Tax Implications of Ministerial Income

Income for members of clergy has different tax implications than other income regularly reported on forms W-2 and 1099-Misc. Clergy members should consider enlisting the expertise of a CPA when it comes time for their tax preparation. The following is a synopsis of an IRS-issued publication on Earning for Clergy:

1.  Clergy may receive forms W-2, a 1099-Misc., or both from their congregation. The regular services provided by clergy to the congregation are usually considered employment because of the control that the congregation has over the minister’s services (income for W-2), while other services performed such as marriages, baptisms, etc., are usually considered self-employment (income for 1099-Misc).

The income from the W-2 is to be reported as wages on a tax return, while the 1099-Misc income is self-employment income to be reported on Schedule C, where applicable expenses can also be deducted. The Schedule C income is subject to self-employment taxes, covering both the employer and employee contributions to Social Security and Medicare taxes.

In some cases, the church will not withhold or pay payroll taxes even for the ministerial income reported on Form W-2, and in this case the clergy member is liable to pay self-employment tax for both W-2 and 1099-Misc income reported on their main return.

2.  Clergy housing allowances generally aren’t taxable. To the extent that an amount paid to a minister for housing expenses is within the fair market rental value of the minister’s home, used to pay expenses attributed to a home, and reasonable compensation for the services that the minister provides, housing allowances are excludable from taxable income. In this case, itemized deductions such as property taxes and mortgage interests for homeowner ministers CAN still be claimed on Schedule A.

The housing allowances are still subject to self-employment tax.

Davis & Hodgdon Associates CPAs has been assisting Vermont individuals and business owners with tax consulting and retirement planning for more than 25 years. Call our office in Williston 802.878.1963 or Rutland 802. 775-7132 to schedule a tax planning strategy session today.

By Alexander Dixon, Davis & Hodgdon Associates CPAs