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Tax Forms for Clergy

Consultation for Clergy
and Churches


Your Tax Return

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When knowledge and experience count.
Myths & Legends
Myth 1
Most ministers are employees.
Myth 2
Employee status doesn’t really hurt a minister as long as an Accountable Reimbursement Plan (ARP) is in place.
Myth 3
Self-employed ministers get audited more than employee ministers.
Myth 4
If you are a self-employed minister, you cannot have a TSA (403b), a church paid medical plan, or even a pension.
Myth 5
Housing (Parsonage or Manse) Allowances can only be a set percentage of  income.
Myth 6
The minister's housing allowance cannot be changed during the year.
Myth 7
Most ministers can’t opt out of social security because they can't, in good conscience, sign the 4361 declaration.
Myth 8
A lot of churches are being audited.
Myth 9
One innocent mistake can send a minister or church board member to jail.
Myth 10
A lot of churches are losing their tax-exempt status.
Myth 11
Leasing a car saves taxes for clergy.
Myth 12
If you don’t want to do all the work figuring employment tax for part-time church employees,  just give them a love offering and call them independent contractors.


ęCopyright 1999, 2003 John M. Simon, All Rights Reserved.

Myth #1 
"Most Ministers are Employees."
  • Ministers have filed tax returns as self-employed, and not as employees, for over 90 years.
  • No law has changed. The clear black letter of the law says two things: a) a minister is Self-Employed for SE tax purposes b) a minister is not subject to withholding of any tax. So why use a W-2 withholding form?  Clergy Tax and Financial Services will give a $100.00 gift certificate to the restaurant of choice to the first person who can provide a legitimate copy of federal legislation changing tax law to declare ministers as employees.
  • Recent tax court cases have made it clear that the employment status of ministers is a matter of his or her individual situation. A minister who is tightly controlled in the details of his/her work may be considered an employee, while the vast majority of ministers who do not labor under such control are self-employed. As of this writing, only one tax court has designated a senior minister as an employee, and several have designated ministers as self-employed.


Myth # 2  
"Employee status doesn’t really harm a Minister as long as  an Accountable Reimbursement Plan "ARP" is in place."
  • If you review the theology of ministry of your church or denomination and don’t have a theological problem with employee status; review the term "Instant in season and out of season" and reflect, how will you reprove your employer! Or order our booklet: "The Theology of Ministers' Employment Status".
  • Do you really want to be a hireling?
  • Few churches and church leaders are willing to fully implement an ARP. There may well be expenses which the minister does not want to reveal to his church board.    In addition, ARP is a "use it or lose it matter."  Ministers, who usually fund an ARP out of their ministerial budget, tend to estimate low, and lose some of the protection of the Accountable Reimbursement Plan.
  • With employee status, the minister is subject to  2% reduction of all employee business expenses on Schedule A; in other words, pays taxes on a portion of expenses.
  • Employee status limits the medical insurance deduction by making employee business expenses a "below the line" deduction.
  • Employee status increases tax for the parsonage dweller  who does not itemize deductions and therefore cannot deduct employee business expenses.
  • Employee status can be expensive in the extreme to the minister who has an approved 4361 (Exemption from Self-Employment Tax)
  • More important, employee status may subject the local church, the district headquarters, and national church to deep pocket lawsuits, based on any purported misdeeds of the minister.  A W2 innocently prepared by a scrupulous treasurer may be the only opening a lawyer needs. 


Myth # 3 
"Self-Employed Ministers get audited more than Employee Ministers."
  • We hear this claim, but no one has proved it and we haven't found any proof.  In fact, CTFS will give a dinner for two to the first person who can proves it.
  • A minister's employee business expenses, taken as miscellaneous deductions, far exceed the cost to the average worker of safety shoes and union dues.   That raises an audit flag for the IRS.  On the other hand, the self-employed minister who lists the same expenses on a Schedule C generally has lower expenses compared to small businesses whose owners also file Schedule C.
Myth #4
"If you are a Self-Employed minister you cannot have a TSA (403b), a church paid medical plan, or a pension."
  • What law changed?  Ministers have had such a right for decades.
  • The 1997 TAX Act specifically says that ministers can have a TSA (tax sheltered annuity) plan.  By implication, pension and medical benefits are included.


Myth # 5 

"Housing (Parsonage) Allowances can only be a set percentage of the minister's income."
  • There are no such limits anywhere in the law or in tax court cases.


Myth # 6
"Housing allowance cannot be changed during the year."
  • Your housing allowance can be changed at any time but no change can be retroactive.  It is always best to estimate expenses high (we suggest $5000 more than you think you will spend). Any  unused portion can be added to your income at tax time.
Myth # 7
"Most Ministers can't opt out of social security because they can't in good conscience sign the 4361 declaration."
  • Lots of ministers have reviewed the rules and concluded that they can opt out in good conscience.   If you are new to the ministry, you need a consultation with an expert at CTFS.
Myth #  8
"A lot of Churches are being audited."
  • A few churches are audited by state employment tax auditors, but the IRS audits only a tiny number of  churches and  usually for good reasons.
Myth # 9  
"One innocent mistake can send a minister or church board member to jail."
  • Yep, we’ve seen the slick advertising too - the shackled minister quailing before an angry judge!   The fact is that innocent errors can cost the the minister or church board members tax penalties, but no minister has gone to jail for innocent errors in the United States. 
Myth # 10
"A lot of churches are losing their tax-exempt status."
  • The fact is that very few churches lose exempt status, and when the do, it is usually for practices that are blatant and way off base.
Myth # 11
"Leasing a car saves tax
  • Leasing is almost always much more expensive than purchasing a car, and does not save taxes in a vast majority of cases. Avoid the sales pitch.
Myth # 12
"If you don’t want to do all the work figuring employment tax for part-time church employees,  just give them a love offering and call them independent contractors
Churches get in trouble more in this area than any other area of law.   If you pay a church employee more than $50.00 in a calendar quarter,  you must do the proper withholding  and then file quarterly 941 reports with the IRS and W-2 forms.   Subject employees include babysitters for Women’s Bible Class, church musicians, gardeners who only serve the church,  part-time secretaries, youth workers,  and many others.   Your church can be subject to a significant penalties for failure to comply (but you  won’t go to jail).  
If you have a church employee question ask for a conference via phone with a Clergy tax expert.