Key point 1-03.02. Most ministers should report their federal income taxes as employees, because they will be considered employees under the tests currently used by the IRS and the Tax Court.
The question of whether a minister is an employee or self-employed for federal income tax reporting purposes is an important one. The IRS thinks so too, for its audit guidelines for ministers state that "the first issue that must be determined is whether the minister is an employee or an independent contractor." Why is this distinction so important? Consider the following reasons:
Reporting compensation. Employees report their compensation as wages on line 7 of Form 1040, while self employed persons report compensation on Schedule C (of Form 1040).
Business expenses. Employees deduct unreimbursed (and "nonaccountable" reimbursed) business expenses on Schedule A only if they itemize deductions and only to the extent that such expenses exceed 2% of adjusted gross income. Self employed persons report their business expenses on Schedule C. Business expenses are in effect deductible whether or not the minister itemizes deductions, and are not subject to the 2% floor.
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.