Welcome to Clergy Tax Returns 2012!
Course Objectives
Read through the course and take notes (as you feel necessary). Complete all of the Check-for-Understanding quiz questions at the end of each module.
To get started, click the next button at the bottom right-hand corner of your screen.
At the conclusion of this course, you will be able to:
• Explain how to calculate clergy net earnings for SE tax.
• Explain the process for clergy to file exemption from SE tax.
• Explain how a clergy housing allowance or the fair rental value of a provided parsonage is treated for tax purposes.
• Explain how to determine deductible and nondeductible clergy business expenses by allocating expenses between taxable and tax-free income.
• Accurately complete tax returns for clergy that include Form 2106, Schedules A, C, and SE, and Clergy Member’s Income Statement.
This WBT was developed/updated in July, 2012.
Clergy Net Earnings for SE Tax
Members of the clergy who have earnings from qualified services performed as a minister are generally subject to self-employment (SE) tax, whether they are a church employee or are self- employed, unless they have received an IRS exemption. So, although the clergy member may be an employee and receive a Form W-2, there may not be any withholding for social security or medicare taxes.
To calculate the clergy member’s SE tax, you need to first establish their gross ministerial income. Next, you subtract their qualified expenses to arrive at their net ministerial earnings.
In this module, you are going to learn how to establish a clergy member’s gross ministerial income.
By the end of this module, Clergy Net Earnings for SE Tax, you will be able to
• List the clergy services and income items that are included in gross income for purposes of calculating SE tax.
• List the clergy services and income items that are NOT included in gross income for purposes of calculating SE tax.
• Calculate clergy net ministerial earnings.
Clergy income received for the performance of qualified services is subject to SE tax unless the client received an IRS exemption.
Generally, qualified services are those performed by a client in the exercise of a ministry or are duties as required by their religious order. Most services performed by a minister, rabbi, priest, etc., are qualified services. These include:
• Performing sacerdotal functions – functions “of or relating to priests or a priesthood”
• Conducting religious worship
• Controlling, conducting, and maintaining religious organizations, boards, societies, and other integral agencies under the authority of a religious body that is a church or denomination
Clergy income received for services that are not part of the ministry is generally subject to social security and medicare tax withholding under the rules that apply to workers in general.
The following are not qualified services:
• Services performed for nonreligious organizations, other than services assigned or designated by the minister’s church
• Services performed as an employee of the United States, the District of Columbia, a foreign government, or any of their political subdivisions, even if performing sacerdotal functions or conducting religious services
• Services performed as a chaplain in the Armed Services of the United States
• Services performed in a government-owned and operated hospital
Qualified services must be performed by a minister, which the IRS defines as:
“Individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. They are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed 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 social security purposes.
Services performed as a member of a religious order in the exercise of duties required by the order are qualified services.
However, if a member of a religious order is directed to work outside the order, the employment is not considered a duty required by the order unless both of the following are true:
• The services are the kind ordinarily performed by members of the order.
• The services are part of duties that must be performed for, or on behalf of, the religious order as its agent.
After determining the clergy’s gross income, the second step to calculating net earnings for SE tax is to deduct all qualified business expenses incurred in performing ministerial services.
Clergy who are church employees deduct unreimbursed ministerial expenses directly on Schedule A or on Form 2106. Self-employed clergy deduct all business expenses incurred in performing ministerial services on Schedule C.
If the client is a U.S. citizen or resident who is living and serving in a foreign country, net earnings for SE tax are calculated without any foreign earned income exclusion or foreign housing exclusion or deduction.
Example: Saul is the minister of a U.S. church in Tanzania. He earned $17,000 and excludes the entire amount under the foreign earned income exclusion. However, Saul must include the $17,000 when calculating net earnings for SE tax.
Select the income items that are included in clergy gross income when determining net earnings for SE tax.
Offerings received for marriages, baptisms, funerals, Masses, etc.
Offerings others made to the church.
Housing allowance, plus any utility allowance, or the fair rental value of a provided parsonage, plus the cost of furnished utilities.
Housing allowance or fair rental value of a parsonage provided after retirement.
Pension payments or retirement allowances received for past qualified services.
1&3
Correct. Offerings for the performance of sacerdotal functions and housing allowances received as an active clergy member are included in gross income for SE tax purposes.
Congratulations! You've just completed Module 1.
In this module, Clergy Net Earnings for SE Tax, we discussed:
• The clergy services and income items that are included in gross income for purposes of calculating SE tax.
• The clergy services and income items that are NOT included in gross income for purposes of calculating SE tax.
• How to calculate net ministerial earnings.
