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15 Mar 2018

5 Common Myths Surrounding Ministers' Taxes

Raul Rivera

If you had the choice of getting a tax refund or owing taxes, which would you choose? It’s really a no-brainer. Of course you would choose to receive a tax refund.

While there are many factors that influence whether you get a tax refund or owe taxes, what if I told you that you have more control of your tax outcome than you may realize.

The truth of the matter is that many ministers and tax professionals do not fully understand the unique tax status of ministers, and oftentimes, this can cost the minister in the end.

For instance, in 2017 a minister (who shall remain nameless) came to us and asked that we review his tax return he completed, before submitting it to the IRS.

Because our tax team specializes in ministers’ taxes, we discovered an additional $1,200 in his tax refund from deductions his missed.

Had he not asked us to review his tax return, he would have missed out on an additional $1,200. That’s quite a substantial gain.

From our experience in assisting ministers with their tax returns, ministers who end up owing taxes usually do so because of incorrect information received from another minister and, in some instances, a tax professional.

And oftentimes, the incorrect information can be attributed to “myths” surrounding ministers’ taxes.

With that being said, I want to spend some time debunking five common myths surrounding ministers’ taxes that will help you make better, well-informed decisions for your taxes.

File Your Taxes Today!

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5 myths surrounding ministers’ taxes

Myth 1: “Ministers do not have to pay income taxes.”

In reality, ministers are exempt from income tax withholding . . . not from having to pay income taxes. 

Many ministers misunderstand the fact that their wages as a minister are not subject to income tax withholding.

This leads to the false assumption that they do not have to pay income taxes. Not until it is too late, and costly, do they realize the gravity of their mistake.

Since ministers have a dual tax status, ministers are responsible to withhold and pay their own taxes. As a minister, you can pay your taxes in quarterly installments using Form 1040-ES.

If you want your church to withhold and pay your income taxes like a nonministerial employee, you can do so, but you must enter into a voluntary withholding agreement with the church.

For more information on entering into a voluntary withholding agreement, click on the article listed below.

(Recommended reading: "Do Ministers Have to Pay Estimated Taxes?")

Myth 2: “Love offerings are not taxable income.”

The confusion surrounding love offerings comes primarily because the term love offering implies a gift that is given because of love and respect for the recipient. 

In the giver's mind it may be a gift, while in the IRS's mind it is compensation. 

Herein lies the conflict.

Section 102(a) says, "Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance."

While the members of the church are truly giving a love offering as a gift, the IRS says it is taxable income because section 102(c)(1) says that "any amount transferred by or for an employer to, or for the benefit of, an employee" shall be treated as gross income.

While the law clearly says that a gift is tax free, the fact that the gift is given to the church and then given to the pastor or leader makes it 100% taxable because of section 102(c)(1).

The law makes an exception for a gift given by the church to the pastor if it is under $25.00.

(Recommended reading: “Love Offerings--When They Are Taxable and When They Are Not”)

Myth 3: “If I do not have the exact figures for my deductions, then I can just round up or make a best faith estimate.”

Deductions should not be in round numbers. Inserting round numbers on a return tells the IRS that you are likely making them up and can increase your chances of being audited.

(Recommended reading: “Is Your Home Office Deduction Legal?”)

Estimate Your Tax Withholdings!

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Myth 4: “If I owe taxes and file an extension, then I will not have to pay the taxes I owe until the extension is due.”

The truth is that all money owed to the IRS is due by the annual tax deadline.

This year the tax deadline is April 17th, 2018.

If you happen to owe taxes and fail to meet the April 17th deadline, then you will be penalized for each month that you are late (even if you have filed an extension using Form 4868). 

In general, if you file a tax extension using Form 4868 and think that you may end up owing money for your taxes, it is better to pay the IRS an estimated amount by April 17th.

If you happen to overpay, the IRS will reimburse you the amount you overpaid.

Myth 5: “Any CPA is a good CPA for ministers.”

While there are many knowledgeable and well-intentioned CPAs, not all of them are familiar with the various caveats of taxes for ministers.

A CPA working on taxes for ministers should be well versed on the subject and be familiar with nonprofit tax law because many of the tax benefits afforded to a minister are directly tied to a minister’s ordination.

For example, IRS Publication 517 is dedicated to explaining various rules regarding the tax status of ministers, and within this publication it defines a minister as, 

“[I]ndividuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Ministers have 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.” [emphasis added]

With this definition in mind, your chosen CPA should have a working knowledge of nonprofit tax law and how it relates specifically to you as a minister.

(Recommended reading: “Are You Sure Your Ordination is Legal?”)

Utilize a tax service trusted by thousands of ministers

Over the years, we have served thousands of pastors with their personal income tax returns through our minister's tax service.

Our experienced CPAs and tax department know how to best serve you and your tax needs. 

With our minister’s tax return service, you can confidently know that you are taking advantage of every tax benefit available to you as a minister.

I encourage you to give us a call at 877-494-4655 to find out more about how we are able to serve you.

Get the Help You Need with Your Taxes Today!

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Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Raul Rivera

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About the Author

Church Planter. Speaker. Author. CEO. Raul Rivera has had ample experience in the church planting world. His current venture, StartCHURCH, has helped 1000's of churches to start right. Raul has compiled an array of manuals and software tools that help churches stay compliant with the IRS. He also hosts over 35 national conferences per year, training pastors on how to launch their churches. Raul is married to his wife Genel, and they and their five children live in Atlanta, GA.