November 08, 2009

Retirement Contributions to Reduce SE Tax

Question:

A church compensates its minister who does not request optional income tax withholding. Then, it issues Form 1099-MISC (non-employee compensation form).

He deposits the maximum allowable contribution to a Roth IRA. Can he also establish a tax deductible Simplified Employee Pension (SEP) retirement account which is eligible for a higher maximum contribution?

Answer:

My January 27, 2008, blog posting, Ministers’ Retirement Options, reviews some of the alternatives available to ministers.

In the question above, I recommend that the church consider filing Form W-2 (employee compensation form). Unless the minister is an itinerant preacher, it is likely that he should be properly classified as an employee. This means that the church could establish a 403(b) plan and the minister could make elective deferrals to reduce both his income and SE tax. Unlike 403(b) plan contributions, Roth contributions reduce neither Form 1040 taxable income nor Schedule SE self-employment income.

Further, the contribution limits for 403(b) plans are significantly higher than those for Roth IRAs.

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