Tax Topic #417 |
2008 Tax Year |
Topic 417 - Earnings for Clergy
For income tax purposes, a licensed, commissioned, or ordained minister
is generally treated as a common law employee of his or her church, denomination,
or sect. There are, however, some exceptions such as traveling evangelists
who may be treated as independent contractors. If you are a minister performing
ministerial services, you are taxed on wages, offerings, and fees you receive
for performing marriages, baptismals, and/or funerals.
The services you perform in the exercise of your ministry are generally
subject to self-employment tax for social security purposes. See Publication 517, Social Security and Other Information for Members
of the Clergy and Religious Workers, for limited exceptions from self-employment
tax.
Even though, for social security tax purposes, you are considered a self-employed
individual in performing your ministerial services, you may be considered
an employee for income tax or retirement plan purposes. For income tax or
retirement plan purposes, some of your income may be considered self-employment
income and other income may be considered wages. Depending on all the facts
and circumstances, under common-law rules you are considered either an employee
or a self employed-person. Generally, you are an employee if your employer
has the legal right to control both what you do and how you do it, even if
you have considerable discretion and freedom of action. For more information
about the common-law rules, see Publication 15-A (PDF), Employers
Supplemental Tax Guide. If you are employed by a congregation for a salary,
you are generally a common-law employee and income from the exercise of your
ministry is considered wages for income tax purposes. However, amounts received
directly from members of the congregation, such as fees for performing marriages,
baptisms, or other personal services, are considered self-employment income.
If you itemize your deductions, you may be able to deduct certain unreimbursed
business expenses related to your services. You may need to fill out Form 2106 (PDF), Employee Business Expenses, and
attach it to your Form 1040 (PDF). Refer to Topic 514 for information on Employee Business Expenses, and Topic 508 for
information on the 2% of adjusted gross income limitation. For the offerings
or fees you receive for performing marriages, baptismals, and/or funerals
use Form 1040, Schedule C (PDF), Profit or
Loss From Business, or Form 1040, Schedule C-EZ (PDF), Net
Profit From Business, to report these earnings and expenses. The gross
income of a licensed, commissioned or ordained minister does not include the
fair rental value of a home (a parsonage provided), or a housing allowance
paid, as part of the minister's compensation for services performed that are
ordinarily the duties of the minister. If you own your home, you may still
claim deductions for mortgage interest and property taxes. If your housing
allowance exceeds your actual expenses, you must include the amount of the
excess as other income.
A minister who is furnished a parsonage may exclude from income the fair
rental value of the parsonage, including utilities. However, the amount excluded
cannot be more than the reasonable pay for the minister's services.
A minister who receives a housing allowance may exclude the allowance from
gross income to the extent it is used to pay expenses in providing a home.
Generally, those expenses include rent, mortgage interest, utilities, repairs,
and other expenses directly relating to providing a home. The amount excluded
cannot be more than the reasonable pay for the minister's services.
The minister's employing organization must officially designate the allowance
as a housing allowance before paying it to the minister.
The fair rental value of a parsonage or the housing allowance is excludable
from income only for income tax purposes. No exclusion applies for self–employment
tax purposes. For Social Security purposes, a duly ordained, licensed or commissioned
minister is self–employed. This means that your salary on Form W–2,
the net profit on Schedule C or C–EZ, and your housing allowance, less
your employee business expenses are subject to self–employment tax on Form 1040, Schedule SE (PDF), Self-Employment Tax.
However, you can request an exemption from self–employment tax, if you
are conscientiously opposed to public insurance for religious reasons. You
cannot request exemption solely for economic reasons. To request the exemption,
file Form 4361 (PDF), Application for Exemption
From Self-Employment Tax for Use by Ministers, Members of Religious Orders
and Christian Science Practitioners, with the IRS. You must file it by
the due date of your income tax return (including extensions) for the second
tax year in which you have net earnings from self–employment of at least
$400.00. This rule applies if any part of your net earnings from each of the
two years came from the performance of ministerial services. The two years
do not have to be consecutive tax years.
For more information, refer to Publication 517, Social Security
and Other Information for Members of the Clergy and Religious Workers.
Page Last Reviewed or Updated: December 22, 2008
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