• Feature articles in the previous two 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 takes effect on January 1, 1990. According to the article appearing in the previous issue of Church Law & Tax Report, 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 deduction of half their self-employment tax for both income tax and self-employment tax purposes. This position was based on private discussions with representatives of the IRS chief counsel’s office. In a recent letter to Washington, DC attorney Charles Watkins, a representative of the IRS chief counsel’s office confirmed that clergy will be entitled to a deduction in computing both their income tax and self-employment tax liabilities in 1990. This clarification should come as good news to clergy and other persons treated as self-employed for social security purposes since the burden of the new self-employment tax rate will be significantly eased. The recent IRS letter also resolves another issue addressed in the previous two issues of this newsletter—whether or not clergy who report their income taxes as employees (rather than as self-employed) would be eligible for any deduction in computing their income tax or self-employment tax liability. The IRS letter confirms that the two deductions will be “allowable to all individuals on whom [self-employment] taxes are imposed, including common law employees.” Finally, note four other considerations. First, the calculation of estimated taxes in 1990 (and future years) will need to incorporate the new rules. Clergy have been provided guidance in advance of their first quarterly estimated tax deadline for 1990 (April 15th). Second, churches that have paid half of their ministers’ self-employment taxes in the past in order to “duplicate” the payment of half of all employees’ FICA taxes will need to reassess this practice. A more complex analysis will be required to determine “half” of a minister’s self-employment tax liability under the new rules. Third, IRS Publication 17 (page 27) presents the original position of the IRS (i.e., clergy who report their income taxes as employees are not eligible for any offsetting deduction). This information is incorrect, and should be disregarded. The recent IRS letter indicates that the next issue of Publication 505 (“Tax Withholding and Estimated Tax”) will state the current position of the IRS. Fourth, there will be no deduction in computing self-employment taxes for taxpayers who earn $55,550 or more in 1990 (a partial deduction is available for taxpayers earning between $51,300 and $55,550).
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