As a person of the cloth, whether you are a Rabbi, a Priest, or a Minister, you have a special tax situation. Anyone who is practicing as a minister, regardless of what title, falls under the Clergy Tax heading, as long as the organization for which you minister is a 501(c)(3) religious organization. It does not matter what religion you practice, as long as you meet the requirements to be considered a member of the clergy, you qualify for special tax conditions.
What makes clergy taxes special?
- Housing Allowance: if the controlling board of the organization specifies a housing allowance as part of the compensation for the pastor of the organization, that housing allowance is not subject to income tax. This means a portion of a Rabbi’s salary might be income-tax free. An allocated amount for the pastor’s housing allowance must be specifically documented. This amount is still subject to self-employment taxes, however, unless the minister has elected out of the Social Security system for religious reasons by completing IRS Form 4361.
- Electing out of Social Security: By completing IRS Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners, a member of the clergy may elect out of the Social Security system. This is not something to be taken lightly and has significant consequences. The filing of this form just for economic purposes is not allowed, and once in effect it can only be revoked by filing IRS Form 2031. Once revoked, it cannot be applied for again.
- Retirement: Retirement can be considered housing allowance, if certain qualifications are met.
- Expenses: Expenses for legitimate costs related to the ministry of the clergyman may be deducted as income tax expenses and may also be used to reduce the self employment tax.
- Estimated Tax Payments: Because many churches and other religious orders do not withhold taxes from ministerial wages, ministers must pay estimated taxes.
- Employment status: Ministers might be employees or they might be self-employed independent contractors. Unlike most other occupations, pastors and other members of the clergy are allowed to choose for themselves. Making the right choice involves a clear understanding of the pros and cons to each option.
We prepare taxes for all pastors all over the country. We have clients in all faiths, denominations, and religions. We prepare taxes for all states, and we work with ex-patriots all over the world. For a free consultation, by phone or in person, contact us now!
