7 Big Mistakes Ministers Make with Their Taxes

By Raul Rivera

Filing taxes can be a daunting task for anyone.

Ministers’ taxes can especially be daunting because if churches do not properly handle the ministers’ compensation and taxes, then ministers can end up paying more taxes than the average taxpayer.

Ministers can avoid paying more in taxes by simply avoiding common tax mistakes.

Our tax team has been able to identify common mistakes that are recurring themes when it comes to ministers’ taxes. I want to share with you those mistakes so that you may avoid them, and the associated consequences, when you file your taxes. 

Ministers’ tax mistakes to avoid

Mistake #1: Faulty housing allowance deduction claims

Ministers are often under the impression that they can claim as a housing allowance whatever amount was initially approved by their board of directors. Yet, according to the IRS, the amount that you are allowed to claim as a housing allowance is the lesser of the following:  

• The fair market rental value of your home.  
• The actual cost of providing and living in your home.

Since your housing allowance deduction is based on the lesser of these factors, it is important that you maintain and keep track of all of your housing expenses for the year.

Not tracking these expenses may lead to a minister claiming more of a housing allowance than what he/she can claim, and can end up being more costly in the end.

There is a way to make sure you are maximizing your housing allowance. We teach on it at all of our conferences, and if you’d like to learn about it check out the link below.

Mistake #2: Failure to pay social security tax on the designated housing allowance

As a minister, if you have not “opted-out” of self-employment tax, then your designated housing allowance is still subject to the 15.3% social security tax.

Consider the following example.

Minister Tom earns an annual salary of $40,000.00 from his church and $20,000.00 of his annual salary is designated as a housing allowance. From this we know that $20,000.00 of his annual salary of $40,000.00 is exempt from income tax since it has been approved as a housing allowance. However, Minister Tom has not taken the proper steps to “opt-out” of paying the social security tax. Therefore, Minister Tom must withhold and pay the 15.3% social security tax on his full salary amount of $40,000.00, which would be $6,120.00.  

Important note: If you have filed Form 4361 with the IRS to “opt-out” of paying the social security tax and your approval is still pending, then you must still pay the 15.3% tax. Once your approval comes through, you may amend your tax return and get that money back from the IRS.

Mistake #3: Misunderstanding of the home office deduction 

Do you know that your home office can be used as a tax deduction?

According to Internal Revenue Code §280A and IRS Publication 587, in order for you to be eligible for the home office deduction, there are four requirements that you must meet. 

We discuss these four requirements in a previous blog post, but I will list and summarize them below. 

1. Exclusive use - The area of the home must be used only for trade or business. It cannot be used for any other purpose.
2. Regular basis - The specific area of your home must be used on a regular basis for business use. 
3. Convenience of the employer - This means that the home office must do more than make the employee’s job easier. The employee’s home office must be essential to the performance of his/her job.
4. Principle place of business - The home must be the principle place of business. Furthermore, the home will qualify as the principle place of business if there is no other fixed location where administrative tasks are substantially conducted. 

Mistake #4: Filing two income tax returns 

It is not uncommon for ministers of smaller churches or new church plants to be bi-vocational. Receiving some compensation from the church and some from an outside place of employment can, however, lead to some confusion during tax season.

Due to the nuances associated with ministers’ taxes, it is easy to see why some ministers believe they need to file two income tax returns. However, if you receive two Form W-2s, one from the church and another from a different employer, it does not mean you need to file two tax returns.

In short, you should only file one tax return for each tax year, no matter how many sources of income you have.  

(Recommended reading: "Do I Report the Housing Allowance on my Tax Return?")

Mistake #5: Spouses each filing tax returns as head of household

How you choose to file your taxes matters. This is especially so if you and your spouse work and need to file taxes.

In general, if you are married, then you and your spouse will either choose to file individual tax returns or choose to file a joint tax return. 

If you decide to file separate tax returns, then it is important to know that only one of you can claim head of household. In addition, if you have children, then only one of you will be able to claim them as dependents and receive the child tax credit.

It is imperative to know that filing two tax returns per family as head of houshold in an effort to get additional tax benefits is a fraudulent act. If caught by the IRS, the taxpayers may be convicted of fraud and incur penalties and prosecution. 

Mistake #6: Your child in college files his/her own tax return without your knowledge 

If you have children in college, then this is something to be mindful of.

We have seen ministers surprised to learn that a child in college filed an advance tax return claiming his/her self.

When this occurs (without your knowledge) your exemptions become incorrect and other problems arise, such as your tax return is rejected because your child filed his/her own tax return in order to get a refund for spring break.

Therefore, if you have children in college and you plan on claiming them as dependents, then it would be wise to have a conversation with them to make sure they have not filed their own tax return. 

Mistake #7: Neglecting to send in a 1099 from a brokerage firm

Many pastors have investments in stocks, bonds, and other various investment accounts. Depending on the type of investment, you may receive a 1099 in the mail from that brokerage firm or investment group.

It is important to make sure that you do not neglect to provide your tax professional with the 1099 from a brokerage firm, even if you did not make any money on your stock trading account.

If you have trades, the IRS assumes 100% profit unless you show the transactions on schedule D and reflect the basis of the stocks sold.

Right the wrongs by choosing the right team

In reading this article, perhaps you have identified one or more issues that you have or are facing in completing your tax return. You are not alone in this.

It takes time and experience to be able to navigate the “ins and outs” of tax filings in a way that protects your interest and is the most beneficial for you and your family. 

Our tax team specializes in ministers’ taxes, and they are ready to handle all of your tax return needs and questions.

Give us a call today at 877-494-4655, or simply click on the link below to learn more about how we can help!

Recommended blogs for you:

• "Should Pastors Receive a W-2 or 1099?"
• "Does the Tax Reform Affect Ministers Taxes?"
• "How Should Churches Respond to Sexual Harassment?"

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