How Can I Enter a Minister/Clergy Member Tax Return on ProWeb?
Those commissioned, licensed or ordained by a Church are referred to as Ministers. The word church has been used to refer to all religions. Form W-2 is used to report the compensation which the ministers or clergy members employed by the church receive. Form 1099-NEC on the other hand, reports compensation paid to ministers for performing services such as baptisms and weddings. It is possible for a minister or a member of the Clergy to receive the two forms.
Almost all Ministers get the dual-status taxpayer's treatment:
- For Purposes of Income Tax, they are Employees
- For Purposes of Social Security and Medicare tax, they are self-employed
Ministers' Federal Taxes cannot be Withheld. Acting on the Ministers' instructions, to cover any SE taxes and Income, employers may withhold the Ministers' taxes.
Form W-2 Box 2 holds the information about all withheld tax, referring to it as federal income tax withheld. The minister must complete a Schedule SE using their worksheet to calculate the taxable amount of their income in the event that Boxes 3-6 of Form W-2 are not filled.
When a minister receives Form 1099-NEC as well as income received by the minister from self employment are reported on Schedule C. Out-of-pocket expenses incurred by the minister in relation to this income are also reported on Schedule C.
To calculate SE tax on W-2 wages of the minister as well as parsonage and utilities allowance, Schedule SE must be completed. The minister or member of clergy can file Form 4361 and Form 4029 and have them approved by the IRS to be exempted from paying SE tax. This is the only way of avoiding the SE tax.
To enter the minister’s income on Schedule C in the Taxx Savage ProWeb:
- Go to the Federal Section of a tax return (Form 1040)
- Select Income
- Then Select Profit or Loss from Business
- Proceed to +Add a Schedule C Income from Business
- From there, show for whom the Schedule C is for a MFJ return
- Enter the required information appropriately. This includes the name, employer ID number and address.
- Key in the Principal Business Code. The IRS uses this code to classify types of businesses. Generally, for ministers, it is 813000 (Religious).
- To move to the Questions menu, click Continue. Here, show the method for accounting and if need be, show the method for inventory valuation then mark the other checkboxes appropriately. Ensure that you mark the box for “Check here to Prorate Expenses for Minister/Clergy.”
- To proceed to the Clergy Tax-Free Income Worksheet, click Continue.
- Once in the Clergy Tax-Free Income Worksheet, complete it.
- In the appropriate field, enter the W-2 Box 1 minister income
- Key in the minister’s income reported on Schedule C
- Check the box for parsonage incase the Church provided the minister with it
- Amounts for fair rental value for the home of the minister, the utilities as well as the allowances received by the minister are to be entered. All these are required in the calculation of the percentage of tax-free income after which that amount that has been calculated will be taken to the SE tax line of Form 1040.
- Once you have completed the worksheet, go back to the Schedule C edit menu. Here, enter the non W-2 income from the extra services performed by the minister. All the expenses related to income received by the minister but have not been included in W-2 income must also be entered. It is on the basis of the percentage of the tax-free income that the expenses are to be prorated. All this information flows to Schedule SE.
Once you create Schedule C, Schedule SE will automatically be created. There are a few situations though, that may require editing:
- To show that the taxpayer has Form 4029 or 4361 approved
- To show that the taxpayer has notary income which is exempted from self-employment tax
- To show that the taxpayer differs half the SE tax payment, for tax year 2020
From the Federal Section of the Tax Return (Form 1040), you can directly edit Schedule SE:
- Select Other Taxes
- Go to Self Employment Tax
- For a MFJ return, select Schedule SE for the taxpayer or their spouse as ,may be appropriate
- Indicate that the taxpayer has Forms 4029 or 4361 exemption approved under the Religious and Exempt Income if at all they do have them. The taxpayer usually has a copy of the approved form.
Minister’s Income Tax vs. SE Tax
|
Income Tax |
SE Tax |
|
|
Parsonage Given to A Minister |
There is an exclusion of the home value including utilities. The exclusion should not exceed the reasonable pay the minister gets from their services. |
Gross income is required in calculating SE tax. Included in the Gross Income is the home’s fair rental value which includes the cost of utilities. |
|
Housing Allowance Paid To A Minister |
The smallest of the following can be excluded from income by the Minister:
Box 14 of Form W-2 is used to report housing allowance. Taxable Wages in box 1 are not inclusive of the Housing Allowances. Should the amount to be excluded from income by the minister be lower than the housing allowance, you should report the excess as income on Line 7 of Form 1040. |
When calculating the SE tax, the whole housing allowance, inclusive of utilities’ allowance, is added to the gross income. |
|
Retired Minister |
The following can be excluded from taxable Income of a retired minister:
|
The Minister’s housing allowance nd the housing provided to them are not subject to SE tax |
Independent contractor vs. Employee
The IRS applies the same common law rules applied to other taxpayers in order to determine ministers who are employees and those who are independent contractors. Ministers who receive salaries from congregations that employ them are regarded as employees. Ministers who are independent contractors are considered to be fw by the IRS. For instance, travelling evangelists. A minister may be an employee eligible to receive Form W-2 instead of Form 1099-NEC.
Earned Income Credit (EIC)
To find a minister’s earned income, take the net self-employment income and from it, take away a half of self employment tax together with any wages that are non-ministerial. Parsonage allowance is also included in Earned income.
Parsonage Allowance
These are subject to SE tax and not income tax.
Fair Rental Value
Fair Rental Value is determined by the facts and circumstances of the local market. There are no guidelines set by the IRS for calculating fair rental value.
Surviving Spouse
Unless received for ministerial services performed, a minister’s surviving spouse is not allowed to exclude a parsonage allowance from income.
Exemptions From Self-Employment Tax and Social Security Tax
Ministers and members of the religious order can make requests for exemption from SE tax provided that they belong to a recognized religious group, do not take a vow of poverty or christian science practitioners. Due to religious beliefs and principles, the taxpayer should be opposed to public insurance in a conscientious manner. For more information, check out Publication 517.
Vow of Poverty
An exemption is made for the Members of the religious orders so that they do not pay SE tax on income from qualified services when they take a vow of poverty. In such circumstances, their income is considered that of the religious order.
Church Employees Other Than Ministers
Employees of Churches as well as qualified church-managed organisations opposed to payment of Social Security and Medicare taxes due to religious reasons can be excluded from FICA coverage by those churches and organizations. If wages exceed $108.28 then the employees will be required to pay SE tax. Wages are reported on Schedule SE.
Note: this is not tax advice but a guide to entering clergy information into the Taxx Savage ProWeb.
More Information:
IRS: Publication 15-A - Employer's Supplemental Tax Guide
IRS: Tax Topic 417 - Earnings for Clergy
IRS: Pub 529 - Miscellaneous Deductions
IRS: Pub 535 - Business Expenses