Top 10 Questions Pastors ask Tax Professionals

1. Am I an employee of the church or am I self-employed?

The answer is “both.” Most ministers are considered employees in every respect except for purposes of paying self-employment tax (Medicare and Social Security). This means that they are eligible for virtually all employee benefits that are given favorable tax treatment in the IRC. Many of these benefits...

2. What can I deduct for a housing/parsonage allowance?

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. A minister living in a parsonage qualifies for a housing allowance to the extent of his own out-of-pocket costs. The minister’s church or other qualified organization must designate the housing allowance pursuant to official action taken in advance of the payment. The IRS lists only food and servants as prohibitions to allowable housing expenses. If a minister owns a home, the amount excluded from the minister’s gross income as a housing allowance is limited to the least of the following three amounts:

3. What are my retirement plan options and what are the advantages / disadvantages of each?

The best retirement plan option for each minister depends on his objectives and his current tax situation. The three most common retirement plan options used by ministers include:

(a) IRC 403(b) plans (also called Tax Sheltered Annuities (TSAs)), (b) Traditional Individual Retirement Accounts (IRAs), and (c) Roth IRAs.

Ministers often select 403(b) plans when they want to...

4. Do you think I should suggest that the church set up a car allowance?

Any financial assistance that a minister’s employer can give is appreciated. A car allowance can be especially helpful. Car allowances, however, must be established as “accountable plans.” This means that any advances given by the employer to the minister must be properly substantiated on a timely basis or the law requires the minister to refund the unspent, undocumented portion of the allowance.

It’s a better idea to...

5. What reports does the church need to file with the government regarding my compensation?

Other than compensation to its pastor, a church files the same reports and is subject to the same withholding rules as any other organization. The only exceptions relate to the exemption from unemployment taxes that all churches enjoy and to an exemption from FICA tax that a few churches applied for in the 1980s. IRS Publication 15 can answer treasurers’ standard questions regarding church payroll.

Reporting a minister’s compensation is often confusing even to treasurers who are familiar with the rules for standard employees. Following is a sample compensation arrangement...

6. Do you have any ideas that the church can consider to control its rising health care costs?

Many ministers and their employers are looking for alternative plans to control rising health care costs without neglecting those in need of medical services. Many churches have only one employee—the pastor. This offers greater flexibility in crafting a plan based on purchasing major medical health insurance for catastrophic needs and self-insuring for all other health costs. The benefit to ministers is that...

7. Can a church give non-taxable gifts to its minister?

Any gifts paid by employers to their employees are considered taxable income and must be reported together with other earnings on Forms 941 and W-2. The only exception relates to gifts of tangible personal property valued less than $25. Accordingly, the typical Christmas bonus collection received by many congregations and given to their employees represent fully taxable compensation. Of course, as participants in a church-sponsored collection, donors may write off their contributions as tax-deductible donations. On the other hand, personal gifts from a member to a minister are neither taxable to the minister, nor deductible by the member.

8. How can the church and I work together to sell the parsonage and to get my family into a home of our own?

The answer to this question varies greatly based on the church’s and pastor’s specific situation. However, following are several issues that most likely will need to be addressed.

(a) Any property transferred by the church to the pastor will be considered taxable compensation at its fair market value (reduced by any payment by the pastor to the church).

(b) Because the pastor will no longer be living in real estate that is tax-exempt housing, his costs of living will increase accordingly.

(c) The tax-free nature of a housing allowance...

9. Should I “opt out” of the social security system?

The IRC exempts ministers from mandatory federal and state income tax and Medicare and Social Security tax withholding by their employers. However, if they do not elect to have income tax withholding, then ministers must file and pay federal and state estimated tax vouchers. In any case, employers of ministers are not permitted to withhold and match the 7.65 percent FICA tax payments (source: IRC 3121(b)(8)). Instead, the minister (unless he opts out of the social security system) is responsible to pay the entire 15.3 percent self-employment tax himself. Many ministers elect to have additional federal income tax withheld so that...

10. What bookkeeping system can our Treasurer use to keep the church books?

The bookkeeping system used by a church must be compatible with current and future treasurers’ training and experience. To adopt a system that is overly complex or suitable for only a highly qualified bookkeeper may create grave difficulty when there is turnover in the treasurer’s position. Following are several solutions that small local churches have found useful:

11. How do you respond to my fellow pastor’s comment: “I do __________ and the IRS has never questioned me”?

Oh, you hear this one too? :-) My typical response—“just because you haven’t been caught yet, doesn’t mean the IRS will excuse your ignorance, nor will the Lord excuse your willful neglect for God’s command to pay tribute to whom tribute is due.” Of course, the basis for the tax actions you take must be the Internal Revenue Code established by the Congress and the decisions that courts have handed down. The IRS gives its opinions, as well, in Revenue Rulings, Regulations, and other documents. In addition to your professional tax preparer, the following resources may be helpful:

 

  • Church and Clergy Tax Guide, by Richard R. Hammar (www.churchlawtoday.com)
  • Worth’s Income Tax Guide for Ministers, by B.J. Worth (www. worthfinancial.com)
  • Zondervan’s Minister’s Tax and Financial Guide, by Dan Busby (www.zondervan.com)