Ministers can prepare their own tax returns. While ministers' taxes present several unique rules, these rules are not complex. Unfortunately, many people confuse uniqueness with complexity. With a little effort most ministers should be able to comprehend these rules sufficiently to prepare their own tax returns. The information provided in my annual Church & Clergy Tax Guide, together with IRS Publication 17 (Your Federal Income Tax), should be all you need in most cases. Of course, some ministers will prefer, for a variety of reasons, to have someone else prepare their tax returns. If that is your choice, be sure you select someone with experience in the preparation of ministers' tax returns (preferably a tax attorney or a CPA). You may wish to share a copy of the Church & Clergy Tax Guide with the person you select.
Before you hire a tax preparer
Before deciding to have someone else prepare your tax return, consider the following:
- More than half of all income tax returns prepared by paid preparers contain errors, according to an IRS study. What were the most common mistakes? Failing to claim the standard deduction; entering dollars and cents in the area for dollars; failing to claim (or incorrectly stating) the amount of a refund; failing to total the multiple entries on Schedule C; filing a Schedule SE even though net selfemployment earnings are less than $400; using the wrong filing status (joint, head of household, etc.); and failing to check the age/blind box.
- Paid preparers are subject to a penalty of $1,000 per return (or 50 percent of the income they earned for preparing the return, if greater) for any understatement in taxes that is due to an "unreasonable position," which is defined by law to mean a lack of a reasonable basis. IRC 6694. As a result, competent paid preparers generally avoid overly aggressive positions when completing ministers' tax returns.
- The IRS has established a Return Preparer Program that can trigger audits of all returns prepared by certain return preparers who intentionally or negligently disregard federal tax law (code, regulations, and rulings). Ministers and church staff should be cautious when dealing with nonprofessional or "mail−order" return preparers, especially those who promise significant tax savings or are not attorneys or CPAs. See IRS Internal Revenue Manual § 4.11.51.
5 tips for selecting a tax preparer
If you've decided to have your tax return prepared by a professional, the next step is to find someone who is experienced and competent in the preparation of ministers' tax returns. Here are some tips to help you find such a person:
- If possible, stick with a CPA or tax attorney.
- Try to use someone local.
- Find other ministers in your community who have their tax returns prepared by a professional, and ask questions. Who do they use? Are they pleased? What is the cost? How many ministers' tax returns does the person prepare?
- Call CPAs listed in your telephone directory: ask if they prepare ministers' tax returns and, if so, ask how many they prepare.
- When you find one or more possible candidates, consider asking a few simple questions that should be answered easily by anyone with any experience in handling ministers' tax returns. Here are a few examples: (1) Are ministers employees or self−employed for Social Security purposes? Ministers always are selfemployed for Social Security purposes with respect to their ministerial income. (2) Can I claim my housing allowance exclusion in computing my self−employment taxes? Absolutely not—ever. (3) If I report my church wages as an employee, are my wages subject to FICA taxes? The answer is never. (4) If I report my church wages as an employee, are my wages subject to income tax withholding? No, unless a minister elects voluntary withholding. (5) What is the minister's housing allowance? The portion of a minister's salary designated in advance by an employing church for housing expenses. This amount is not taxable in computing a minister's income taxes to the extent it is used to pay housing expenses and does not exceed the home's fair rental value.
Persons who are familiar with ministers'taxes should be able to answer all of these questions knowledgeably.
The IRS can help too
Need help completing a W 2, W 3, 1099, or 1096 form? The IRS operates a centralized call site to answer questions about reporting information on these forms. If you have any questions about completing these forms, call the IRS at 1 866−455−7438, Monday through Friday, 8:30 a.m. to 4:30 p.m. eastern time.
• Key point. The Social Security Administration (SSA) is urging employers to be sure that amounts reported on Form W−3 correspond to amounts reported on quarterly 941 forms. The SSA also has noted that the main reason that W−2 forms are rejected is the use of incorrect Social Security numbers. Churches can verify the accuracy of Social Security numbers of up to ten employees on the SSA website. Up to five Social Security numbers can be verified by calling the SSA at 1-800-772-6270 or 1-800-772-1213.
Tip. The IRS has provided the following suggestions to reduce the discrepancies between amounts reported on Forms W−2, W−3, and Form 941: First, be sure the amounts on Form W−3 are the total amounts from Forms W−2. Second, reconcile Form W−3 with your four quarterly Forms 941 by comparing amounts reported for: (1) Income tax withholding (box 2). (2) Social Security and Medicare wages (boxes 3, 5, and 7). (3) Social Security and Medicare taxes (boxes 4 and 6). Amounts reported on Forms W−2, W−3, and 941 may not match for valid reasons. If they do not match, you should confirm that the reasons are valid.
Tip. What are the most common errors the IRS finds on W−2 forms? Using ink that is too faint; entries that are too small; adding dollar signs to dollar amounts (they are not required); and checking the "retirement plan" box when not applicable.
Retaining W−2 forms
It is a good practice for employees to keep copies of all W−2 forms issued to them by their employer until they confirm that the earnings reported on their W−2s correspond to the earnings credited to them on the Social Security Statement that is automatically issued each year to all Americans aged 25 and over. One of the main purposes of the Social Security Statement is to encourage taxpayers to check the accuracy of Social Security records and to make corrections. If earnings reflected on an employee's Social Security Statement are underreported, the easiest way to correct the record is for the employee to present a copy of his or her W−2 for the year in question to the nearest Social Security office. While proof of earnings is possible without a W−2 form, it is more difficult and time−consuming.
Tip. Encourage church employees to retain each W−2 form they receive until they confirm that the earnings reported on the form show up as earnings for the same year on their annual Social Security Statement. You also may want to include a similar notice to your members in your church bulletin or newsletter.
Updated W−4 forms for church staff
If you have not done so already, be sure to check with all nonminister church employees to see if they need to fi le new W−4 forms with the church. The W−4 form is used by employees to report withholding allowances. This information will determine how much income tax the church withholds from the wages of a nonminister employee. The important point is this—W−4 forms often become obsolete because of changes in an employee's circumstances, but the employee fails to submit a new form to the church. This can result in withholding that is significantly above or below the actual tax liability.
Here are some reasons why an employee's W−4 may be inaccurate—the birth of a new child, a pay raise, a divorce, or significant medical expenses. These same considerations apply to ministers who have elected "voluntary withholding" of their taxes.
Tip. The tax cuts passed by Congress in recent years have reduced taxes for most Americans, and this is another reason why church employees should review their W−4 form.
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