Q&A: Ministers and the Health Insurance Tax Credit

How do we factor our pastor into the health insurance tax credit for our church?

Richard R. Hammar, Attorney, CPA
Bio
Our church would like to apply for the health insurance tax credit that’s available to small employers and tax-exempt organizations. Can we include our pastor in the calculation for this credit?
The Affordable Care Act (“Obamacare”) provides a credit for small employers (including churches) who offer health insurance coverage for the first time or maintain coverage they already have. Note the following two points regarding the treatment of ministers for purposes of the health insurance tax credit:
  1. If a minister is an employee under the so-called “common law employee test,” he or she is taken into account in determining an employer’s FTEs for purposes of the health care tax credit. Also, premiums paid by the church for the health insurance coverage of a minister who is an employee can be taken into account in computing the credit, subject to limitations on the credit. If the minister is self-employed for income tax reporting purposes he or she is not taken into account in determining an employer’s FTEs or premiums paid.
  2. Compensation paid to ministers who are employees for duties performed in the exercise of their ministry is not subject to FICA taxes and is not wages subject to income tax withholding. As a result, their wages are not taken into account for purposes of computing average annual wages.
  3. The fact that ministers are taken into account in determining a church’s FTE count, but their wages are not considered in computing the average annual wages paid by a church, makes it more likely that some churches will benefit from the credit since the generally higher wages paid to ministers are removed from consideration.
  4. See chapter 2 in Richard Hammar’s Church & Clergy Tax Guide for a full explanation of the common law employee test. This is one of the tests used by the IRS and the courts in determining a minister’s reporting status for federal income tax reporting purposes. Also, see the Feature Report titled, “A Valuable Tax Credit for Churches,” to learn more on how your church may be able to save money on health coverage. Both resources are available on ChurchLawAndTaxStore.com.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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