Ministers—especially new ones—often fail to file income tax returns. This common problem arises because churches are not required to withhold income taxes or Social Security taxes from the wages of ministers performing ministerial services. There are two primary reasons for this:
- Ministers are classified as self-employed for Social Security purposes, meaning they pay self-employment tax instead of having Social Security and Medicare taxes withheld.
- The tax code exempts ministers’ wages from income tax withholding unless voluntary withholding is elected.
Key Takeaways:
- Ministers must prepay federal income and self-employment taxes quarterly using the estimated tax procedure.
- Failure to file tax returns or pay taxes can lead to penalties, interest, and long-term consequences.
- Church leaders should educate ministers about their tax filing obligations.
Ministers are required to prepay federal income taxes and self-employment taxes using the estimated tax procedure. This means estimating their tax liability for the year and paying one-fourth of the amount quarterly. However, many seminaries fail to inform students of this obligation, leading to misunderstandings.
Common Issues for New Ministers
New ministers often assume their church will handle tax withholdings like a secular employer. When this doesn’t happen, they may rationalize not filing taxes, mistakenly believing:
- Ministers are exempt from taxes.
- Their earnings are too low to require withholding or filing.
This can result in nonpayment of taxes and failure to file tax returns. In time, many realize they owe back taxes but are unsure how to proceed.
Steps to Address Unfiled Tax Returns
Ministers who have failed to file one or more tax returns should take the following steps:
- Consult a CPA or tax attorney to determine outstanding tax obligations and available options.
- Understand potential penalties, including:
- Failure-to-file penalty: Applies if returns are not filed by the due date (including extensions), unless reasonable cause exists.
- Failure-to-pay penalty: Applies if taxes are not paid in full by the due date.
- Interest: Charged on unpaid taxes and penalties.
- Explore options for financial relief, such as installment agreements or offers in compromise, with your tax advisor.
Note: There is no penalty for failing to file if you are due a refund, but refund claims must be made within three years of the return’s due date.
Understanding Tax Filing Deadlines
The IRS enforces strict deadlines for tax filings:
- Refunds cannot be claimed after three years from the return’s original due date.
- The statute of limitations for the IRS to assess and collect taxes does not begin until a return is filed. Without filing, there is no limitation period.
Ministers who delay filing risk losing refunds and facing indefinite tax liabilities.
How Church Leaders Can Help
Church leaders play a crucial role in helping ministers meet their tax obligations. They should:
- Discuss tax filing requirements with every new minister, especially recent seminary graduates.
- Ask specific questions, such as, “How do you plan to pay your income and self-employment taxes? Through voluntary withholding or the estimated tax procedure?”
- Provide IRS Form 1040-ES and instructions to help ministers calculate and pay estimated taxes.
Educating ministers about their tax responsibilities reduces the likelihood of noncompliance and financial stress.
FAQs
- What are estimated taxes?
Estimated taxes are quarterly payments that cover self-employment and income tax obligations not withheld by an employer. - Can ministers elect voluntary tax withholding?
Yes, ministers can arrange for voluntary withholding through their church, though this is uncommon. - What happens if a minister does not file taxes?
Failure to file or pay taxes can lead to penalties, interest, and, in extreme cases, legal action. - How can churches assist ministers with taxes?
Churches can educate ministers about their obligations and provide resources like IRS Form 1040-ES to simplify the process.