3 Ways Ministers Can Make the Most of Their Taxes

By Raul Rivera

Every year, thousands of ministers overpay on their taxes because they are not aware of the special IRS tax rules for ministers. This is also attributed to the fact that many tax professionals are unfamiliar with the uniqueness of ministers’ taxes.

It may be hard to believe, but the current tax code still favors ministers when it comes to their tax liability. The laws within the tax code, however, only favor ministers who are aware of these special rules.

To help show you what I mean, I want to tell you the story of two ministers who had very similar circumstances, but very different outcomes when it came to their taxes.

Two ministers, similar circumstances, different tax outcomes

Both ministers in this story earned a salary of $55,000 from their churches, and each minister was married with four kids. Yet, each minister had very different results on his tax return (as shown below).

1. Minister 1 ($55,000 salary & 4 kids) = taxes owed $5,875*
2. Minister 2 ($55,000 salary & 4 kids) = tax refund of $9,167*

How can two ministers with the same amount of income and dependents have completely different tax returns?

Here’s how:

• Minister 1 did not have a properly established housing allowance, nor was he exempt from self-employment taxes.
• Minister 2, on the other hand, had established his housing allowance using the method we teach at our conferences, and he combined it with his self-employment tax exemption.

Do you maximize these pastoral tax benefits?

Many ministers are unaware that when they combine their housing allowance and self-employment tax exemption benefits, the results are huge tax savings and refundable tax credits. 

In fact, the second minister received a $9,167 refund even though he did not have any taxes withheld. In other words, he kept 100% of his paycheck with no withholdings and still received a $9,167 refund. 

Let me show you the difference between the two ministers.

1. Minister 1, after paying his tax bill on a $55,000 salary, ended up with $49,125 in his pocket.
2. Minister 2, after doing his tax return on a $55,000 salary, ended up with $64,167.

Let those numbers sink in for a minute.

Minister 2 ended up with $15,042 more than Minister 1. After two years, his savings results in $30,084, and after five years, it is $75,210. In essence, he could pay off his house, car, or children’s college tuition. 

For the ministers who take advantage of these tax benefits, this is like getting a big raise. Unfortunately, this is not the reality for many ministers because the tax preparers they hire are not familiar with these tax privileges.

The top three tax privileges and deductions for ministers

1. Minister’s housing allowance

Maximizing your housing allowance takes some planning and careful documentation upfront. Once you have done the hard work on the front end, it becomes quite simple to manage each year.

The key to maximizing your housing allowance is to set it up as a designation of salary and not as an additional part of your salary. At our conferences, we provide a detailed teaching on the StartCHURCH way of establishing the housing allowance.

(Recommended reading: “3 Things Every Minister Should Know About Housing Allowance”)

2. Secure your self-employment tax exemption

This is a big one.

Over the last several years, many of the tax professionals with which I have spoken were not familiar with the rules concerning the self-employment tax exemption afforded to ordained ministers.

To the surprise of many ministers, one can apply for an exemption from paying the 15.3% self-employment tax without losing Social Security benefits already earned.

Using the example of the two ministers who both made $55,000 per year, we can see that an exemption from having to pay the self-employment tax means a tax savings of more than $8,000 because of the Earned Income Credit (EIC) rules that apply. 

That is huge! 

Once the majority of ministers gain a proper understanding of the term “public insurance,” they will easily qualify for the self-employment tax exemption

(Recommended reading: “4 Reasons Why Ministers Should Opt-Out of Social Security”)

3. Deduct business miles from your home

For ministers who do not have self-employment tax exemption, this is the next best thing. Did you know that if you meet certain requirements, you are able to deduct mileage from your home to the church office?

From our experience in helping thousands of ministers with their tax returns, this is the deduction that many ministers do not know exists.

In Revenue Ruling 99-7, the IRS ruled that travel between your home office and the church office (or other ministry-related travel) is a deductible expense. When 100% of all your miles from your home office to your church office are deductible, it lowers your self-employment tax.

(Recommended reading: “Is Your Home Office Deduction Legal?”)

Finding the right tax preparer for ministers

Oftentimes, when filing taxes, a minister will utilize the services of someone who has “done taxes before”. However, the tax service provider has never completed a tax return for a minister or has only minimal experience with ministerial tax returns.

As a result, the tax preparer is not familiar with the tax benefits afforded to ministers nor with properly accounting for these benefits in taxes. In many instances, the minister ends up “leaving money on the table” or owing money like Minister 1 in our example above.

This is why it is imperative that every minister utilize the services of a tax preparer who has experience completing tax returns for ministers.

Over the years, we have served thousands of pastors with their personal income tax returns through our minister's tax service. Our experienced CPAs/accountants know taxes for churches and ministers. 

With our minister’s tax return service you can confidently know that you are taking advantage of every tax benefit available to you as a minister. I encourage you to give us a call at 877-494-4655 to find out more about how we are able to serve you.

Recommended blogs for you:

• “6 Church Fundraising Ideas That Work”
• “Do You Know How to Pay Guest Speakers”
• “Starting a Church? Avoid These Three Mistakes”

Disclaimer:

*Please note that the story of the two ministers in this blog is intend to serve only as an example. The numbers used are estimates and may not reflect changes from the Tax Cuts and Jobs Act.

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