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FAQ
I'VE NEVER HEARD OF FINANCIAL STEWARDSHIP OR CLERGYTAXPROS.COM. WHO ARE YOU GUYS?
Financial Stewardship was established by Russell T. Jones in suburban Detroit in 1985 to provide pastors and churches with tax and financial counsel that could not be found anywhere else. While its beginnings were humble, Financial Stewardship has grown to one of the largest organizations of its kind in the country. Now headquartered in Troy, MI, the heart of the Detroit financial district, Financial Stewardship serves thousands of clients each year, many of whom are clergy. We are affiliated with no denomination or church group. Our clients come from many other and independent churches in most of the 50 states and some foreign countries.
SHOULD OUR PASTOR BE A W-2 OR A 1099?
Most pastors and church staff are employees by definition and should receive a W-2 annually from the employing church. Exceptions who are 1099 self-employed may include traveling evangelists and musicians who receive income from many sources, or custodians who contract with multiple churches or businesses.
DO PASTORS HAVE TO PAY SOCIAL SECURITY TAXES QUARTERLY?
Pastors maintain a dual status as taxpayers. While most pastors are W-2 employees for payment of income taxes, they are considered self-employed for the payment of Social Security (FICA) taxes. Thus, they must pay quarterly Social Security installments if they have remained in the Social Security system. If the employing church is not withholding taxes for the pastor, he must also pay his income taxes in quarterly estimated installments.
HOW CAN A PASTOR QUALIFY TO RECEIVE TAX-FREE HOUSING ALLOWANCE?
The only legal "allowance" is the housing allowance, which is available to clergy and some members of the U.S. Armed Forces. To qualify, the clergy must be "ordained, licensed, or commissioned", or "the equivalent thereof", and regularly performing "substantially all" of the activities that define ministry, such as preaching, baptisms, weddings, funerals, conducting worship, administration of Para church organizations, or teaching in theological seminaries. If you are ordained, licensed, or commissioned, or "the equivalent thereof" when you began your employment, and are performing the usual functions of the ministry, you may qualify to receive tax-free
housing allowance. But you must follow some specific procedures to officially designate part of your compensation as housing allowance. Consult with a tax professional knowledgeable in clergy tax law, or see our Audit Proofing Your Church & Its Clergy. NOTE: While compensation received as Housing Allowance escapes income tax, it is still subject to Social Security taxation. However, if the housing allowance paid to a minister exceeds the fair rental value of the minister's home or the amount spent on housing, the excess is treated as taxable income on the minister's tax return.
WHAT DOES THE HOUSING ALLOWANCE EXCLUSION INCLUDE?
Basically, most expenditures to provide a home for the dual status minister and family can be bought with income tax free housing allowance dollars. This includes rent or principal payments, real estate taxes, mortgage interest, insurance, improvements and repairs, furnishings, appliances, decorator items (rugs, drapes, art, painting, wallpapering, etc.), linens, towels, utilities (including non-business phone use), exterior costs (lawn mower, garden hose, lawn tools, etc). The following are specifically excluded as housing allowance expenses: maids or hired lawn care, personal toiletries, paper products, clothing, jewelry, or items strictly for personal use. A comprehensive list is included in our Audit Proofing Your Church & Its Clergy.
HOW MUCH OF THE PASTOR'S SALARY CAN BE DESIGNATED AS HOUSING ALLOWANCE?
The Internal Revenue Code (IRC) does not establish a dollar limitation or percentage limitation for the housing allowance exclusion.
WHAT IF I DON'T SPEND ALL THE HOUSING ALLOWANCE I DESIGNATED?
Well, that's good. We encourage you to designate more than you expect to spend on housing. Any unused housing allowance is simply shown as as income on page 1 of the Form 1040.
A PASTOR FRIEND OF MINE SAYS I SHOULD OPT OUT OF SOCIAL SECURITY. SHOULD I FOLLOW HIS ADVICE?
