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Pastor, Church & LawMember access only

by Richard R. Hammar, J.D., LL.M., CPA

Income Taxes

§ 1.03.02
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:

  1. 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).
  2. 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.

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