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WHO IS A MINISTER FOR FEDERAL TAX PURPOSES?
According to the IRS, ministers are individuals who
- are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination.
- are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the tenets and practices of that church or denomination.
If a church or denomination ordains some ministers and licenses or commissions others,
anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a Minister for Tax Purposes.
Whether or not one qualifies as a Minister for Tax Purposes is a very important question, since special tax and reporting rules apply to ministers under federal tax law.
These rules include:
• Eligibility for housing allowances
• Self-employed status for Social Security
• Exemption of wages from income tax withholding (ministers use the quarterly estimated tax procedure to pay their taxes, unless they elect voluntary withholding)
• Eligibility under very limited circumstances to exempt themselves from SECA
FOR FEDERAL TAX PURPOSES?
Ministers have a dual tax status. For federal income taxes, they ordinarily are employees, but for Social Security they are self-employed with regard to services performed in the exercise of ministry.
For federal income tax reporting, most ministers are employees under the tests currently used by the IRS. This means that they should receive a Form W-2 from their church at the end of each year (rather than a Form 1099). It also means that they report their employee business expenses on Schedule A rather than on Schedule C. A few ministers are self-employed, such as some traveling evangelists and interim pastors. Also, many ministers who are employees of a local church are self-employed for other purposes.
Ministers must prepay their income taxes and SECA using the estimated tax procedure, unless they have entered into a voluntary withholding arrangement with their church with respect to federal income tax only.
The four-step procedure for reporting and prepaying estimated taxes for 2018 is summarized below.
Step 1. Obtain a copy of IRS Form 1040-ES for 2018 before April 17, 2018. You can obtain forms by calling the IRS toll-free forms hotline at 1-800-TAX-FORM (1-800-829-3676) or from the IRS website (irs.gov). If you paid estimated taxes last year, you should receive a copy of your 2018 Form 1040-ES in the mail with payment vouchers preprinted with your name, address, and Social Security number.
Step 2. Compute your estimated tax for 2017 using the Form 1040-ES worksheet. Ministers’ quarterly estimated tax payments should take into account both income taxes and self-employments taxes.
Step 3. Pay one-fourth of your total estimated taxes for 2018 in each of four quarterly installments as follows:
For the Period Due Date
January 1–March 31 April 17, 2018
April 1–May 31 June 15, 2018
June 1–August 31 September 17, 2018
September 1–December 31 January 15, 2019
Step 4. After the close of 2017, compute your actual tax liability on Form 1040. Only then will you know your actual income, deductions, exclusions, and credits. If you overpaid your estimated taxes (that is, actual taxes computed on Form 1040 are less than all of your estimated tax payments plus any withholding), you can elect to have the overpayment credited against your first 2018 quarterly estimated tax payment or spread it out in any way you choose among any or all of your next four quarterly installments. Alternatively, you can request a refund of the overpayment. If you underpaid your estimated taxes (that is, your actual tax liability exceeds the total of your estimated tax payments plus any withholding), you may have to pay a penalty.