This is the time of year that Southern Baptist ministers are assailed with the usual emotions: depression over taxes, despair over paying those murderous SECA taxes (especially the brethren who skated on making their quarterly payments, as if April 15 wouldn’t roll around anyway), general malaise over finances, and the annual cussin’ session for those who do their own income taxes.
Having long followed clergy tax matters, one area that I have found our state conventions and denominational entities doing well is in helping our beleaguered ministerial brethren understand and manage their tax affairs.
Here are a few links that help in this regard:
GuideStone Minister’s Tax Guide for 2015 Returns This popular annual tax guide, written by Richard Hammar, J.D., LL.M., CPA, includes sample tax returns for both active and retired ministers and step-by-step instructions for each. This edition contains a special supplement addressing the current status of the housing allowance exclusions.
Ministerial Tax Issues There are multiple tax rules that apply only to ministers and churches. This specialized booklet is written in an easy-to-understand question and answer format. It will prove to be a valuable resource to ensure compliance with unique IRS regulations.
Social Security Is it ethical for ministers to opt out of Social Security? Russell Moore, president of the Ethics & Religious Liberty Commission of the Southern Baptist Convention, shares insight for those considering this critical decision.
These are all from GuideStone. Your state convention probably has some resources that supplement these.
A few observations about clergy taxes:
There is an endless supply of bad advice on clergy taxes. Hardly any of us are free from having a colleague with a friend who is certain that they know how to get around clergy paying self-employment taxes. Drop kick these colleagues into the next county. Their advice is bad and both you and your church could incur serious trouble.
Pay your stinkin’ taxes, all of them, income and Social Security. Hold your nose if you must. Cuss a little under your breath if necessary. No one is going to change our system anytime soon so write the check. It’s your civic and spiritual duty.
Don’t fall for the IRS Form 1099 advice. The whispered counsel is this: “Hey, pastor, if you get the church to give you a 1099 for your pay, they can leave off your housing allowance and you don’t have to pay self-employment taxes on it.” Some clergy, those with a more itinerant mnistry like evangelists and supply preachers, etc., may properly receive a 1099. Generally though, as Guidestone puts it: [We ordained ministers] are employees for federal income tax purposes, but self-employed for Social Security purposes with respect to earnings from services performed in the exercise of their ministry. Dual tax status means that most ministers should file their tax returns as employees and pay self-employment (SECA) taxes on their ministerial income.
“Dual status” brethren. You get the W-2, but in most cases without any witholding and you add in the housing allowance to figure your SECA tax bill. Don’t you feel special? There are always complications and special situations but GuideStone’s advice is directed at the vast majority of SBC ordained ministers and is very solid.
Pour as much into a Housing Allowance as you can, but do it right. It helps avoid income taxes, but not Social Security (SECA) taxes. There’s a maximum amount that you can designate as the HA. GuideStone explains what it is here. The minister’s housing allowance is our Sacred Clergy Tax Break and it is perfectly legitimate to max it out without apology. Again, do it properly.
CPAs and tax preparers are often unfamiliar with clergy taxes. I had a conversation recently with the accountant who handles our church’s finances where I sounded him out about clergy taxes, housing allowance, W-2s and all that. He was very well informed. Tax preparation software has made this is less of a problem than previously but you should understand that not all tax preparers are well informed. A tax preparer who works with a lot of ministers should be more educated on the vagaries of clergy taxes. If you have a tax preparer whose advice conflicts with GuideStone, go with GuideStone.
If you want to save on current taxes put more into your retirement. Let the church pay directly through a monthly billing by GuideStone or another retirement account provider. You get a little less cash pay. You pay a little less in taxes. You benefit greatly in the long run. You really cannot afford not to do this. Start early and increase this as much as you can.
And when you get through with your taxes this year, treat yourself to something special like a Chic-fil-A frosted lemonade. Be sure and ask for the whipped cream and cherry topping. You deserve it.