Guiding Bivocational Ministers Through the Tax Maze

Vince Stover left a full-time pastor’s job in 2014 and moved 250 miles with his wife, Katie, to a city where the couple didn’t know a soul. He found a job in insurance sales and planted Bible Pathway Baptist Church in Lexington, Kentucky. The couple started a family, welcoming sons Brett and Camden.

Yet it was the prospect of filing his annual tax return—for the first time as a bivocational pastor—that kept him awake some nights.

“I was scared to death,” said Stover, who still pastors Bible Pathway but now sells advertising and programming time for a local radio station. “I had been a pastor before, and we did our taxes ourselves. But I knew there was a lot more involved now.” So, he and his wife, Katie, sought help from a qualified accountant.

As a bivocational minister, Stover is far from alone.

Around one-third of all pastors have a job outside of their church work, according to a survey conducted by the National Association of Evangelicals and Grey Matter Research. “Bivocational ministry is how a large and growing number of the world’s churches are pastored,” blogged small-church pastor Karl Vaters. “Even in the United States, their number is increasing at a rapid rate as the size of existing churches continues to decline and new church plants pop up.”

Like Stover, many bivocational pastors have felt overwhelmed by tax issues related to bivocational ministry. Along with that, many church financial managers don’t have the tools needed to help their bivocational pastors with these issues.

“You have all these additional problems created especially in smaller churches where the treasurer may have no formal training to do all these things and may not fully understand their role,” said Frank Sommerville, a CPA, nonprofit tax attorney, and senior editorial advisor for Church Law & Tax.

With this in mind, Church Law & Tax asked Sommerville and two other senior editorial advisors to help untangle some of the more difficult areas encountered by bivocational pastors.

A daunting, complex task

For those in ministry who also work full or part time outside the church, navigating the legal and accounting complexities of tax law compliance can be daunting. And because individual situations can vary so widely, generalized tips and information can range from unhelpful to confusing to even contradictory.

Sommerville said there’s no “one size fits all” guide book when it comes to the respective roles church treasurers and bivocational ministers play in the process.

“It’s a two-pronged approach,” he said. “The church has to be sophisticated or get enough training … to meet its responsibilities, like housing allowance and expense reimbursements plans, and the minister must properly report their income and housing allowance on the tax return. Problems are created when these roles aren’t understood or fully carried out. And you can’t make generalizations when tackling this topic. It can go from very simple to very complex really quickly.”

Seek expert guidance

While it is possible for bivocational pastors to complete their own tax return, Sommerville said most turn to a professional for some level of assistance. And that’s the smart thing to do. However, he added, the smartest thing to do may be to seek professional assistance from a tax professional in establishing the compensation package for the bivocational minister.

“Ministers have a self-motivation and an integrity to try and do it right,” Sommerville said. “Rarely do I find that the ministers intentionally create a problem. Many times they listen to other ministers who were given incorrect information, and that’s where they get off base.”

When it comes to seeking professional tax assistance, CPA and senior editorial advisor Elaine Sommerville offered this advice:

Ask [potential tax preparers] how many ministers’ tax returns they do every year. Then ask what they do to stay current with that specific subject. Don’t be afraid to walk away if they reply, “Oh yeah, I do a couple of ministers' tax returns.” That’s not good enough. This is a very specialized area of the law, which is not familiar to a lot of tax preparers, and finding someone with solid experience and understanding in this area is very important.

It’s also important to find out what they know about the housing allowance benefit, added CPA Vonna Laue, also a senior editorial advisor. “Start off asking about the housing allowance. Not every tax preparer is going to understand the uniqueness of ministerial tax reporting issues,” explained Laue. “They’re professionals, but they may not have the expertise for this because it is such a complicated area. If they get that deer in the headlights look, or if they say, ‘housing what?’ you probably can safely assume that they have not helped many ministers along the way.”

Keeping careful records

For the Stovers, keeping detailed records took on a life of its own. The first year after the couple moved from Indiana to Kentucky, Vince Stover kept some mileage logs, but wasn't disciplined or consistent about tracking where he drove, for what reason, or for which job. Early the next year, as Katie Stover began assembling the file the couple would take to meet their new tax professional, her husband realized his mistake.

Although he painstakingly tried to recreate as much as possible from his calendar, Vince Stover knew that not every trip he made to see a visitor from church or a member in the hospital had been noted. And while he said the accountant they work with was “blown away” with their initial attempts at record-keeping, they lost valuable data that could have lowered their tax liability that year.

“He was in shock over how organized [Katie] was,” Vince Stover said. “But even so, the first year we definitely missed some things. We could have gotten more of a refund had we recorded things better.”

Record-keeping is something Elaine Sommerville stresses with every client. “Almost any potential tax pitfall can be avoided with communication and consistent documentation,” she said, which is critical for a bivocational minister who often must switch between secular and church work several times on any given day.

