Is a Minister an Employee or a Self-employed Person for Income Tax Reporting Purposes?
The question of whether a minister should report his or her federal income taxes as an employee or as a self-employed person is one that has generated a good deal of controversy. It is a significant question for many reasons, including the following:
(1) Employees report their compensation directly on Form 1040, and claim unreimbursed business expenses on Schedule A only if they itemize deductions and only to the extent that such expenses (together with most other miscellaneous expenses) exceed 2% of adjusted gross income (only 80% of travel and entertainment expenses are counted). Self-employed persons report compensation and business expenses on Schedule C. Business expenses are in effect deductible whether or not the minister itemizes deductions, and are not subject to the 2% floor.
(2) Adjusted gross income ordinarily will be higher if a minister reports as an employee, since business expenses are deductions from adjusted gross income. Self-employed persons deduct business expenses in computing adjusted gross income. Adjusted gross income is a figure that is important for many reasons. For example, the percentage limitations applicable to charitable contributions and medical expense deductions are tied to adjusted gross income.
(3) Ministers working for a church or church agency should receive a Form W-2 each year if they are employees, and a Form 1099-MISC if they are self-employed (and receive at least $600 in compensation).
(4) Favorable tax-deferred annuities offered by nonprofit organizations (including churches) may only be available to employees.