard mileage rate of 32.5 cents by
477 miles to get $155.
These expenses total $242 ($155 + $87). However, he cannot deduct
the part of his expenses allocable to his tax-free parsonage
allowance. He attaches the required statement (shown later) to his
return showing that 23% (or $56) of his business expenses are not
deductible because they are allocable to that allowance. He subtracts
the $56 from the $242 and enters the $186 difference on line 2.
Line 3.
He enters his net profit of $3,814 both on line 3 and on Form
1040, line 12.
Lines 4-8b.
Rev. Michaels fills out these lines to report information about
his car.
Form 2106-EZ
Rev. Michaels fills out Form 2106-EZ to report the
unreimbursed business expenses he had as a common-law employee of
First United Church.
Line 1.
Before completing line 1 Rev. Michaels fills out Part II because
he used his car for church business. His records show that he drove
2,708 business miles, which he reports in Part II. On line 1 he
multiplies 2,708 miles by the mileage rate of 32.5 cents for the year.
The result is $880.
Line 4.
He enters $219 for his professional publications and booklets.
Line 6.
Before entering the total expenses on line 6, Rev. Michaels must
reduce them by the amount allocable to his tax-free parsonage
allowance. On the required Attachment 1 (shown later), he shows that
23% (or $253) of his employee business expenses are not deductible
because they are allocable to the tax-free parsonage allowance. He
subtracts $253 from $1,099 and enters the result, $846, on line 6. He
also enters $846 on line 20 of Schedule A (Form 1040).
Schedule A (Form 1040)
Rev. Michaels fills out Schedule A as explained here.
Line 6.
Rev. Michaels deducts $1,750 in real estate taxes.
Line 10.
He deducts $6,810 of home mortgage interest.
Line 15.
Rev. and Mrs. Michaels contributed $4,800 in cash during the year
to various qualifying charities. Each individual contribution was less
than $250.
Line 20.
Rev. Michaels enters his unreimbursed employee business expenses
from Form 2106-EZ, line 6.
Lines 24, 25, and 26.
He can deduct only the part of his employee business expenses that
exceeds 2% of his adjusted gross income. He fills out these lines to
figure the amount he can deduct.
Line 28.
The total of all the Michaels' itemized deductions is $13,500,
which they enter on line 28 and on Form 1040, line 36.
Schedule SE (Form 1040)
After Rev. Michaels prepares Schedule C-EZ and Form
2106-EZ, he fills out Schedule SE. He reads the chart on page 1
of the schedule which tells him he can use Section A--Short
Schedule SE to figure his self-employment tax. Because Rev.
Michaels is a minister, his salary from the church is not considered
"church employee income." Thus, he does not have to use
Section B--Long Schedule SE. He fills out the
following lines in Section A.
Line 2.
Rev. Michaels attaches a statement (see Attachment 2, later) that
explains how he figures the amount ($44,459) to enter.
Line 4.
He multiplies $44,459 by .9235 to get his net earnings from
self-employment ($41,058).
Line 5.
Because the amount on line 4 is less than $76,200, Rev. Michaels
multiplies the amount on line 4 ($41,058) by .153 to get his
self-employment tax of $6,282. He enters that amount here and on Form
1040, line 52.
Line 6.
Rev. Michaels multiplies the amount on line 5 by .5 to get his
deduction for one-half of self-employment tax of $3,141. He enters
that amount here and on Form 1040, line 27.
Form 1040
After Rev. Michaels prepares Form 2106-EZ and the other
schedules, he fills out Form 1040. He files a joint return with his
wife. First he fills out the address area and completes the
appropriate lines for his filing status and exemptions. Then he fills
out the rest of the form as follows:
Line 7.
Rev. Michaels reports $34,400. This amount is the total of his
$31,000 church salary and $3,400 college salary, which were reported
to him in box 1 of the Forms W-2 he received.
Line 12.
He reports his net profit of $3,814 from Schedule C-EZ, line
3.
Line 21.
He reports $240, the excess of his utility allowance over his
utility costs. The parsonage allowance is not taxable for income tax
purposes.
Line 27.
He enters half his SE tax from Schedule SE, line 6.
Line 36.
He enters the total itemized deductions from Schedule A, line 28.
Line 47.
The Michaels can take the child tax credit for their daughter,
Jennifer. Rev. Michaels figures the credit by completing the
Child Tax Credit Worksheet (not shown) in the instructions
for Form 1040. He enters the $500 credit on line 47.
Line 52.
He enters the self-employment tax from Schedule SE, line 5.
Line 58.
He enters the federal income tax shown in box 2 of his Form
W-2 from the college.
Line 59.
He enters the $8,400 estimated tax payments he made for the year.
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