• Previous issues of Church Law & Tax Report have discussed a significant change in the “self-employment tax” (i.e., the social security tax for self-employed persons) that took effect on January 1, 1990. The self-employment tax rate increased from 13.02% in 1989 to 15.3% in 1990 (i.e., self-employed persons now pay the combined FICA tax), but clergy and other persons deemed self-employed for social security purposes are permitted a “double deduction”—(1) a deduction of half the total self-employment tax (i.e., 7.65%) in computing their self-employment taxes, and (2) a second deduction of half their actual self-employment taxes in computing their income taxes. While it was assumed that the income tax deduction would be an “adjustment” to income taxes (available whether or not a taxpayer is able to itemize deductions on Schedule A), this was not clarified by the IRS. There is good news. The “advance proof copy” of Form 1040, released by the IRS on July 16, 1990, confirms that the income tax deduction will be an adjustment claimed at the bottom of page 1 of Form 1040. This means that clergy will be able to claim this deduction whether or not they are able to itemize deductions on Schedule A. A new line 25 is inserted on the 1990 Form 1040, which lists the “deduction for self-employment tax.” This is important, since it is estimated that only 15% of all taxpayers have enough deductions to use Schedule A. Further, this adjustment does not need to be reduced by 2% of adjusted gross income (as is true of miscellaneous business expenses reported on Schedule A). Clergy also receive a deduction in computing their self-employment (social security) taxes for 1990. The revised Schedule SE (also released by the IRS in July) contains a new line for the computation of this deduction. The new line 4 (of the short schedule) and line 7a (of the long schedule) require the taxpayer to multiply net self-employment earnings times .9235. This is the equivalent of reducing net self-employment income by 7.65% (half the total self-employment tax rate of 15.3%). These new rules will be fully discussed, with filled-in forms, in the next edition of the Church and Clergy Tax Guide (released each December by Church Law & Tax Report).

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