Try Googling your church’s tax issues, and you’ll find lots of misleading information. It’s a unique tax niche. You’ll find confusing and contradictory advice from plenty of unreliable sources.
At Ascension CPA, we have heard from pastors and churches who have tried to file their taxes properly, only to discover later that everything was done incorrectly. Sometimes a well-meaning church member or clerk just doesn’t get it right.
With this in mind, we’re providing this how-to guide to understanding new tax law changes and how they will affect filing for pastors and clergy.
Church Giving May Go Down
First, let’s look at the tax impact of giving. As people decide how much to tithe, their personal finances are always at the backs of their minds.
Looking at 2018 versus 2017, the standard deductions went from: Single Filers $6,350 to $12,000, Married Filing Joint $12,700 to $24,000. This means they might be less tempted to itemize; itemizing tends to benefit churches and charitable organizations.
When it’s time to pass the collection plate, people may give less due to uncertainty about taxes, the economy, and politics. These are factors that tend to make people feel hesitant to give.
Relocation Expenses Are Not Tax Deductible
When a pastor changes churches, it has a tax impact for them personally and for the churches involved. The pastor’s income may change. Relocation costs may be unclear. This matters at tax time.
Keep this in mind: Relocation expenses are not tax deductible. If the church pays for a pastor to relocate, this is taxable income. It’s viewed as a bonus to the pastor’s pay, and taxes must be paid on it.
Pastor Housing Can Be Tricky
Pastors are typically given an allowance from the church for housing. At the end of the year, if the pastor has taken more housing allowance than actually needed, the extra money must be allocated as income.
Of course, this gets tricky when a house is paid off, for example. Or if there are multiple homes involved, the pastor will need to designate a primary home to associate with housing expenses.
Contrary to what most pastors believe, their housing allowance is not 100% tax free. It is still subject to SS/Medicare (or FICA) tax. This can create a huge tax burden. Consult a tax advisor to sort through this challenging issue.
Payroll Problems Plague Churches
At U.S. churches, payroll problems are quite common. Many churches don’t handle payroll correctly and are at risk of getting into trouble with the IRS.
Ministers have a dual-status, meaning they are considered employees for federal and state income tax purposes but self-employed for Social Security and Medicare. Sometimes a church official performs ministerial services like marriages, baptisms, and funerals, and doesn’t realize they are supposed to be paying income tax.
If the IRS determines that there has been a misstatement of income, watch out. They can go back years into the past to determine what is owed - although if it is not a misstatement of income, the IRS has a time limit of 3 years.
Tax Brackets Are All New
When new tax laws were introduced in 2018, the tax brackets were adjusted. This includes the clergy and every other American.
For a pastor, this can cause confusion and financial strain. Clergy members often find that the new tax brackets aren’t what they’d hoped, and they’re going to end up with less money in the long run. Check the tax brackets to be sure.
A List of Important Things to Know
Prior to tax reform in 2018, the individual clergy members bore the responsibility of getting the benefit of tax programs. However, this is no longer the case for the new tax year. It is up to the church.
Here are some things to keep in mind:
Have an accountable plan.
An accountable plan allows pastors to be reimbursed for their out of pocket expenses. With the 2018 tax reform, individuals can no longer claim unreimbursed business expenses. This means that when there’s no accountable plan, there’s no tax free reimbursement. Accountable plans should be considered when generating the pastors compensation package. Additionally, the church needs to determine what all can be reimbursed when creating the accountable plan.
Create a Schedule C.
File form Schedule C (1040) for expenses that occur outside of church, like speaking engagements. Track all related expenses. Make sure the 1099 reflects money earned, not passed through. If the 1099 also includes expenses paid on your behalf, then those expenses need to be reported to reduce taxable income.
Use a QSEHRA.
This stands for qualified self-employment health reimbursement arrangement, and churches can use it in place of benefits. It works much like an accountable plan; it’s something that should be included in a pastor’s compensation package if the church doesn’t offer benefits.
Familiarize yourself with Form 4361.
Form 4361 is the Application for Exemption From Self-Employment Tax for Use By Ministers, Members of Religious Orders and Christian Science Practitioners.
Incorporate retirement planning.
Remember, retirement planning can reduce the taxable income for a clergy member.
And one final reminder for churches: It’s important to always be 100% certain that the IRS considers your church to be a tax-exempt organization and that you have filled out all of the proper paperwork.
How Ascension Can Help
Ascension CPA has experience helping churches and clergy members with tax filing and advice. The founders, Jamie Ward and Cassidi Heltcel, both have first hand experience with the complexities of clergy taxes.
Jamie was in the ministry and grew up in a pastor’s home, seeing firsthand how taxes impact the clergy. Cassidi is married to a youth pastor and has done extensive research into church taxes as she’s personally invested in the topic.
At Ascension, many of our personal friends are in the ministry and have asked us to handle their taxes.
While you can accomplish a lot in QuickBooks, you’ll need to understand the most current tax laws to ensure it is set up properly. You can't rely on QuickBooks support to be fully versed on the tax code. Additionally, the national tax preparation chains are ill-equipped to help such a specialized niche.
Ascension CPA is a full-service Oklahoma Public Accounting firm that handles accounting, bookkeeping, payroll, planning, and more. We can help you understand clergy taxes and make it much easier to run your church.