Tax Day is quickly approaching. Whether you’re preparing your own taxes using software like TurboTax or are working with a tax preparer, most clergy know that the special rules and exemptions for pastors aren’t always clear.
Keep these personal income tax tips in mind when you’re preparing to file your 2020 return.
1. You are considered self-employed ONLY for social security and Medicare contribution purposes.
To fund social security and Medicare, taxpayers pay either SECA (Self-Employment Contributions Act) or FICA (Federal Insurance Contributions Act). Clergy don’t pay FICA and should not have it withheld. This means on the W-2 you receive from your local church, boxes three, four, five and six should be blank or be filled with 0’s.
Clergy are considered self-employed only for social security and Medicare contribution purposes and, thus, pay SECA at tax time.
2. You don’t get a 1099 form from your church.
An employer issues a 1099 form to an independent contractor to show the amounts paid during the previous year. For tax purposes, you are employed by your local church. Because you are an employee of the local church, you should not receive a 1099 form. Instead, you should receive a W-2.
3. Know your housing-related exemptions.
Clergy can exempt from gross income any compensation, either in-kind or cash, that they use for housing, including the value of a parsonage and cash received and used for rent, mortgage payments, utilities, furnishings and other home-related expenses. That’s a lot to digest. Let’s break it down.
Housing income can take a variety of forms. It could be in-kind in the form of a parsonage and furniture in a parsonage. It could be cash in the form of a housing allowance that the church pays to you. It might be amounts the church has paid on your behalf, such as amounts paid or allowances given for utilities or for furnishings.
Those other home-related expenses form a broad category, including items such as lawn care, snow removal, carpeting, painting and renovations, small and large appliances, and more.
With all this in mind, know that the total amount of housing exemption is limited to these three factors:
- The amount set by the congregation in a charge conference.
- The fair rental value of the pastor’s fully furnished home with utilities paid in your locale.
- The amount the pastor can substantiate with receipts.
Housing is excluded from income for purposes of income tax, but you must pay self-employment contributions. While this stings, it isn’t as bad as having to pay both income tax on top of self-employment contributions.
4. Adopt an accountable reimbursement policy.
In the past, professional expenses were deductible. Today it’s advised that your church adopt an accountable reimbursement policy at charge conference. This won’t help you with the taxes due April 15, 2021, but it will make things more clear for future years.
An accountable reimbursement policy allows the church to set a budget for what you spend on incurred business expenses on the church’s behalf. For example, if you went and bought a new desk chair, you would submit the receipt and a statement of business purpose to the church. Then, the church would reimburse you out of this set budget. The chair is the church’s property.
Because you’re accounting to the local church instead of the IRS for these expenses, your reimbursements aren’t considered income and, therefore, aren’t taxed or subject to self-employment contributions.
5. Log and track any mileage with the new 2021 rate.
Because of the accountable reimbursement policy mentioned in No. 4, mileage driven solely for “business purposes” can be reimbursed by the local church at a rate set each year by the IRS. The 2021 rate for mileage reimbursements is $.56/mile driven. You must keep a log with start odometer reading, end odometer reading, where you drove and for what business purpose in the log. With that log, the church can reimburse you for those miles driven. However, beware of “commuting miles.” They are not reimbursable by IRS regulation. Any mile you drive from your home to the church (or to the first church on a multi-point charge) is a commute, even if it’s a really long drive. There is a “home office” exception to this rule, but a home office must be established solely for the benefit of the church, NOT the pastor’s convenience (or to make miles reimbursable).
You likely still have questions. Check out Rev. Nate Berneking’s hour-long presentation on clergy taxes, available in our resource library
. If you have further questions, contact Nate at firstname.lastname@example.org