Members of the clergy are taxed differently than most taxpayers. An authorized clergyman, appointed or ordained is usually employed in accordance with the customary law of the church, denomination, sect, or organization employs to provide this ministry services. However, there are exceptions, such as itinerant evangelists, who are independent contractors (who are self-employed) at common law. If you are a cleric who has ministerial services, all your earnings, including wages, offerings and fees you receive for marriages, baptisms, funerals are subject to income tax, regardless of whether you earn the amount as an employee or as a person who is self-employed. However, the fact whether receiving income as an employee or as a person who is self-employed affect how expenses related to those gains are treated as described below.
Calculating Clergy Income
For purposes of the social security tax and Medicare , regardless of their status under the common law, the services performed in the exercise of his ministry are considered earnings from self-employment and are generally subject to tax self-employment. See Publication 517 , Social Security and Other Information for Members of the Clergy and Religious Workers (Social Security and Other Information for Members of the clergy and religious workers). This guide explains basis rules of self employment
You will be considered as an employee or self-employed depends on all the facts and circumstances. Generally, you are an employee if the church or organization it serves has the legal right to control what you do and how you do it, even if you have considerable discretion and freedom of action.
Factors in Calculating Clergy Income
If you are a salaried employee of a congregation, usually, you are an employee of the congregation in accordance with law and a salary is considered wages for purposes of income tax. However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services are generally earnings from self-employment for purposes of income tax. Both the salary you receive from the congregation and the fees it receives from members of the congregation are subject to tax on self-employment.
Itemizing Deductions as Clergy Member
If you itemize deductions, you may deduct certain unreimbursed business expenses related to their service as an employee on Schedule A (Form 1040) , Itemized Deductions(itemized deductions). You may need to fill out Form 2106 , Employee Business Expenses (Employee Business Expenses), and attach it to Form 1040 , U.S. Individual Income Tax Return (Declaration of personal income taxes in the United States).
For self-employment income (offerings or fees received for marriages, baptisms, funerals, etc.). Clergy must use the Schedule C (Form 1040) , Profit or Loss From Business (gain or loss of business), or Schedule C-EZ (Form 1040) , Net Profit from Business (Net income for the business), to report these gains and expenses.
It is possible that an authorized cleric named or ordered may exclude from income the fair rental value of a home (a parsonage) or a housing allowance provided as compensation for ministerial services as an employee.
A cleric who is given the parsonage may exclude from income the fair rental value of the parsonage, including the cost of utilities. However, the amount excluded can not exceed the reasonable compensation for the services of the clergy.
The cleric who receives housing allowance may exclude from gross income to the extent used to pay housing maintenance costs. Usually, these expenses include rent, mortgage interest, utilities, repairs and other expenses directly related to the maintenance of housing. The amount excluded can not exceed the reasonable compensation for the services of the clergy.
Special Tax Deductions for Clergy
If you own your home, you may still claim deductions for mortgage interest and real estate taxes. If the housing allowance exceeds the lesser of fair compensation, the fair rental value of the home, or your actual expenses, you must include such excess as income.
The organization employing the cleric has to officially designate the housing allowance subsidy and pay it before the cleric.
The fair rental value of a parsonage or housing allowance is excludable only for purposes of income tax. The amount must be included for purposes of the tax self-employment.
For purposes of the social security and Medicare, an ordained clergyman, authorized or appointed to provide ministerial services is considered self-employed. This means that your wages on Form W-2, net income on Schedule C or C-EZ, and housing allowance, unless your employee business expenses are subject to tax on self-employment in the Schedule SE (Form 1040) , Self-Employment Tax (Tax on self-employment).
IRS Form 4361
However, you may request an exemption from self-employment for their ministerial earnings, if you object to true public insurance for religious or conscience reasons. You can not apply for exemption for economic reasons. To apply for exemption, submitted to IRS on Form 4361 , Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners (Application for exemption from tax of self-employment for use by clergy members of religious orders and Christian Science practitioners).
You must submit this form no later than the due date for filing your income tax return (including extensions) for the second tax year in which you have net earnings from self-employment of at least $ 400. This rule applies if any part of the net earnings of each of those two years are from the performance of ministerial services. The two years do not have to be consecutive.
For more information, see Publication 517 , Social Security and Other Information for Members of the Clergy and Religious Workers (Social Security and Other Information for Members of the clergy and religious workers).