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New Law Makes Sweeping Changes in Ministers’ 2001 Tax Returns

With so many changes in the tax law last year, some ministers might want to employ the services of a CPA or other tax expert for filing their 2001 federal income tax returns.

The passage of the Economic Growth and Tax Relief Reconciliation Act in 2001 featured a $1.35 trillion tax-cut package and makes more than 440 other changes, most of which will be phased in over several years.<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />
Some highlights of these changes include:

  1. Ministers who have permanently opted out of Social Security have until <?xml:namespace prefix = st1 ns = “urn:schemas-microsoft-com:office:smarttags” />April 15, 2002, to revoke this exemption.
  2. A new IRS ruling exempts the minister’s tax-free housing allowance as “compensation” for determining contribution limits to a 403(b) retirement plan. (Note: The constitutionality of this housing allowance is currently under question in the 9th U.S. Circuit Court of Appeals.)
  3. In 2001 a tax court ruled (Swaringer v. Commissioner) that “love gifts” made by churches to their ministers represent taxable compensation for services rendered and could not be considered as tax-free gifts.

Unlike other taxpayers, most ministers in congregational-governed churches have a dual tax status. They are considered employees for federal income tax purposes and self-employed (SECA) for Social Security.
A pastor in a local church is considered an employee, and the church is required to issue the pastor and all other ministerial personnel a W-2 rather than a Form 1099-MISC.However, when the pastor makes guest speaking appearances in other churches, the minister is considered self-employed and that church is required to issue a 1099-MISC. In addition, any honoraria received from individual members in the minister’s home church must be entered on Schedule C under self-employment income.
Since ministers are considered self-employed for Social Security tax purposes, ministers must complete Schedule SE. The only exception is if they have filed a timely exemption application that has been approved by the IRS, which very seldom occurs.
Generally, the IRS recognizes a person as “minister” for federal tax purposes if he or she is ordained or licensed, can baptize, administer the Lord’s Supper, conduct worship, has church management responsibilities and is recognized as a religious leader.
Ministers are exempted from income tax withholding as other employees. However, they must pay their taxes quarterly unless they elect voluntarily for the church to withhold taxes.
Ray Furr is a freelance writer and operates his own communications/marketing business in Poquoson, Va.
An excellent resource for minister taxes is the Church Ministry Resources AnnualChurch and Clergy Tax Guide by Richard Hammar. Order this guide directly over the Web at ICLOnline Resources Webstore