by Jo Ann McNaught, CPA
June 17, 2005
Are clergy employees or self-employed? The answer to that question is “yes." You are both! And this is the single most unique aspect of United Methodist clergy taxes. (It is not true of all denominations.) I know of no other occupation in which this is the case.
United Methodist clergy are employees for INCOME TAX purposes.
ALL clergy are self-employed for SOCIAL SECURITY TAX purposes.
The second most unique aspect of clergy taxes concerns FREE HOUSING—a distinct benefit!! However, it’s only free for INCOME TAX purposes. It is fully taxable for SOCIAL SECURITY (SELF-EMPLOYMENT) TAX purposes. There are limitations to the amount that is free from income tax. That which is free is the least of these three things:
(1) the amount of the housing allowance,
(2) the amount of actual expenses—you can’t include food and servants!
(3) the fair rental value of the house.
You never deduct housing expenses on your tax return. They are excluded from your income, therefore they are not reported. But keeping records to substantiate the expenses is very important.
If your housing allowance exceeds the amount you can exclude, you keep the money and report it as “other income” on your tax return. You cannot deduct more expenses than the amount of your allowance. BE SURE IT IS HIGH ENOUGH.
Some things reduce both INCOME TAX and SELF-EMPLOYMENT TAX: The amount you have withheld from your salary to contribute to your PIP (pension); and the amount you have withheld for the cafeteria plan for insurance premiums, dependent care, or medical reimbursement. Both these amounts are excluded from your income, i.e. not reported or deducted.
The cafeteria plan is a “use it or lose it” item. BE SURE IT IS NOT TOO HIGH.
What about BUSINESS EXPENSES?
Without an accountable reimbursement plan:
For INCOME TAX: They are not deductible at all unless you itemize deductions on Schedule A, and then only to the extent that they exceed 2% of your and your spouse’s combined adjusted gross income. Other reductions also apply: You can only claim 80% of meal expenses; and your total business expenses must be proportionally reduced for that part of your total income that is exempt from income tax, i.e. your housing exclusion.
For SELF-EMPLOYMENT TAX: All your expenses are deductible with the exception of the 20% reduction of meal expenses.
With an accountable reimbursement plan: You account to your church instead of the IRS for your business expenses—with the same substantiation requirements as if it were the IRS. It is not income to you and is not reported to the IRS. It is a “use it or lose it” item. BE SURE IT IS NOT TOO HIGH.
The business expenses that are not reimbursed are treated like any others that are not part of an accountable reimbursement plan.
Note for either situation: The standard IRS business mileage rate for 2005 is 40.5 cents per mile.
WHAT ABOUT MY TITHE?
It IS a contribution, just like all the other people in your congregation, deductible only if you itemize deductions on Schedule A—just like all the other people in your congregation.
It IS NOT a “business expense”.
You may choose to have the treasurer withhold it from your paycheck. That is only a convenience for you and DOES NOT exclude it from your reportable salary.
HOW DO I PAY MY TAXES? The standard manner for paying taxes is to personally make quarterly tax deposits—like other self-employed persons do. If it is agreeable with both the minister and the church agree to it, taxes may be withheld and paid in along with other employees of the church. The amount to be withheld should also be determined by agreement. No FICA or Medicare should be paid on the minister’s salary. (Remember, ministers are subject to self-employment tax for Social Security purposes.)
NEED MORE INFORMATION? Check the website for the General Council on Finance and Administration of the United Methodist Church: http://www.umc.org/gcfa
And whatever else you do, be sure to establish a good working relationship with your church treasurer. She/he carries a heavy responsibility and is usually a volunteer.
One last word: The treasurer’s office does not give tax advice. For answers to specific personal situations, consult a tax advisor.