Clergy Exemption From SE Tax
In the last module, you learned that members of the clergy who have earnings from qualified services performed as a minister are generally subject to SE tax, whether they are a church employee or are self-employed. However, under certain conditions, these clergy members are exempt from SE tax completely.
In this module, you are going to learn which clergy members are exempt from SE tax and the procedure for applying to be exempt. You are also going to learn that members of certain religious sects may apply to be exempt from SE tax.
After completing this module, you will be able to:
• Explain the conditions under which a clergy member may be completely exempt from paying SE tax.
• Explain the conditions under which members of certain religious sects recognized by the IRS may claim exemption to SE tax, as well as social security and medicare taxes.
• Describe the procedure a clergy member follows to claim exemption from SE, social security, and medicare taxes.
• Describe the procedure for members of certain religious sects recognized by the IRS to claim exemption from SE, social security, and medicare taxes.
Earnings from qualified services performed as a minister are generally subject to SE tax.
However, a clergy member can be exempt from SE tax if one of these conditions applies to them:
• They request and receive approval from the IRS to be exempt from SE tax.
• They are a member of a religious order who has taken a vow of poverty. They are exempt from SE tax due to the vow of poverty and their earnings are considered to be income of the religious order.
• The clergy member is subject only to social security laws of a foreign country under provisions of a social security agreement between the U.S. and that country. More information on this issue can be found by referring to Bilateral Social Security (Totalization) Agreements in IRS Publication 54.
Note: The exemption only applies to earnings received for ministerial services. It does not apply to any other self-employment income.
Note: The following clergy members cannot file for an exemption from SE tax:
• A clergy member who elected before 1968 to be covered under social security for their ministerial work.
• A clergy member who filed Form 2031, Revocation of Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners, for the 1986, 1987, 2000, or 2001 Tax Years.
Members of Certain Sects Can Also Apply to be Exempt
In addition to clergy, the members of a recognized sect or a division of a recognized sect may request exemption from SE tax on self-employment income. The members of a recognized sect or a division of a recognized sect may also request exemption from social security and medicare taxes on wages paid to them as an employee of the recognized sect.
To request an exemption from SE tax, clergy members and members of a recognized sect or division of a recognized sect must follow the procedure that applies to their situation.
Procedure for Clergy Members to Request Exemption
To request an exemption from SE tax, clergy members must meet all of the following conditions (click on the following to reveal):
File IRS Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners.
Be conscientiously opposed to public insurance because of individual religious considerations (not just because of general conscience) or the principles of the clergy member’s religious denomination.
File for the exemption for other than economic reasons. Not wanting to pay is not sufficient grounds.
Inform the ordaining, commissioning, or licensing body of the church or order that they are opposed to public insurance.
Establish that the organization that ordained, commissioned, or licensed the individual or their religious order is a tax-exempt religious organization.
Establish that the organization is a church or a convention or an association of churches.
Have not made an election barring exemption.
Sign and return the statement the IRS mails certifying they are requesting the exemption based on the grounds listed on the statement.
Procedure for Members of Recognized Religious Sects to Request Exemption
To request an exemption from SE tax and/or social security and medicare taxes, members of recognized religious sects or divisions of recognized sects must meet all of the following conditions (click on the following to reveal):
The member must file Form 4029.
Membership in the recognized sect must require followers to be conscientiously opposed to accepting benefits of any private or public insurance that makes payments for death, disability, old age, retirement, or medical care, or provides for medical care.
The recognized sect must make reasonable provision for its dependent members and must have done so continuously since December 31, 1950.
The member must have never received or been entitled to receive benefits payable under social security. If the member has received social security benefits, they may be considered for exemption if they repay the benefits.
Exemption is Irrevocable
The exemption approval process takes a long time, but once approved, the exemption is irrevocable, so the client should consider the request very carefully.
The exemption from SE tax needs to be applied for and approved annually.
True False
f
Yes, that’s correct. Once the exemption is approved, it is permanently in place and irrevocable.
How do members of recognized religious sects request exemption from SE tax?
Write “exempt” on the Form 1040, self-employment tax line.
File Form 4361.
Write “exempt” on Schedule SE and file with their Schedule C and Form 1040.
File Form 4029.
4
That is correct. Members of recognized religious sects must file Form 4029 to request exemption from SE tax.
Congratulations! You've completed Module 2.
In this module, Clergy Exemption From SE Tax, we discussed:
• The conditions under which a clergy member may be completely exempt from paying SE tax.
• Members of certain religious sects recognized by the IRS may apply to be exempt from SE tax and/or social security and medicare taxes.
• The procedures a clergy member or a member of a recognized religious sect follow to claim exemption from SE tax and/or social security and medicare taxes.