Lecture Notes: Tax Challenges Facing Clergy

Introduction

• Taxes are complex and can lead to errors, particularly for clergy.
• Focus mainly on tax issues specific to pastors rather than churches.
• Goals:
  • Increase awareness of tax challenges for clergy.
  • Share practical tax tips and strategies.

Why Clergy Taxes Are Difficult

• Clergy taxes are more complex than regular income taxes.
• Pastors are considered both employees and self-employed:
  • Receive a W-2 but must file a Schedule SE for self-employment taxes.
  • Pay both employee and employer portions of Social Security and Medicare (15.3%).

Tax Payments for Pastors

• Generally, pastors pay taxes through quarterly estimated payments.
• Churches can withhold income tax but not Social Security and Medicare.
• Pastors should set aside about 20-30% of income for taxes.

Moving Expenses

• Moving expenses are no longer tax-exempt.
• Factor in taxes for any conference-paid moves.

Opting Out of Social Security

• Pastors can opt out due to moral objections, not financial reasons.
• Opting out risks losing certain benefits and UM benefits tied to Social Security.

Housing Allowance

• Parsonages: Not taxable for income tax, but taxable for self-employment.
• Cash Housing Allowance: Similar treatment; not included in W-2 but affects self-employment taxes.

Clergy Compensation Form

• Important tool to help pastors make tax decisions:
  • Designated Housing Exclusion: Should never be zero; covers home-related expenses.
  • Medical Reimbursement Account: Reduces taxable income.
  • Pension Contribution: Encouraged for future financial security.

Practical Tax Management

• Get the treasurer on board; share clergy comp form.
• Use the church website for resources and connect with them for assistance.

Tax Filing System

• Set up a system to organize tax documents:
  • Create folders for different tax years and categories (e.g., housing expenses, tax documents).
  • Maintain detailed records for housing-related expenses.

Estimated Tax Payments

• Schedule payments on key dates (April 15, June 15, etc.).
• Consider treasurer-managed withholdings for convenience.

Seeking Professional Help

• Consider hiring a tax professional knowledgeable in clergy taxes.
• Utilize professionals who provide remote services if needed.

Resources

• Information and materials are available online with additional support.

Conclusion

• Importance of being proactive about tax management to avoid complications.
• Continued availability of resources and professional guidance.