10
The Tax System for Ministers
The impact of a minister being considered self-employed for income tax purposes is generally very significant even if only health insurance is considered. Reporting these premiums as taxable (minister-employee) versus tax-free (self-employed minister for income purposes) can impact the minister’s tax bill by thousands of dollars. If health insurance premiums are included in taxable income, a low-income minister might also have his or her earned income tax credit reduced or eliminated.
❏ Health savings accounts, health reimbursement arrangements,
Caution If a church directly pays or reimburses health insurance premiums for a minister considered to be self-employed for income tax purposes, the payments are fully taxable.
or flexible spending accounts are only available to ministers who are employees for income tax purposes.
❏ Group-term life insurance of $50,000 or less provided by a church is tax-free to ministeremployees but represents taxable income for self-employed ministers.
❏ A voluntary arrangement to withhold income tax may be used by ministeremployees but may not be used by the self-employed.
Recommended Filing Status Virtually all ministers serving local churches qualify as employees for income tax purposes. It is wise to file as an employee for income tax purposes, unless you can clearly demonstrate that you qualify for selfemployed status. Few ministers can substantiate filing as selfemployed for income tax purposes. Even though ministers may take exception to the reporting of the church, the church has a responsibility under the law to determine the proper filing method and to proceed accordingly.
Key Issue It is vital for churches to treat ministers as employees (Form W-2) for income tax purposes in nearly every instance. If ministers are not considered employees for income tax purposes, it jeopardizes the tax-free treatment of fringe benefits like health, accident, and long-term care insurance premiums, group-term life premiums, and certain other fringe benefits.
Evangelists and Missionaries The qualifications of itinerant evangelists for the special ministerial tax provisions are generally the same as for ministers serving local churches. Most evangelists are self-employed both for income tax and self-employment social security tax purposes. The only exception is the evangelist who has formed a corporation and is an employee of the corporation. In this instance, the evangelist is an employee for income tax purposes, but remains self-employed for social security tax purposes. Missionaries are also subject to the same rules to qualify for ministerial status for tax purposes. Qualifying for benefits such as a housing allowance is often not so important for ministermissionaries because of the foreign earned income exclusion. However, the question of ministerial tax status is vitally important to determine if ministers are subject to social security as employees or as self-employed persons. The foreign-earned income exclusion affects income tax but not social security tax.