Common Mistakes Made By Ministers, Part 1!
By Raul Rivera
I am not on salary at my church, should I still set up a housing allowance and opt out of self employment tax?
This is the time of year when ministers begin to think about going on salary at the church. They wonder about setting up a housing allowance and opting out of self employment tax.
When it comes to tax compliance, the most common mistake I see ministers make is when they do not set up a housing allowance and do not opt out of social security. Many ministers think they are unable to do these things because they are not yet on salary with the church. This is a subject that we touch on at all of our conferences, and surprisingly, even after attending, many ministers still fail to opt out of social security and do not set up a housing allowance. Why? The simple reason is that they do not see the benefit in doing so because they do not plan on being on salary any time soon. This is NOT a valid reason!
I say that you should begin both; create the housing allowance and opt out of social security, regardless of whether or not you are receiving a salary from the church. It is never too early, but it can be too late. I talk to pastors on a regular basis who have just learned that time had run out, and the reality sets in that the option for these benefits is gone for good. Why wait? Why risk losing these benefits when you can get started now? It is part of your stewardship. Let me give you four good reasons why you should set both up today. They are numbered below.
-
If you ever receive a love offering at the church, you enter into a taxable event, and having both the housing allowance and the social security exemption in place will keep the love offering tax free. Remember, you cannot set up a housing allowance retroactively. If you have already received the love offering, it is too late.
- Opting out of social security taxes is only done once. It will last for the rest of your life. If you ever publish a book or sell CD's of your messages, having the social security exemption in place makes the sales of those items self employment tax exempt to you. You can enjoy the financial support you get from these sales tax free. I know of a minister that did not opt out. He sells around $28,000.00 to $30,000.00 per year in CD's and other resources that he has created. Every year he pays around $4,500.00 extra in self employment tax. Had he opted out on time, he would pay $0.00 in self employment tax. Don't get caught off guard. It can happen to you and the chances of it happening are very high if you do not do it now.
-
Just because you never plan on being on a salary at the church, or you believe that it is years away, does not mean that you never experience taxable events. In fact, they occur when you least expect them. A love offering, an honorarium, the sale of sermon messages and music recordings, and counseling session love gifts all create taxable events that trigger the clock and can make it too late for you.
-
If you have a secular job and your income is just at the point where it barely qualifies for earned income credit, an unexpected event at the church or ministry may disqualify you from the earned income credit. Setting up the housing allowance and opting out of social security will keep you qualified. For earned income credit, Congress defines reportable income as income that is required to be reported on either your Form 1040 or Schedule SE. If you have a housing allowance and you have opted out of social security, you will continue to qualify for the earned income credit.
Please, do not read this article and just say AMEN, but then do nothing about it. I give you my word that acting upon this can only mean good news for you down the road.