Only clergy have the option to stay in the Social Security system or to opt out. The decision to opt out is a personal one legally based on your own conscientious objection to the government taxing religious institutions. Before you make that decision, carefully read the statement you must sign on IRS Form 4361. If you do opt out, it is absolutely critical that you immediately replace your forfeited Social Security benefits with financial products that will protect your family in the event of your death, illness, or disability.
MY CHURCH GIVES ME A MILEAGE ALLOWANCE? IS THAT LEGAL?
A mileage allowance is legal, but IRS considers it to be 'nonaccountable' and therefore taxable to you. In order for the payments to be tax-free, they must be paid under an 'accountable reimbursement plan' that requires you to submit a mileage log or other documentation to the church treasurer within 60 days of incurring the business mileage to be reimbursed. If any amounts are paid to you that exceed the maximum mileage rate allowed by the IRS (it changes almost every year), the excess is taxable income. The accountable reimbursement plan should be in writing and approved by the church board prior to any reimbursements being made.
MY TREASURER INCLUDED MY CHRISTMAS BONUS ON MY W-2 THIS YEAR. THAT DOESN'T SEEM RIGHT TO ME. WHAT'S THE LAW SAY?
Nearly all bonuses, gratuities, and gifts made to the pastor are properly taxable income, since they are usually the result of a service he has rendered. They should be reported as income. Only gifts from individuals which are strictly given because of "love and affection", and are not tied to the pastor's provision of some service, can possibly be considered tax-free gifts. Your treasurer was right to include your Christmas bonus on your W-2, and may have saved you considerable trouble should your return be audited in the future.
I HAVE A TSA, BUT A MINISTRY FRIEND SAYS A ROTH IRA IS BETTER BECAUSE IT IS TAX FREE. SHOULD I SWITCH TO A ROTH IRA?
It depends. A TSA (or 403B) accepts pre-tax contributions which grow tax-deferred until withdrawal when they are taxed. With a TSA the tax advantage is in not paying taxes on contributions, and tax-deferred growth, both considerable advantages. A Roth IRA is an after-tax account, i.e. no tax-deduction for contributions. However, principal does grow tax-deferred. Both principal AND earnings may be withdrawn tax-free when you have had the account for at least 5 years AND you have attained the age of 59 1/2. Which one is best for you depends on your present tax exposure. If you are paying federal income tax now, the TSA will likely work best. But if you have restructured your compensation and are not paying any income tax, you'll definitely be better off by contributing to a Roth IRA.
MY CHURCH BOARD JUST WON'T SET UP A REIMBURSEMENT ACCOUNT FOR MY BUSINESS EXPENSES. WHAT SHOULD I DO?
First, we'd like the chance to convince your board that, if they are reimbursing you tax-free without an accountable plan in place, they are violating current tax law. While the IRS is not aggressive in enforcing the "no more allowances" law, it is still the law. Christians are bound by scripture to obey the properly constituted laws of the land, including tax laws. Your church lay leaders have a fiduciary responsibility to both you and the members of the church to do things in compliance with the law. See the Consulting Services page for ways we can help you by working with your church board.
I'D LOVE TO HAVE SOMEONE DO MY TAXES, BUT I JUST CAN'T AFFORD THE COST ON MY TIGHT BUDGET. ANY THOUGHTS?
Yes indeed! One of our current team members became a client of Financial Stewardship back in 1987 when he was in the ministry. The very first year Financial Stewardship helped restructure his compensation and did his tax returns, he saved about $4,000 in federal and state taxes! Our clergy tax specialists can nearly always find perfectly legal ways to reduce your tax exposure and save you much more than you'll pay in tax preparation fees. See the Consulting Services page for information on our Church Retainer plan that can provide you with a significant discount on our clergy tax preparation fees.
I LIVE OVER 1,000 MILES FROM TROY, MI. DOES IT MAKE SENSE FOR ME TO WORK WITH SOMEONE THAT FAR AWAY?
We are the preferred tax and financial consultants for clergy in most of the 50 United States and missionaries serving in many foreign countries. Our clergy tax preparers have access on line to every form in every state, and all the IRS forms you will ever need. Through phone, email, and fax we can communicate very easily and efficiently. Remember, our specialists are a resource you just can't find from a general practice tax firm or individual.
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