Tax Preparer Study Guide on Income for Clergy Member Tax Returns

October 13, 2011 by  Filed under: Taxes 

When IRS registered tax return preparers perform work for clergy members, some extra steps are often required to accurately report taxable income. In most cases, ministers are employees of their churches. However, exceptions do exist. For example, traveling evangelists are taxed as independent contractors.

In addition, clergy members normally receive fees for performing special services at weddings, baptisms, and funerals. Knowing the tax treatment of these fees is necessary for answering tax preparer exam questions. Fees received directly from congregation members are taxed separately from wages paid by the church.

A tax preparer study guide reveals that fees for ministerial services are self-employment income reported on Schedule C along with associated expenses. The expenses a minister deducts on Schedule C are those that are ordinary and necessary to earning fees received for the special services. This includes, for example, an auto deduction for mileage driven to perform a wedding ceremony. Other expenditures incurred as a minister employed by a church are deductible as unreimbursed employee expenses. The registered tax return preparer work for these expenses is only necessary if the minister itemizes deductions.

In rare cases, ministers are given such compete control over church activities that they are self-employed and compensated as independent contractors. But most situations involve a church having control over the functions of a minister, although the clergy member is given considerable discretion. Despite receiving wages that are taxed just like any employee, a minister is considered self-employed for all compensation. This means that a tax preparer job involves calculating self-employment tax on a clergy member’s W-2 wages along with other ministerial income.

Another source of income a minister may have is a housing allowance. This category includes the fair rental value of a parsonage provided. A housing allowance or fair rental value of a parsonage – including utilities – is normally excluded from taxable income. However, this amount is included in the calculation of self-employment tax.

In addition, a housing benefit is included in taxable income to the extent it exceeds the reasonable pay for a minister’s services. Various scenarios are addressed in RTRP exam study materials. For example, when a housing allowance exceeds the lesser of salary or actual expenses, the excess is included in taxable income.

An important factor that paid tax preparers must inquire about with clergy members is whether they have filed IRS Form 4361. The deadline for submitting this form is the tax return due date for the second year when net earnings from ministerial services exceed $400. This is the threshold for incurring self-employment tax. Form 4361 is a request for exemption from self-employment tax based upon conscientious opposition to public insurance for religious reasons. Ministers who submit Form 4361 acknowledge that they will not participate in Social Security or Medicare as either contributors or beneficiaries.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Fast Forward Academy is a leading publisher of education for enrolled agents and other tax professionals. Access to their enrolled agent course and free questions for the enrolled agent exam is available on their website.

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