“Mileage, or auto expense, is probably one of the biggest expenses incurred by a minister,” she said. "There’s no other method for determining what the deduction is unless a minister keeps track of his mileage. Whether a minister keeps track using a phone app, notebook, or another method, what matters most is that it’s done all the time, every time, and that it is done at the time the mileage is driven.”

Tax estimates and savings

Another critical component is knowing your individual tax estimate, Elaine Sommerville said.

She explained:

You can’t use income tax withholding tables to get there, because they don’t consider all the sources of income in your family. The incremental tax brackets, where they break, and whether the minister is subject to self-employment tax as well as other factors all affect the tax estimate. It’s always good for a bivocational pastor to realize that any additional taxable income from the church is going to come in at the highest tax bracket that he’s in. You cannot guess its tax effect; you need to know the tax cost and you need to plan.

Perhaps the most misunderstood tax savings for pastors who aren’t experienced in tax preparation is the ministerial housing allowance, Elaine Sommerville said.

“Up to 100 percent of a minister's salary can be allocated to a housing allowance and it represents the biggest tax advantage for most ministers, even though it still is subject to self-employment taxes,” she explained.

Laue said the ministerial housing allowance is a benefit that bivocational ministers should use to its full advantage—especially given their circumstances.

The housing allowance “is certainly a benefit that the church can offer ministers that the other organization for which they work likely cannot, unless it also is a church or ministry-related entity,” Laue said.

Taxable income vs. tax deductions

Laue said bivocational ministers can help their tax liability by understanding the difference between taxable income and tax deductions when it comes to allowances. The housing allowance is a familiar term to many, but other allowances—like automobile and book allowances—are different in that they represent taxable income. Foregoing the taxable allowance and enacting an accountable expense reimbursement plan is a smart move, she added.

Laue explained:

The problem is that [set amounts from automobile allowances and book allowances] each month create fully taxable income for income tax purposes. Whereas, if the church reimburses for miles driven for doing visits or [other work-related activities] at the IRS mileage rate or lower, that’s completely tax-free under an accountable reimbursement plan. It requires a little more record-keeping, but you don't have to pay tax on that, so it’s one area where some tweaking could potentially be of real help. To maximize the benefit for bivocational ministers, churches should categorize and treat these funds differently.

Elaine Sommerville offered these additional insights:

Plans should qualify as accountable expense reimbursement plans to secure tax-free reimbursements for the ministers, This is now a critical step in the process since recent tax legislation eliminates the deduction for out-of-pocket employee business expenses by any employee, including ministers. For bivocational ministers, a strong accountable expense reimbursement plan covering all the minister’s business expenses provides the best use of the church’s funds in the most advantageous manner for the minister.

Learning from experience

Vince Stover hopes he won’t always need to be a bivocational pastor. Like many others, to support his family now, he said he needs to have a job in the secular workplace in addition to his ministry work. Reflecting on this, he says one benefit of his current situation is he has learned a lot from the experience, including the discipline and organization needed to meet his tax responsibilities.

“If I could do all this over again, I wouldn’t change a thing about our accountant or really much at all about how we've done things since that first year,” he said. “He communicates with us and tells us what's going on, even when it’s something we don’t necessarily want to hear.”

A few more tips for bivocational pastors

CPAs Vonna Laue and Elaine Sommerville answered a few other questions to help guide bivocational pastors.

When it comes to taxes, what is one big mistake bivocational pastors make?

Sommerville: Churches aren’t required to withhold, so many churches won’t and don’t even offer to do that, especially smaller churches. That’s where some ministers get into trouble, and there’s tax due.

What about benefits if a bivocational pastor is receiving a very minimal compensation?

Sommerville: Most benefits cannot be offered unless you’re an employee. Proving you’re an employee requires some level of compensation. Now it’s common, and possible, to pay a minister only housing allowance. Housing allowance is not subject to federal income tax but is still subject to self-employment tax.

Also, consider an Individual Retirement Plan (IRA). The IRA is a deduction for federal income tax purposes, but not for self-employment tax purposes. So even if bivocational pastors use all of their salary from the ministry job to fund an IRA, they’ll still owe self-employment tax on that entire amount. You can still owe money in this situation, so that’s something to keep in mind.

One of the things to also remember is that an employer can’t, in essence, look at the worker and say, “We’ll just pay you in daycare.” Compensation can be in cash or noncash items such as free daycare. Specifically, it’s difficult to only negotiate a compensation package just for a selected noncash benefit without tax consequences.

What if pastors aren’t sure about being bivocational? How should I guide them?

Laue: Take a long-term approach. What are their long-term goals, and what are the church’s? Will they continue to do this part-time or do they expect that within a certain period of time their position will transition into full-time church work? Encourage them to budget, plan, and put away reserves for that if that’s the case. If they’re, say, an IT specialist and they don't feel called to full-time ministry but enjoy doing some ministry work, that's great. Make sure everyone is on the same page.