March 21, 2013

Review: Allowable Deductions for a Minister

Question:

A new minister is wondering what deductions are available to him as a minister. He receives a Form 1099-MISC from his church.

Answer:

It is important for a pastor to be recognized as an employee of the church in order to take advantage of many ministers' tax advantages. This means that he will receive a Form W-2, instead of the Form 1099-MISC which is intended for non-employee, independent contractors. These employment advantages include:
  1. Housing Allowance (HA) – non-taxable to the extent that the HA was used for housing expenses; any HA designation greater than actual expenses will be taxable income (For the three-part test, please follow this link and select 2012 Minister's Housing Allowance Worksheet http://ministrycpa.com/?q=alldownloads).
  2. Form 4361 exemption (optional) – will not pay Self Employment (SE) taxes on your ministerial income. A minister must make this election within the first two years of becoming a minister however and will have to plan for his own retirement as his ministerial earnings will not be used in the calculation of any Social Security benefit to which he may be entitled.
  3. Form 2106 expenses – deduction for any unreimbursed ministry expenses. These expenses typically include vehicle mileage, travel and entertaiment, professional dues and supplies, business use of home when no church office is provided, etc. If the church employs an accountable plan, reimbursed expenses are not reported as deductions nor are reimbursements taxable. However, if the minister incurs expenses which are not reimbursed by the church, he can claim a deduction on this Form for them. These unreimbursed expenses will also reduce any SE tax he may owe.
  4. Internal Revenue Code Section 403(b) Retirement Contributions - Deduction for any elective deferrals including both a reduction in income taxes and SE taxes.
  5. Other non-taxable fringe benefits intended for employees, including (a) group, term life insurance, (b) employee health insurance, (c) Health Reimbursement Arrangements (HRA), (d) health savings accounts (HSA), (e) employer funded child-care, etc.
See the Minister’s Audit Techniques Guide and Form 2106 Instructions for information on deductible expenses.

2 comments:

  1. Does the amount have to be approved by the church in order for things such as utilities and furniture to be deducted? In our case there is no housing allowance, but the pastor lives in the parsonage, which has long been paid off. Can he deduct any of the furniture, appliances, etc. that he bought when he moved here last year?

    ReplyDelete
  2. @Ryan

    A minister living in a parsonage qualifies for a housing allowance to the extent of his own out-of-pocket costs. If you would like more details, read Question No. 2 from our "Top 10 Questions that Ministers, Missionaries, and Church Treasurers Ask Tax Preparers."

    Here is the link to our website's download page to access the "Top 10 Questions": http://ministrycpa.com/?q=alldownloads.

    Tara

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