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Tax Season Tips for Clergy

January 29th was the official start of the 2024 tax filing season. For some there will be weeping and gnashing of teeth, but for others a sigh of relief! The big change this year, due to inflation, is the standard deduction has increased to $14,600 for singles, $21,900 for heads of households and $29,200 for married couples filing jointly.

Clergy dual tax status—employee of church for federal income tax and self-employed for Social Security and Medicare taxes—creates unique challenges when it comes to things like self-employment tax payments, estimated tax payments, housing allowances or exclusions and reimbursed expenses. Some tax preparers may not understand the unique situation of clergy, but finding one who does, or self-preparing your taxes, can save money and reduce audit risk.

Jesus told the Pharisees to “Render to Caesar the things that are Caesar’s, and to God the things that are God’s” (Mark 12:17). Elsewhere, Jesus provides temple tax money for both Himself and Peter (Matt. 17:24–27). Paying taxes is never fun, but required. Paying taxes with integrity is both a witness to the world and a means of loving our neighbor. These tax tips will help clergy reduce stress, maximize their income and minimize the total tax they render to the IRS.

Tip 1: Compensation Package 

  • Clergy should know the amount of their cash salary, housing allowance, reimbursable account, HealthFlex insurance plans, pension and United Methodist Personal Investment Plan (UMPIP) contributions.
  • There are three types of clergy income: (1) Salary reported in Box 1 of W-2; (2) Housing-Related reported in Box 14 of W-2; and (3) Honoraria/Self-Employment reported on Schedule C.
  • Clergy should receive a W-2—not a 1099—from their employer reporting salary, housing allowance and UMPIP contributions.

Tip 2: Employment Status

  • Clergy working for churches are treated differently than other employees when it comes to tax withholding.
  • Clergy are considered employees for income tax and self-employed for the various social insurance taxes.
  • Instead of paying half (7.65%) of the 15.3% FICA tax, clergy are responsible for paying the whole 15.3%.
  • SECA tax on their income and housing allowance in addition to local, state and federal taxes.
    SECA tax should not be withheld from clergy’s pay on boxes 3, 4, 5 and 6 on their W-2.
  • It is illegal for churches to withhold and pay FICA taxes for clergy employees.

Tip 3: Housing Allowance

  • The amount of the housing allowance must be determined in advance and designated as a housing payment by the church. Clergy pay self-employment taxes on their housing allowance.
  • The Fair Rental Value (FRV) of a parsonage (including utilities) is automatically excluded from income before federal income tax is calculated.
  • Clergy should always designate an additional housing allowance to cover the cost of the “stuff” that goes inside the parsonage.
  • Instead of a parsonage, the church designates a housing allowance for clergy to spend on their own housing expenses. The amount excluded from income is the lowest of (1) the predetermined housing allowance, (2) the actual amount spent on housing or (3) the fair market rental value of your home.

Tip 4: Honoraria

  • Clergy perform duties outside of their normal work (e.g., teaching classes, speaking at conferences or officiating at weddings and funerals).
  • If anyone compensates clergy for time or services, that is taxable income.
  •  If the amount is $600 or more, they’ll receive a 1099-MISC or 1099-NEC.
  • There are two possible places for clergy to report this income on their taxes. As a general rule, if it’s a one-time thing and for a minimal amount, it belongs on Schedule 1. If it’s a regular part of their job, it belongs on Schedule C.
  • All honoraria are self-employment income for the self-employment tax.

Tip 5: Reduce Taxable Income

  • Charitable donations.
  • Correctly calculate housing allowance.
  • Track and deduct “ordinary and necessary” business expenses.
  • Contribute more than the match to the United Methodist Personal Investment Plan
  • Set aside money on a pre-tax basis in a Flexible Spending Account and/or Dependent Care FSA, Health Saving Account to pay for qualified medical and dependent care expenses.

It is imperative for clergy to track and document all business expenses related to their work during the year. Clergy can deduct those on Schedule C. Always remember the 5 W’s of Documentation: (1) Who; (2) What; (3) When; (4) Where; and (5) Why!

Following these tax tips will help clergy reduce stress, maximize their income and minimize the taxable income they render to the IRS!

Rev. Cary James, Jr
Pastor, Jones Memorial UMC, Washington, DC

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