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!

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.)

Is your housing allowance getting you the biggest tax benefit?

housemoneyMinister’s Housing Allowance, Parsonage Allowance, Parsonage Exclusion… different churches and denominations call this different things. But it’s all the same.

The US Congress has reiterated that they want properly credentialed pastors, rabbis, imams, and other clergy to be able to exclude the entire cost of their housing from taxes every year. This includes mortgage payments, rent, HOA, insurance, utilities, furniture, landscaping, repairs, and improvements. But not maid service. Generally, anything that belongs in your house that you can’t easily take with you when you’re walking out the door can be included. This means you can count a desktop computer in your housing allowance but not your laptop.

The housing allowance is a HUGE TAX BENEFIT for pastors! What you include in your housing allowance is an EXCLUSION from income, not a deduction from taxes. This means that your housing allowance will reduce your taxable income dollar for dollar.

Many pastors or churches have been told (and thus believe) that they can only count half of the pastor’s income or some magic number like $40,000 as parsonage allowance. But that’s not the case.

Read more

RANT: Should I opt out of social security?

should pastors opt out of social security?“The improper (actually, the word is ‘illegal,’ but it is such a harsh word) opting out of social security by ministers is one of the dirty little secrets of the profession.”
2015 Zondervan Minister’s Tax & Financial Guide

I can’t tell you how many times I’ve been listening to Dave Ramsey and a pastor will call in asking if he (it’s always male for some reason) should opt out of social security.

Dave doesn’t take any time and ask about the pastor’s religious convictions or whether the pastor is conscientiously opposed to receiving ANY kind of public assistance (social security, FEMA assistance in case of a natural disaster, CHIP, SNAP, Medicaid, Medicare, etc.) and would never take them if needed and offered.  Dave simply cuts the guy off, gives his pat answer about how you can invest the money better than the government can, and tells the pastor that he should opt out of social security if possible.

It is possible for a pastor to opt out of social security (within the first two years after ordination). It may even make sense from a pure money-management standpoint (if a pastor were to actually invest that money in retirement accounts). But usually, the pastor just doesn’t want to pay it and wants to use the money for something else instead.

I personally know several pastors who opted out of social security because they didn’t want to pay it. These were some of the same pastors who didn’t file quarterly taxes, freaked out on April 15, and ended up owing massive taxes with penalties and interest year after year after year! And guess what? They weren’t taking that social security money and putting it away into their 403(b) for retirement. They were just using it.  And now they’re stuck and poor and there’s no social security coming in either. At least they’re getting medicaid and food stamps now (but weren’t they opposed to public insurance?).

Oh, wait. It is.

Read more

403(b), IRA, Roth?

Roth IRA, 401(k), 403(b), 403b, Dave RamseyWhat’s the right mix for you?

When it comes to retirement savings, Dave Ramsey tells his listeners to contribute 15% of their monthly income to retirement after they’ve done baby steps 1-3.  He tells them to contribute to their 401(k) first up to the employer match and then max out their Roth.  If they still haven’t invested the full 15%, go back to the 401(k) and contribute the rest.

But what’s good advice for everyone else might be bad advice for pastors.

Because pastors are considered self-employed for Social Security Tax purposes, you’ll save the 15%+ SECA tax on ALL of your 403(b) contributions. In this case you’ll do A LOT better with different advice than what Dave Ramsey gives to everyone else. Also, because clergy-specific 403(b) retirement distributions can be categorized as parsonage allowance, the money can also grow and be withdrawn tax-free.

From Stewardship Services Foundation:

You pay self-employment tax on contributions you make to a traditional IRA. You pay federal income tax on distributions.You pay self-employment tax and federal income tax on contributions you make to a Roth IRA [but not on distributions]. You never pay taxes on 403-b contributions. You pay no taxes on 403-b distributions that are used for housing expenses. You only pay federal income taxes on 403-b distributions which are NOT used for housing expenses.

Of course if you’ve opted out of Social Security, however, that may be a different thing altogether.

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