Ministers—especially new ones—often fail to file income tax returns. It's a common problem, because churches are not required to withhold either income taxes or Social Security taxes from the wages of ministers who are performing ministerial services. This occurrence takes place for two main reasons:
- Ministers are classified as self-employed by the tax code for Social Security purposes (they pay the self-employment tax in lieu of having Social Security and Medicare taxes withheld from their wages by their employing church), and
- The tax code exempts the wages of ministers from income tax withholding.
Unless they elect voluntary tax withholding, ministers are required to prepay their federal income taxes and self-employment taxes using the estimated tax procedure. This requires the minister to estimate his or her income taxes and self-employment taxes for the year and pay one-fourth of this amount quarterly.
The problem is that few seminaries inform students of their obligation to prepay their taxes using the estimated tax procedure. Many new ministers assume that their church will operate like a secular employer and withhold these taxes. When they realize that nothing is being withheld, pastors may rationalize their failure to pay taxes or file tax returns (e.g., "ministers must be exempt from taxes" or "I probably am not earning enough to trigger withholding"). This leads to nonpayment of taxes and, in many cases, to a failure to file a tax return.
In time, some of these ministers realize that they owe back taxes, but they are unsure how to proceed. Thankfully, there are preventative and restorative measures you can take. Consider the following points pertaining to clerical income tax procedures:
- If a tax return is not filed by the due date (including extensions), a taxpayer may be subject to the failure-to-file penalty unless reasonable cause exists.
- Taxpayers who did not pay their tax liability in full by the due date of the return (excluding extensions) may also be subject to the failure-to-pay penalty unless reasonable cause exists.
- Interest is charged on taxes not paid by the due date. Interest is also charged on penalties.
- Ministers who have not filed one or more tax returns should consult with a CPA or tax attorney to determine whether taxes are owed, and if so, what options are available. Taxpayers who owe taxes, but are financially unable to pay them, may qualify for assistance in making payments through either an installment agreement or an offer in compromise. Discuss these options with your tax adviser.
- There is no penalty for failure to file if you are due a refund, but a return claiming a refund has to be filed within three years of its due date for a refund to be allowed.
- After the expiration of the three-year window, the refund statute prevents the issuance of a refund check and the application of any credits, including overpayments of estimated or withholding taxes, to other tax years that are underpaid.
- The statute of limitations for the IRS to assess and collect any outstanding balances does not start until a return has been filed. In other words, there is no statute of limitations for assessing and collecting the tax if no return has been filed.
Church leaders should discuss tax filing requirements with every new minister, especially those who are recent seminary graduates. Leaders need to ask pastors questions like, "How do you plan to pay your income taxes and self-employment taxes? Through voluntary withholding? The estimated tax procedure?" If the latter, provide them with a current copy of IRS Form 1040-ES (including the instructions). This is the form used to compute estimated taxes. It also includes payment vouchers that are used with each quarterly tax payment.
Check out the 12 Law & Tax Guidelines for New Ministers for key legal and tax information for new pastors.
For a comprehensive treatment of income tax policies for ministers, see the Church & Clergy Tax Guide.