March 21, 2009

SE Tax Trauma

Question:

Missionaries, as most ministers, are subject to both federal and state income taxes and self-employment tax.

Consider the following example. An independent missionary on deputation earns enough income (after deducting all allowable travel and ministry expenses) to owe $6,000 in self-employment (SE) tax on his support. Due to write-offs against his income taxable earnings (housing allowance, personal itemized deductions, personal exemptions for his family members, etc.) he not only owes no income tax, he receives $3,000 of credits that can gain him a refund check from the IRS even though he paid nothing in. Then comes his SE tax--ouch! Instead of receiving a refund, he must write the IRS a check for $3,000.

He asks, "Is there any legal way for me to file differently and avoid the Form 1040, Schedule SE tax?

Answer:

Missionaries in the above situation should consider at least two matters.

First, travel and other business expenses incurred while on deputation reduce reportable SE earnings. Many mission agencies require their missionaries to submit regular reports documenting their financial activity. Not only is this good stewardship on behalf of the supporting churches and individual donors, it makes good tax sense for the missionary. The mission agencies then issue to their missionaries Form W-2 which include only the portion of their support that is taxable after excluding reimbursements sent to the missionary for tax-deductible expenses.

Second, a missionary may consider applying for exemption from SE tax by filing a timely Form 4361. See my answer to Question 9 in the link below to my website:

Top 10 Questions that Pastors ask Tax Preparers

One final "reality check." Paying the 15.3 percent SE tax is a burden and reality that most missionaries and ministers face. While non-ministers have the 7.65 percent FICA (social security and Medicare) tax withheld from their gross earnings and matched by their employers, ministers must pay "both halves" but can pay this tax on their net (after business expenses) earnings. Accordingly, missionaries are well advised to either make quarterly federal estimated tax payments or to request federal income tax withholding by their mission agencies.

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