Skip to main content

Minister Performing Services as an Independent "Business" Activity

Question:

Can a private pastoral counseling practice - including pastoral counseling, church consultation, and education - qualify for the housing tax deduction? The individual seeking ministerial status is not paid by his church; however, his ministry is affirmed as an extension of a church's ministry. Essentially, he operates a sole proprietorship earning income that supports his ministry at a church.

Answer:

IRS Publication 517 addresses this situation in its definition of a minister:

"Most services you perform as a minister, priest, rabbi, etc., are qualified services. These services include: performing sacerdotal functions, conducting religious worship, and
controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination."

Publication 517 also addresses services for nonreligious organizations:

"Your services for a nonreligious organization are qualified services if the services are assigned or designated by your church. Assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship. If your services are not assigned or designated by your church, they are qualified services only if they involve performing sacerdotal functions or conducting religious worship."

It seems that the individual described in the question may not qualify for ministerial status. If he and a Board of Directors establishes a qualified IRC 501(c)(3) organization "under the authority of a religious body that is a church or denomination" (see above), then that organization can designate a housing allowance. Alternatively, the church may recognize his contribution to its ministry and hire him as a counseling minister employed by the church. Of course, he loses the autonomy that he now enjoys as a sole proprietor.

Comments

Popular posts from this blog

Church Car Purchase for Pastor

Question: A church would like to purchase a car for the pastor's use. What is the best method to accomplish this goal? Should the car be titled in the pastor's name? What will be the tax consequences of this arrangement? Answer: The church has two main alternatives for this purchase:  Title the car in the pastor's name and reimburse him for business expenses Title it in the church's name and treat personal use as taxable compensation There are fewer immediate tax consequences for the latter. Since both are viable options, we will discuss both situations in this post. If the church chooses to give the car to the pastor and register it in his name, he is free to use it for whatever personal use he desires with no tax consequences. However, the fair value of the car is taxable as compensation at the time it is given to the pastor. Internal Revenue Code section 102(c) clearly states that gifts given to employees by their employers are taxable compensation. The...

Can Form 4361 be filed after the deadline?

Question:   Is it possible to opt out of Social Security after the 2-year deadline? Answer:  Unlike other employees, a licensed or ordained minister has the option to opt out of Social Security and Medicare (FICA). If a minister wants to opt out they must file Form 4361 by the tax deadline including extension, in the second year in which they have received ministerial income of $400 or more. This election is final, and the minister cannot opt back into FICA taxes.  At MinistryCPA, we have received questions from ministers who have exceeded the two year deadline and desire to opt-out. There have been several court cases which provide guidance in answering this question. Some have argued that the minister was unaware of the deadline, had mistakenly believed they had filed a timely election, were given incorrect advice by an IRS employee, or their opposition to participate in Social Security and Medicare did not arise until after the 2-year deadline had passed. In each of th...

Form 941 or 944 - Which Should a Church Use for Payroll Reporting?

Question:   Are churches required to file a Form 944 annually to report their employees' earnings and tax-withholdings? A quarterly Form 941 (rather than an annual Form 944) is required of some employers. Which IRS form, if any, should be filed? Answer: According to IRS Section 1402(c) and 3121(c), ministers are not subject to mandatory income tax withholding. Unless one or more ministerial employees request non-mandatory withholding, church employers with only ministerial employees do not need to file Form 941 or Form 944.  The IRS  Ministers Audit Techniques Guide  explains in further detail a minister's treatments for Social Security, Medicare tax, and income tax withholding.   Form 941 or 944 must be filed when non-ministerial employees are compensated or when ministers request withholding. When can a church file the annual Form 944 rather than filing Form 941 each quarter? The IRS may permit the annual filing of Form 944 for employers wh...