Business Expenses of Ministers

Written by Raul Rivera on Jan 30, 2009 in IRS Compliance

Pastors all across America work hard and are underpaid. Statistics show that the average pastor is severely underpaid; more than in any other profession.

Many pastors have chosen not to opt out of having to pay social security taxes. Social security tax (otherwise known as self employment tax) is 15.3% of the pastor's income. This means that a pastor making $30,000.00 a year has to pay $4,590.00 in self employment taxes. Additionally, he/she also has to pay regular income tax on his/her salary after calculating his/her housing allowance exclusions. Bottom line- this minister's taxes will be over $5,000.00 per year.

Many churches do not create compensation contracts!

Section 4958 requires churches that pay the pastor or minister any type of salary (whether a regular salary or housing allowance) to put it in writing. Under the latest IRS regulation of section 4958, not having a contemporaneous written agreement can cause the pastor to be fined up to 200% of his/her salary. At our conferences, we teach churches and ministries how to create an 11-page contract which includes a housing allowance, a section 105(b) medical reimbursement plan, a deferred housing allowance retirement plan, and every necessary clause you will need to have in place.

Deducting Business Miles!

Since we are talking about the minister's contract for employment, did you know that if you meet certain requirements, you are able to deduct your miles from your home to the church office?

A minister's mileage for commuting between the his/her residence and the the church office, or a member's home or even going to a prison or hospital to visit someone, are not deductible under §§ 1.162-2(e) and 1.262-1(b)(5) of the Income Tax Regulations. However, the costs of going between one business location and another business location generally are deductible under § 162(a). So, what does this mean to a minister? Because most ministers have home offices, it means that your commuting miles may be deductible; and at today's mileage deductions allowed by the IRS, you are looking at 58.5 cents a mile effective July 1st of 2008.

How to make your home office commuting miles deductible

To make the miles deductible, the compensation contract must require the pastor to maintain a home business as his/her principal place of business. This office must meet the requirements of section Section 280A(c)(1)(A). As a pastor defined in section 3401(a)(9), you are also considered self employed, which means that you can declare your home office to be your principal office. Your church office, if you have one, is actually considered your secondary office. Therefore, 100% of all your miles from your home office to your church office are deductible. Furthermore, 100% of the miles from your home to the hospital, a prison, or a member's home that are for the purpose of doing the work of the ministry are deductible. In Curphey v. Commissioner, 73 T.C. 766, the Tax Court ruled that daily transportation expenses incurred in going between an office in a taxpayer's residence and other work locations were deductible where the home office was the taxpayer's principal place of business within the meaning of § 280A(c)(1)(A) for the trade or business conducted by the taxpayer at those other work locations (See Revenue Ruling 94-24, Revenue Ruling 99-7).

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.

Blessings,
Raul Rivera


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