Every Friday we post one question from our Ask Tax Question feature and invite our tax professional audience to help our visitor. The Tax Question this week is as follows:
Thank you for the article about who is considered a minister for tax purposes. I am a female whose current church does not ordain women as ministers or deacons. I am a missionary to Jamaica and just created my own ministry after serving almost a year with another ministry. My ministry’s focus is street evangelism and church planting.
If a church in Jamaica ordains me, would that count for IRS purposes or would I have to be ordained by an organization in the U.S.? I realize that we are talking case-by-case. Is there a group within the IRS that would receive a submission of review regarding ordination or status? Thank you so much for your help with this!!!
I appreciate it greatly!!
A minister who wishes to be exempt from social security/Medicare tax must file a Form 4361 with the IRS for approval. Before your application can be approved, the IRS must verify that you are aware of the grounds for exemption and that you want the exemption on that basis.
This was a story told to us by another Tax Advisor that we promised to protect their privacy if they shared their story with us and allowed us to share it with our audience. Therefore, we are publishing this under my name and encourage your comments at the end of this blog post.
When it comes to the IRS and religious organizations, these organizations fall into two categories – churches and other religious organizations. Due to the First Amendment, the IRS is extremely reluctant to tread in the area of church organizations. This is not to say that churches have carte blanche to ignore the tax laws, but that the IRS grants them a great deal of leeway in regulating them. All religious organizations are subject to the law in regard to taxation. However, many operate as if the laws do not apply to them. Some of the most common mistakes made by religious organizations are the subject of this article.
At the outset, it should be noted that churches do not have to apply for 501(c)(3) status. They may choose to do so, and there are some very good reasons that they might wish to make such an application. All other religious organizations must apply for this status by completing and filing Form 1023 or Form 1023EZ. A church is automatically treated as though it has 501(c)(3) status.
Filing a return. Churches do not have to file a Form 990. However, some churches file these returns. This is unnecessary and may cause the IRS to take a closer look at the organization. If you don’t have to file, don’t file. Read More
“Passion is absolutely necessary to achieve any kind of long-lasting success.” In a minute, I will share with you who that quote belongs to but for this moment remember that passionate people have very strong beliefs. As I was arranging speakers for the Internet Tax Summit, the passion these tax experts have in protecting taxpayers and businesses was prevalent. You know when you encounter people in life with purpose and passion for what they do; you know they get things done. You can expect to encounter tax professionals who get things done at TaxConnections Internet Tax Summit. You are invited to meet and interact with Tax Experts in this historical event where individual taxpayers and business leaders meet tax experts during an online event. It is free so all you need to do is register and we will send you a link to access the Internet Tax Summit. Read More
Until 1969, there was no legal requirement that an organization must file with the IRS to obtain tax-exempt status. This status was automatic if the organization could demonstrate that it met the requirements set forth in Section 501(c)(3) of the tax code. In other words, an organization claiming tax exempt status was presumed to be qualified unless the IRS determined to the contrary. However, in 1969, Section 508 was added to the tax code, specifying that no organization would be treated as tax-exempt unless it applied to the IRS for tax-exempt status. Thus Form 1023 was born as the tax-exempt status application.
Some exceptions were carved out, however. Three classes of organizations do not have to apply for tax exempt status: Read More
In the course carrying out ministerial duties, a minister will incur various expenses that are related to his or her occupation. Some of these may be reimbursed by the employer, while others may be the expense of the minister. What is the criteria for reimbursing or deducting legitimate business-related expenses?
Whether an expense is reimbursed by the employer or if it falls on the minister to pay, the same IRS guidelines apply. An expense must be “ordinary” and “necessary under IRS rules. Business expenses do not include capital expenses such as a computer or other equipment. However, these may be depreciated in most cases. Personal expenses are not deductible business expenses. Read More
It is a tradition in many churches to give the ministerial staff a Christmas gift, or bonus at the end of the year. The IRS has some rules regarding the taxability of these gifts and it serves the church, the minister, and the members of the church to adhere to these rules so as to not run afoul of the IRS.
Many times, these Christmas gifts are considered by the church and the minister to be gifts, not compensation, and they are not included in the minister’s W-2 at the end of the year. It is a basic tenet of our tax law that a “gift” cannot be given to an employee, but is disguised compensation. The exception to this is that the employer may give a gift to an employee if the value is $25 or less and is not cash or a gift card. Thus, an employee may receive a small gift from the employer as long as the value is under the IRS limitation. Read More
The 7th U S Circuit Court of Appeals has dismissed a lawsuit by the Freedom From Religion Foundation (FFRF) that challenged the constitutionality of the clergy housing allowance. The suit was originally brought in the District Court for the Western District of Wisconsin where Judge Barbara Crabb ruled that the tax break for ministers was unconstitutional. Her basis for the ruling was that the law benefited religious people and no one else. The decision, which would potentially eliminate the most important tax break for ministers, was stayed pending appeal.
The law allows ministers of the gospel to exclude income tax on amounts designated by the church as housing allowance. Self-employment taxes are payable on these amounts. In addition, ministers may “double dip,” as they are allowed to deduct mortgage interest Read More
Churches occupy a distinct place in the tax code of the United States. They are tax exempt, but that is not where the uniqueness lies. Many types of charitable organizations are considered tax-exempt non-profit organizations. Most organizations wishing to obtain tax exempt status must first file Form 1023 (or the new Form 1023EZ) with the IRS, seeking approval as an IRS-qualified tax exempt organization. The unique aspect of a church is that qualifying as tax exempt is automatic if it meets the IRS definition of a 501(c)(3) organization:
1. The organization must be organized and operated exclusively for religious, charitable, scientific, or other charitable purpose.
2. Net earnings may not inure to the benefit of any private individual or shareholder. Read More
The housing allowance is a significant tax benefit for a minister. It can result in thousands of dollars in tax savings annually. The law currently allows a minister to occupy a church-owned parsonage without paying income tax on the value of the accommodations. Alternatively, the church may designate an amount to be paid to the minister as housing allowance. This amount, when used for housing costs, is not subject to income tax. Both a parsonage and a housing allowance are subject to self-employment taxes.
Only One Home Subject to Housing Allowance
Several court cases have recently been brought, seeking to limit or abolish this tax benefit for ministers.
The housing exclusion has been characterized as the most important tax benefit available to ministers. There are two commonly encountered situations in regard to housing for a minister. In the first case, the minister lives in church-provided housing. While this was quite common in the past the number of churches providing a parsonage for the pastor has declined significantly in recent years.
Under these arrangements, a minister lives in the parsonage without charge. In some cases, the church will also provide a housing or utility allowance to cover expenses incurred by the minister in maintaining the home. The value of the provided housing and allowance are not subject to income tax, but the fair rental value plus any allowance amount are subject to self-employment taxes. Read More