Frequently Asked Questions
- Can't I just use Turbo Tax or similar product to do my tax return? There are many specialized IRS rules governing ministers and many of the online tools don't ask the correct questions. Using this online tools may save you a few dollars in tax preparation fees, but make you miss some important deductions that could cost you a whole lot more. Our rates are quite reasonable and we will answer your tax questions, plus handle any IRS questions.
- Am I an employee or self-employed? According to the legal case of Weber vs. The Commissioner in 1995, ministers are employees for everything except social security taxes. Therefore, they should receive a W-2 form. The ruling was based primarily on the fact that ministers receive paid vacation and health insurance and pension which a true self-employed person would never receive.
- Can an Accountable Reimbursement plan (ARP) help? Definitely! The main difference between filing as an employee and as self-employed is the business expense deduction. If you put your business expenses on the tax return as an employee, then you have to place them on Schedule A subject to two deductions: one a 2% of your adjusted gross income, the other a larger percentage depending on the amount of your housing allowance related to your salary. You could wind up claiming NO business expense deduction for your federal and state taxes. They are still eligible to come off of your social security taxes.
- Is an ARP plan a use it or lose it plan? No. The unused portion can be carried over to the first three months of the next year. It CANNOT be paid out to the minister at the end of the year as regular income.
- Is the IRS really targeting ministers tax returns? Not any more so than most other groups. About 1% of ministers are audited each year. Most ministers do not make a large enough income to be cost effective for the IRS to audit large numbers of them.
- Is it a good thing to opt out of social security? I get asked this question a lot. The best way to answer this is to say that social security covers medicare, life insurance, disability insurance, and retirement. If you opt out and spend all the extra cash on Hawaii trips then you will be in big trouble. If you take the saved money and invest it in life insurance, disability insurance, and pension, then you might come out ok. However, keep in mind medicare. You can still buy medicare even if you have opted out of social security but it is much more expensive. If you are second career or bi-vocational you may already have your 40 quarters in to be eligible for medicare.
- Can you change a housing allowance during the year? Yes you can. The new housing allowance can only be used for the rest of the year and is not retroactive to the first of the year. The earlier housing allowance would cover the earlier part of the year.
- Do churches get audited? Not usually. In fact, I don’t know of a single specific church that was audited.
- Can churches lose their tax exempt status? Ah, so you got those ads in the mail too. The only churches that are losing their tax-exempt status are those that probably should not have had it in the first place. Have you ever seen the ads that say for $50 you can become a bishop in the _________ church? (If you can call those a church). Those are the churches losing their status.
- Was Matthew really a tax collector? Yes. Just goes to show you that anybody can turn over a new leaf, even IRS people. (That was tongue in cheek folks)
- Do I have to pay estimated taxes or can my church withhold? Churches can withhold the taxes so that a minister does not have to send in quarterly payments. However, when the money is sent in by the church it is all sent in as federal and state taxes. The church does NOT send in social security money.
Hints and Suggestions
1. Make sure your social security numbers are correct. This is one of the major mistakes on a tax return.
2. Make sure the estimated payments on your tax return are actually what you mailed to the IRS. This is the most common mistake I see ministers make.
3. Remember the child credit.
4. Send in a change of address form to the IRS when you move.
5. Send in a change of name form to the Social Security Administration when you change your name (such as when you get married).
6. Make sure your treasurer has only filled in one copy of the W-2 (there are two to a page) with the same information. The IRS will think you made twice what you really made if you fill in both copies.
7. Make checks payable to United States Treasury (not IRS).
8. Make sure your housing allowance is set BEFORE January 1. Set your parsonage exclusion amount high enough that you will not surpass it. Whatever you do not spend just counts as ordinary income.