What Ministers Need to Know About Their Taxes

By Raul Rivera

“I cannot believe I owe $5,875 on my tax return!” That is what a Florida minister told me last year. Interestingly enough, another minister from Iowa that I met at a conference last year was excited that he would be receiving a refund of $9,167. While I celebrate his refund, the sad fact is that both pastors made exactly the same amount of income last year. 

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

We will address this question in today’s article. 

Here is why the ministers had different tax results

Every year, thousands of ministers overpay on their taxes because they are not aware of the special IRS rules for ministers. The current tax code actually favors ministers. However, the laws within the tax code only favor ministers that are aware of these special rules.

Ministers often overpay on their taxes because they are not aware of the special IRS rules for ministers.

For instance, the minister from Florida did not take advantage of certain tax benefits afforded to ministers. While the minister from Iowa properly applied for these special tax benefits and received a refund over $9,000!

Both ministers 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) = owed $5,875
2.  Minister 2 ($55,000 salary & 4 kids) = refunded $9,167

Here is why: 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 here, at StartCHURCH, and he combined it with his self-employment tax exemption.

Do you know about these 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.

• Minister 1, after paying his tax bill on a $55,000 salary, ended up with $49,125 in his pocket.
• 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. 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. However, this is not the reality for many minister because the tax preparers they hire are not familiar with these tax privileges.

Finding the right tax preparer for you

I firmly think that you, as a minister, should be surrounded with a team of people who speak into your life on the topics of ministry, marriage, and money (especially when it comes to your tax preparation).

Surround yourself with a team of people who speak into your life.

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 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 that has experience completing tax returns for ministers. 

You may already have a knowledgable individual, or team of individuals, that completes your ministerial tax return. If that is the case, then you are ahead of the curve.

Though if you do not, or if you have a tax preparer but are unsure of how much he knows about minister’s taxes, then I want you to consider three tax privileges and deductions afforded to ministers. Next, ask yourself, “Am I fully maximizing these benefits?”

The top three tax privileges and deductions for ministers

1. Maximize your 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 the housing allowance is to set it up as a designation of salary and not necessarily as a part of compensation. At our conferences, we provide a detailed teaching on the StartCHURCH way of setting up the housing allowance.

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

Due to the IRS' "least of these" rules, when a minister receives a housing allowance payment instead of a designation, he/she will likely leave money on the table each year when it comes to taxes.

You may be thinking that what I am saying does not make sense. It may take time to fully grasp this concept. Trust me, once you learn it, you will be blown away at how much you will save each year. 

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. 

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 that do not have a self-employment tax exemption, this is the next best thing. Did you know that if you meet certain requirements, then 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?”)

Utilize a tax service trusted by thousands of 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, toll free, at 877-494-4655 to find out more about how we are able to serve you.

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