The Pastor's Guide to Taxes and the IRS (Updated for 2018 Tax Laws!)
What's Different About Tax Preparation for Pastors?
Tax preparation for pastors is unlike tax preparation for anyone else - church members, nonmembers, even lay church workers. A pastor has church-related factors and special tax issues to consider.
When a pastor moves to be closer to a church, their relocation expenses are not tax deductible. If the church pays relocation fees, this is considered taxable income.
A pastor’s housing allowance is subject to SS/FICA tax, but not income tax. If excess housing allowance is taken, it must be allocated as income.
A pastor may be unclear about their personal tax bracket due to additional taxable income from relocation, housing, and services such as performing marriages, baptisms, and funerals.
How The 2018 Tax Law Impacted Pastors & Clergy
With the 2018 tax changes, the standard deduction is up by between $150 and $300 depending on filing status. This means congregation members may be less tempted to itemize, which could reduce giving to churches. For pastors and clergy members themselves, it may change the decision to itemize too.
Pastors may be confused about what tax rate they pay because the tax brackets shifted slightly in 2018. Many clergy members are finding that their tax rate isn’t what they’d expected and they will end up with less money as a result.
Before the 2018 tax reform, the church bore the responsibility of seeking the benefits of tax programs. However, this is no longer the case. It is now up to the individual clergy member.
Tax Strategies for Clergy
Accountable Reimbursement Plans
An accountable plan for reimbursement follows IRS regulations to make sure everything is accounted for correctly on a clergy member’s tax return. For the church, the accountable plan can also protect tax-free money. The church can reduce taxable income to account for a pastor’s out of pocket costs up front, then determine what’s included on the accountable plan.
QSEHRA stands for qualified self-employment health reimbursement arrangement. Churches often use these plans in place of benefits like health insurance. Gross wages are reduced but the pastor is still reimbursed. If you pursue this approach, it must be used across the board for all full-time employees of the church.
A pastor can be given an allowance from the church for housing, and any extra that is unused at the end of the year is considered income. If there are multiple homes involved, the pastor will need to designate one as a primary home. There are also some considerations about SS/FICA tax and Social Security, so work with a tax advisor to ensure you’re getting the details right.
Should churches pay payroll taxes for pastors?
A pastor typically pays their own payroll taxes as if they were self-employed. Since they have dual status as self-employed and as an employee of the church, a church’s pastor would receive a W-2 at the end of the year to show the income they’ve received. But the church should not withhold FICA payroll tax from the pastor’s income because pastors pay SECA, or self-employment tax, instead.
Should we hire an in-house finance administrator to handle payroll or outsource church finance management?
It’s risky to entrust your church’s financial management to an in-house clerk or volunteer. Although they may have the best of intentions - and may even have an accounting background - church finances and taxes are very complex. The laws change constantly, including a set of new tax laws that just took effect in 2018.
At Ascension CPA, we’ve fixed mistakes from Quickbooks and tax preparation companies that got it all wrong. Instead of taking the risk of doing your tax returns and financial management in-house, you can trust Ascension CPA to get it right the first time, and every time.
Should a pastor be a church employee or an independent contractor?
A pastor has a unique dual tax status. While they can be considered an employee of a church, for federal income tax purposes a pastor is considered self-employed by the IRS. Some pastors are considered independent contractors if they aren’t affiliated with one specific church, like traveling evangelists.
- How The 2018 Tax Law Changes Impact Pastors Clergy
- 5 money Saving Tax Strategies for Clergy
- Churches Payroll Taxes. To Pay or Not to Pay.
- Tax Preparation for Pastors
What's the best way to account for income from guest speaking engagements?
If the speaking engagement happens outside the church and isn’t directly affiliated with the church, it’s considered actually income as an independent contractor. The pastor would follow independent contractor rules.
However, if the speaking engagement is part of regular church service, it would be considered part of the pastor's main employment income for the church. The church would provide a W-2 for this income, without FICA. The pastor would account for their income as a self-employed worker and pay self-employment taxes.
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