20 Common Clergy Tax Errors

How to report correctlyCorrection will increase or decrease taxes 1 reporting Social Security taxes as

How to report correctlyCorrection will increase or decrease taxes

1reporting Social Security taxes as an employeeall ministers are self-employed for purposes of Social Security with respect to their ministerial income (except for some government chaplains)increase
2reporting income taxes as a self-employed workermost ministers are employees for income tax reporting purposes under the tests used by the IRS and Tax Courtincrease
3failure to report “special occasion gifts” as taxable incomemost special occasion gifts to ministers (e.g., Christmas,birthday, anniversary, retirement) represent taxable incomeincrease
4failure to report the personal use of a church-provided car as taxable incomea minister’s personal use of a church-provided car represents taxable income, and such use must be valued and reported as income by the church on the minister’s W-2 formincrease
5failure to claim an “adjustment” for half of one’s self-employment tax liabilityministers, like any taxpayer who is self-employed for Social Security, can deduct (as an adjustment on line 27 of Form 1040) half of their self-employment tax computed on Schedule SEdecrease
6claiming the housing allowance exclusion when computing self-employment taxesthe housing allowance is excluded from taxable income when computing income taxes, but not when computing self-employment taxesincrease
7self-employed ministers claim exclusions available only to employeessome items (such as employer-paid health insurance premiums, employer-paid group term life insurance up to ,000, “cafeteria plans,” and 403(b) annuities) are excludable from taxable income only by employees, and not by self-employed personsincrease
8failure to report income associated with “below-market interest loans”low-interest and no-interest loans made to ministers generate taxable income (if the loan amount is ,000 or more)increase
9inadequate records to substantiate business expensesministers can participate in accountable expense reimbursement arrangements, and deduct unreimbursed and nonaccountable reimbursed expenses, only if they maintain adequate records to substantiate their expensesincrease
10ineligible ministers exempt themselves from Social Securityeligibility of ministers for exemption from self-employment (Social Security) taxes requires that several strict conditions be metincrease
11excluding the church-designated housing allowance when computing federal income taxesministers may only exclude the lowest of the following amounts when computing their income taxes: (1) church-designated housing allowance; (2) actual housing expenses; and (3) if they own their home, the annual fair rental value of the home (furnished, including utilities)increase
12failing to deduct unreimbursed and nonaccountable reimbursed expenses on Schedule SEministers can deduct unreimbursed and nonaccountable reimbursed expenses in computing their self-employment taxes on Schedule SE even if they cannot deduct these expenses on Schedule A (because they cannot itemize deductions)decrease
13disregarding the Deason ruleministers must reduce their income tax deduction for unreimbursed and nonaccountable reimbursed business expenses by the percentage of their total income that consists of a nontaxable housing allowanceincrease
14applying the Deason rule when computing self-employment taxesministers should not reduce their business expense deductions in computing self-employment taxes by the percentage of their total income that consists of a housing allowance, since the housing allowance is not a tax-free fringe benefit when computing self-employment taxesdecrease
15failing to claim a parsonage allowanceministers who incur any out-of-pocket expenses to maintain a church-provided parsonage can exclude from their taxable income (when computing federal income taxes) that portion of their compensation that is designated by the church as a parsonage allowance, to the extent it is used to pay for parsonage-related expensesdecrease
16failure to report a church’s reimbursement of a spouse’s travel expenses as taxable incomea church’s reimbursement of a spouse’s travel expenses incurred while accompanying a minister on a business trip represents income to the minister unless the spouse’s presence serves a legitimate business purpose and the spouse’s expenses are reimbursed under an accountable arrangement.increase
17failure to report a forgiven debt as taxable incomea minister incurs taxable income in the amount of a church loan that is forgiven (principal and accrued interest)increase
18incorrect tax liability entered from tax tablesthe IRS cites this as one of the most common mistakes made by taxpayers, so be sure to double-check that you are obtaining your tax liability from the correct table and lineeither
19computational errorsthe IRS cites this as one of the most common mistakes made by taxpayers, so be sure that all totals (deductions, income, etc.) are correcteither
20incorrect or missing Social Security numbersthe IRS cites this as one of the most common mistakes made by taxpayers, so be sure to use correct Social Security numbers (they no longer are printed on the mailing label you receive from the IRS)neither
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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