Six Major Tax Mistakes Ministers Make
- They take an automobile allowance.
- They fail to take full advantage of their housing allowance
- The opt out of Social Security for the wrong reasons
- They don’t keep a mileage log
- They don’t use a tax accountant or bookkeeper who understands ministry finance
- They fail to take a housing allowance from their retirement funds, such as a 401(k) or 403(b)
Some highlights from today’s Rainer Report:
- Ministers can’t legally receive an automobile allowance. You can claim automobile reimbursements for mileage, however.
- The minister’s housing allowance in non-reportable and non-taxable. Ministers should take advantage of this.
- Every minister should be keeping a mileage log for anything other than his/her commute to the church.
- If you’re in ministry, you need to have a tax accountant who understands ministry income taxes. It can save you a lot of money and headache.
NOTE: For those who have not opted out of Social Security, your income is taxable for self-employment taxes.
Posted on October 3, 2018
With nearly 40 years of ministry experience, Thom Rainer has spent a lifetime committed to the growth and health of local churches across North America.
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Tax’s for churches and pastors
If a church is incorrectly paying FICA on a minister is there something they need to do for past pay periods or can they correct this mistake going forward?
I like the video format
Ministers have to pay social security tax on the housing allowance, but no federal taxes.
Ministers are considered as employees of the church for reporting purposes such as W-2’s but for Social Security purposes they are considered self employed and must pay Self Employment Tax ( 15.2%) on their salary and housing allowance less business expenses such as unreimbursed mileage, books, supplies, etc. If the church treats them as an employee for Social Security and withholds the SS tax from the wages and pays the other half of the Social Security tax, they could have some major problems with IRS including the possibility of tax fraud. This is a big problem that smaller churches may have and they need to consult a CPA or other tax preparers including their convention or local denomination authorities.
I am a minister and CPA and have seen it done incorrectly. I have heard that IRS may be reviewing tax returns of ministers for this purpose. The church could have problems too including the treasurer and local board who approves the financial reports. If your church is doing it wrong, please change it soon.
I agree with you. A lot of churches are doing incorrectly
Every Accountant that I have worked with says that Housing Allowance must be reported on the W2 Form issued by the church. (ministers should not be paid with a 1099). This housing allowance is subject to Social Security but not to income tax, but the amount must be shown on the W2
A minister employed by a church should receive a W-2 if they are an employee of the church. Housing allowance amount does not go in box 1 of the W-2 where the salary goes. Housing allowance can be put in box 14 for information purposes
Hey Thom, Just a thought; when I entered the ministry, I opted out SS and put the money into real estate. The Lord has been good, very good. Bless His sweet Name.
The reason for opting out of SS (at least it used to be) was that one was opposed to receiving SS. Not that one was opposed to paying or could do better. When getting into the pastor a number of decades ago, we were advised by tax consultant who specialized in minsters to opt out. So that is what we were planning to do. Then we read the actual form which indicated being opposed to receiving. I/we couldn’t do that in good conscience. I had received death benefits when my father died when I was a minor, so obviously wasn’t opposed to receiving benefits. We had to really double down to pay since we hadn’t budgeted for it. Widow and minor child support from SS can be helpful. We had a young pastor on staff who was going to opt out. I asked how he could do that in clear conscience since he had been receiving financial aid from the state for a special needs child. I also know of too many pastors who took the counsel of the tax consultant to opt out and didn’t invest the difference as they had been encouraged and are now in a very difficult position.
I have seen ministers opt out of the Social Security for the wrong reasons such as they can not afford it. When they retire, they have no Social Security to help in the golden ages. If they did decide to get out of the system, they should have put the money into a retirement plan but in most cases they did not. In most cases those who opt out of Social Security received bad advise and no advise for the future.
A mileage log is easy now with phone apps. There are several good ones on the market that will automatically track it for you so you don’t have to remember where you went or write anything down. Most will allow you to auto-classify common routes like your commute, then give you automated reports that you can email or print for your taxes. I have used MileIQ for a couple of years and really like it.
Housing allowance is taxable for Self-employment taxes for a minister.
relocation expenses are now taxable as of 2018