Check out these tips for filing clergy taxes correctly:
HOUSING
A housing allowance is not included in income. The rental value on provided housing (parsonage) is not included in income.
EMPLOYEE or NOT ?
The short answer is EMPLOYEE. The Internal Revenue Service has a test for determining whether or not a worker qualifies as an employee. In nearly every circumstance, clergy do. Clergy who chose to be treated as self-employed are at great risk for being audited by the IRS, reclassified as employees anyway and will be liable for additional taxes and penalties.
SE TAX; NOT FICA
Here’s an odd thing. Clergy are employees for Federal Income Tax but are subject to self-employment taxes rather than FICA (Social Security and Medicare taxes).
Sometimes this is stated as clergy being exempt from FICA. That terminology can be confusing. FICA is 15.3% of one’s total compensation. Half is paid by the employer. Half is paid by the employee.
Self –Employment Tax is also 15.3% of one’s total compensation. All of it is paid by the individual. An employer, the church, may pay this tax on behalf of the employee, the clergy. However, this amount will then be included as income for the clergy, which will then in turn be subject to the 15.3% self-employment tax (Schedule SE of Form 1040). To be fair, half of the SE tax is deductible on Form 1040.
PREPAY TAXES-4 INSTALLMENTS
The church as the employer is responsible for adequately withholding and remitting a clergy’s federal income tax. The clergy is responsible for remitting self-employment tax quarterly as income is earned.
Every few months all income, deductions, adjustments, exemptions, and credits should be accumulated, the tax due calculated, and compared to tax already remitted. Any estimated taxes due must be paid on Form 1040-ES) on the following schedule:
April 15th for January 1-March 31
June 15th for April 1-May 30
Sept 15th for June 1-August 31
Jan 15th for September 1-December 31
PENALTIES
Penalties will be assessed if taxes are not paid in advance in installments that match when the income was earned. If calculating your Form 1040 every few months is too “taxing”, you may opt for a safe harbor. If any of the following payments are met, under-payment penalties can be avoided.
Pay 90% of current year tax liability. This is chancy if you don’t want to estimate.
Pay 100% of prior year’s tax liability if your AGI was less than $150,000.
Pay 110% of prior year’s tax liability if your AGI was more than $150,000.
Underpayment penalties are calculated on Form 2210 and attached to Form 1040. If you skip it or forget, no worries, the IRS will do it for you and send a bill.
This has been prepared for informational purposes only, addressing only most tax circumstances. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Consult your own tax, legal and accounting advisors for your specific circumstances and situation.
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