Are you considered Clergy for tax purposes?

clergy for tax purposesThe IRS is specific about who can be considered clergy for tax purposes. This is important! Only clergy receive the “housing allowance” tax benefit, clergy-specific 403(b) distributions, and a clergy Accountable Reimbursement Plan.

You may be ordained and employed in something you consider a ministry, but the IRS may not agree. You may be a missionary, evangelist, chaplain, administrator, itinerant preacher, educator, or ordained wedding celebrant and NOT meet the IRS guidelines.

Here’s how to tell if you’re clergy for tax purposes. (ProTip: The IRS can’t figure it out by your vestments.)

5 Questions:

  1. Are you Ordained, Licensed, or Commissioned?
  2. Do you administer ordinances or sacraments (baptism, Lord’s Supper, etc.)
  3. Do you conduct worship?
  4. Do you have management or administrative responsibilities in the church?
  5. Does your church consider you a religious leader?

To qualify as clergy for tax purposes, you MUST answer “yes” to question 1 AND to a majority of questions 2-5.

If you ARE clergy, congratulations!

If you ARE clergy, you will need to understand:

  • Housing allowance, calculation, and tax benefits
  • 403(b) tax-free distributions as housing allowance
  • Exemption from Income Tax withholding
  • Calculating and paying Quarterly Estimated Taxes (or arrange to withhold on W-4)
  • Paying both parts of SECA (not FICA)
  • Setting up a 100% Accountable Reimbursement Plan

Clergy Financial Coaching can help you understand the unique financial and tax needs of pastors and walk alongside you in ministry to find financial wholeness.

Schedule a FREE 30-minute coaching session to get some clarity on your financial future!

Salary Negotiation – The Committee

money chartMany pastors cannot get a raise. Certain denominations pay their pastors a fixed base salary with cost-of-living adjustments for different parts of the state/country/world and raises based solely on tenure. Typically, these denominations pay their pastors from a central or regional office.

Other denominations may set a range for pastoral salary, with the contract and pay negotiated between the conference, the pastor, and the local church.

Most pastors, however, are paid directly by the local church. This “congregational” model allows the church the widest freedom in hiring and firing and setting the pay and benefits for a pastor. It may also make the pastor feel beholden to certain church members, but that’s a topic for a different discussion.

If you’re in one of these last two groups, you may be able to negotiate a pay raise. But that means you must go through the dreaded salary negotiation.

Most pastors are underpaid. I have coached several pastors who work 40+ hours per week for minimum wage or less.

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13 Reasons Pastors Fail in Finance

13I’ve watched as pastors have lost their homes, been fooled into bad investments, wasted $1000s on get-rich-quick schemes, lost everything to secret sins, illegally opted out of social security, quit giving tithes and offerings, tried to cheat on their taxes, failed to pay their taxes, gone bankrupt, fished around in the petty cash, and lost the respect of their church members, family, and community.

I’m glad to say that these are worst-case scenarios. They’re the type of things that end up disqualifying ministers from employment. And they’re rare.

But it’s NOT rare for clergy to struggle with their finances. It’s more common than you might think for pastors to be a little behind on their bills, to be sinking deeper and deeper into debt each month.

Here are 13 reasons it’s common for pastors to struggle with money:

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Can I deduct my home office?

538070_13190765A home office could really be a great tax savings, because you’d get to calculate the square foot percentage of your house dedicated to a home office and then count that percentage of your rent and utilities and that could add up to a lot! Can a pastor deduct a home office for tax purposes? 

No.

Well, probably not.

Well, no, not really.

The IRS rules about deducting home office expenses are detailed. Most “home offices” don’t meet the bright line guidelines expressed by the IRS. The area must be used EXCLUSIVELY for business (for instance, it can’t be a space that you convert into an extra bedroom when the relatives stay over). Your church has to have no office space or any space that has ever been used as an office (if Pastor Smith used the broom closet as an office in the 1960s, you’re out of luck). You have to do your primary business from the home office, including meeting clients (congregants). Etc.

But none of that really matters. What matters is that the IRS will not allow a home office deduction if you’re already receiving a ministerial housing allowance on that space. You can’t double-dip on this deduction. And if you’re NOT receiving a ministerial housing allowance, then you’re just throwing away thousands of dollars in taxes every year.

So, no. You can’t take your home office as a deduction. But…

Here’s where it might work for you to declare a space in your home as an office:

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Buy this book every year at tax time!

The Zondervan Minister’s Tax and Financial Guide
is a “must have” for all ministers who prepare their own taxes. Even for those who don’t, this book tells you what to expect, what to keep track of, and how to structure or restructure your compensation package to be sure you are getting the greatest tax savings.

Written by Dan Busby, CPA, J. Michael Martin, JD, and John Van Drunen, JD, CPA, this book covers the tax return, insurance, social security, housing, retirement, reimbursement plans, self-employment, salary, compensation plan structuring, and contains a bunch of sample forms.

This book also contains the “10 Biggest Tax Mistakes Made by Ministers,” including #3: “Failing to have at least a modest housing allowance designated when living in a church-provided parsonage.”

Several of the strategies in this book can save the pastor $1000s per year on taxes and cost the church $0 extra to implement!

I especially like the integrity points at the end of each chapter, helping pastors to think through the moral implications of what they are doing with taxes, social security, ordination, etc. and avoid muddy grey areas or illegalities.

You can’t beat the price and the up-to-date information. Buy the new version every year to stay on top of the different changes in the tax code!

(But you really might want to pick up this year’s copy just so you can start planning for next year.)

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