TAX IMPLICATIONS FOR PASTORS
NOTE: What follows are generalizations of tax law for pastors. It is highly recommended that you consult with a tax professional who is familiar with the specifics of clergy tax law at the beginning of each year.
Once a church employee is designated a “pastor”, that employee becomes eligible for certain tax benefits, but also becomes “self-employed” in the eyes of the IRS. As an employee of CTK who is either considering becoming a “pastor” or who has recently become one, you need to be aware of the following important changes to your taxes.
1.As a pastor, you may decide to opt out of paying Social Security and Medicare (also known as Self-Employment Taxes). To do so, you must sign a document that affirms you are opting out of paying Social Security and Medicare as a conscientious objector (see details on page 3). What this means is you must state to the government that you have a moral objection on religious grounds to paying for and/or receiving these governmental benefits. (Note: economic objections do not meet the IRS standards for opting out.)
1.If you opt out of social security and Medicare, the benefits you will receive from these programs will be limited according to the years and wages that you paid into the program. You will need to set up your own savings plan for retirement.
2.There is a formal process to opt out of Social Security. Consider all implications carefully and consult your tax advisor.
2.Pastors are eligible to receive a housing allowance (whether they own or rent a home).
1.Housing allowance may include the following
1.Cost of mortgage/rent payments.
2.Cost of insurance.
3.Cost of upkeep and improvements on property.
4.Cost of utilities.
2.Housing allowances must be approved by the CTK council prior to the beginning of each tax year (once approved, only changes need to be approved annually), or at the time of hiring. Housing allowances may not be made retroactively.
3.You will be required to substantiate the use of your housing allowance for allowable housing costs.
1.Any housing allowance NOT used for housing expenses becomes federally taxable income.
2.Housing expenses above the amount of the housing allowance are NOT deductible.
4.Although the housing allowance is NOT subject to federal taxes, it IS SUBJECT TO SELF-EMPLOYMENT TAXES AT A RATE OF APPROXIMATELY 15%.
5.Housing allowances are limited to the fair rental values of the home and furnishings. Consult your tax advisor.
3. Pastors are considered “self-employed” by the IRS.
1.This means that your wages are NOT subject to Federal tax withholding automatically.
1.However, the portion of your wages that is not designated as a housing allowance is still taxable income for state and federal taxes.
2.By itemizing tax deductions, the amount of taxable income for federal taxes can be significantly reduced.
2.In addition, if you have not opted out of social security and Medicare, you will be required to pay approximately 15% of your entire wages (including housing allowance) as self-employment (FICA) tax.
1.You will be required to pay this 15%. Some deductions are allowed to reduce self-employment taxes, but in most cases these deductions will not be significant. Consult your tax advisor.
2.CTK pastors may either pay quarterly estimates directly to the I.R.S. or instruct Network Resources to withhold an appropriate amount from each paycheck.
EXAMPLE 1:
Pastor Joe is hired at a rate of $40,000 per year. He has NOT opted out of Social Security and Medicare.
He has a housing allowance of $25,000.
His Federal Income will be $15,000 ($40,000-$25,000). By claiming deductions, this amount may be reduced to zero. (If not, he may owe approx. 15% of his adjusted taxable income).
His Self-Employment tax will be approximately 15% of his entire $40,000 or $6,000. (Some deductions are allowed to lessen this amount, but in most cases the savings will not be significant.)
BOTTOM LINE: Pastor Joe should instruct Human Resources to withhold a minimum of 15% of his salary for taxes in order to avoid owing a large amount at the end of the year.
EXAMPLE 2:
Pastor Steve is hired at a rate of $40,000 per year. He has NOT opted out of Social Security and Medicare. He does not have a housing allowance.
His Federal Income will be $40,000. By claiming deductions, he reduces this amount to $20,000. Steve will owe federal tax at a rate of approximately 15% on $20,000, producing a federal tax bill of $3000.
His Self-Employment tax will be approximately 15% of his entire $40,000, or $6,000. (Some deductions are allowed to lessen this amount, but in most cases the savings will not be significant.)
Pastor Steve’s total tax liability will be approximately $9000.
BOTTOM LINE: Pastor Steve should instruct Human Resources to withhold a minimum of 22% of his salary for taxes in order to avoid owing a large amount at the end of the year.
EXAMPLE 3:
Pastor Bill is hired at a rate of $40,000 per year. He has OPTED OUT of Social Security and Medicaid.
He has a housing allowance of $25,000.
He will not owe Self-Employment Taxes on his salary or housing allowance.
His Federal Taxable income will be $15,000 ($40,000-$25,000). With deductions, this amount may be reduced to zero. If so, Pastor Bill’s tax liability will be zero.
BOTTOM LINE: Pastor Bill needs to set aside at least 15% of his income for retirement and disability insurance.
Opting out of Social Security
byCrown Financial Ministries
Since Social Security has been determined by the Supreme Court of the United States not to be an insurance plan but a social welfare plan provided by the government, the decision for clergy to get out of Social Security must be a conscientious objection to government welfare based on their religious beliefs. Exemption is based on the filing with and approval by the IRS of Form 4361. The decision to withdraw must be based on the following statement of conscience contained in Form 4361.
I certify that I am conscientiously opposed to, or because of my religious principles I am opposed to, the acceptance (for services I perform as a minister, member of religious order not under a vow of poverty, or a Christian Science practitioner) of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that, makes payments toward the cost of, or provides services for, medical care. (Public insurance includes insurance systems established by the Social Security Act.)…Under penalties of perjury, I declare that I have examined this application and to the best of my knowledge and belief it is true and correct.
Publication 15-A pages 9 and 10 of the IRS Code
4. Religious Exemptions
The earnings of a minister are not subject to federal income, social security, and Medicare tax withholding. However, the earnings as reported on the minister’s Form 1040 are subject to self-employment tax and federal income tax. You do not withhold these taxes from wages earned by a minister, but you may agree to voluntarily withhold tax to cover the minister’s liability for self-employment tax and federal income tax.
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