5 Myths About Ministers’ Taxes
By Valerie West
Read Time: 4.5 min
Are you ready for tax season? What if you had more control over your tax outcome than you realized? I'm so happy to tell you that you do, Pastor! And it could mean the difference between owing taxes or receiving a refund.
As I am sure you are aware, many factors influence whether you get a tax refund or owe taxes, and the truth of the matter is many ministers and even tax professionals do not fully understand the unique tax status of ministers. Oftentimes, this can erroneously cost the minister.
For instance, once a minister came to our team and asked that we review his tax return he had completed before submitting it to the IRS.
Because our tax team specializes in ministers' taxes, we discovered an additional $1,200 in his tax refund from deductions he had missed.
Had he not asked us to review his tax return, he would have missed out on an additional $1,200. That's quite a substantial gain.
From our experience in assisting ministers with their tax returns, we found that ministers who end up owing taxes typically do so because of incorrect information received from another minister and, in some instances, a tax professional.
Oftentimes, the incorrect information can be attributed to "myths" surrounding ministers' taxes.
With that being said, let's look at five common myths surrounding ministers' taxes that will help you make wise and well-informed decisions for your taxes.
5 Myths About Ministers' Taxes
Myth 1: "Ministers do not have to pay income taxes."
Ministers are exempt from income tax withholding . . . not from having to pay income taxes. There's a huge difference.
Many ministers misunderstand the fact that their wages as a minister are not subject to income tax withholding.
This leads to the false assumption that they do not have to pay income taxes. Not until it is too late and costly do they realize the gravity of their mistake.
Since ministers have a dual tax status, ministers are responsible for withholding and paying their own taxes. As a minister, you can pay your taxes in quarterly installments using Form 1040-ES, Estimated Tax for Individuals.
Did you know that if you want your church to withhold and pay your income taxes like a non-ministerial employee, you can do so, but you must enter into a voluntary withholding agreement with the church? If you haven't done so and would like more information, please let us know by calling 770-638-3444. We are happy to help walk you through that process or click on the article listed below.
Myth 2: "Love offerings are not taxable income."
The confusion surrounding love offerings comes primarily because the term love offering implies a gift that is given because of love and respect for the recipient.
In the giver's mind, it may be a gift, while it is compensation in the IRS's mind!
Herein lies the conflict.
IRS Code Section 102(a) says, "Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance."
While the members of the church are truly giving a love offering as a gift, the IRS says it is taxable income because section 102(c)(1) says that "any amount transferred by or for an employer to, or for the benefit of, an employee" shall be treated as gross income.
While the law clearly says that a gift is tax-free, the fact that the gift is given to the church and then given to the Pastor or leader makes it 100% taxable because of section 102(c)(1).
The law makes an exception for a gift given by the church to the Pastor if it is under $25.00.
(Recommended reading: "https://www.startchurch.com/blog/view/name/a-simple-guide-to-giving-love-offerings)
Myth 3: "If I do not have the exact figures for my deductions, then I can just round up or make a best faith estimate."
Deductions should not be in round numbers. Inserting round numbers on a return tells the IRS that you are likely making them up and can increase your chances of being audited. Do your best to keep receipts organized and easily accessible.
(Recommended reading: "3 Huge Tax Benefits for Ministers"
https://www.startchurch.com/blog/view/name/3-huge-tax-benefits-for-ministers)
Myth 4: "If I owe taxes and file an extension, then I will not have to pay the taxes I owe until the extension is due."
The truth is that all money owed to the IRS is due by the annual tax deadline.
The filing deadline for the 2021 tax year is April 18th, 2022.
If you happen to owe taxes and fail to meet the April 18th deadline, then you will be penalized for each month that you are late (even if you have filed an extension using Form 4868).
In general, if you file a tax extension using Form 4868 and think that you may end up owing money for your taxes, it is better to pay the IRS an estimated amount by April 18th than to delay and owe more due to penalties.
If you happen to overpay, the IRS will reimburse you the amount you overpaid.
Myth 5: "Any CPA is a good CPA for ministers."
While there are many knowledgeable and well-intentioned CPAs, not all of them are familiar with the various caveats of taxes for ministers.
A CPA working on taxes for ministers should be well versed on the subject and be familiar with nonprofit tax law because many of the tax benefits afforded to a minister are directly tied to a minister's ordination.
For example, IRS Publication 517 explains various rules regarding the tax status of ministers, and within this publication, it defines a minister as:
"[I]ndividuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination." [emphasis added]
With this definition in mind, your chosen CPA should have a working knowledge of nonprofit tax law and how it relates specifically to you as a minister.
(Recommended reading: "Are You Sure Your Ordination is Legal?")
Pastor, it's imperative you utilize a tax preparer who has experience completing ministers' tax returns.
Wouldn't you like to know that you are taking advantage of every tax benefit available to you as a minister? You can, with confidence, trust that our team is here to help you navigate this tax season with ease. You can learn more about our minister's tax return service here.
We would love to give you a FREE ebook, "3 Ways To Make The Most Of Your Taxes"! Please give us a call at 770-638-3444 or click the link below to schedule a call to claim your copy today!
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