By Dennis Wiggs
The young pastor must learn early in the ministry how to satisfy the Internal Revenue Service. Specific rules apply to ministers and churches. Both should be careful to abide by the rules for testimony’s sake and for obedience to the law.
When the pastor understands the financial aspects of the ministry, he can reduce the risk of an IRS audit.
File Income Taxes Properly
The minister must establish proper procedures for filing his taxes. First, the pastor is considered by the Internal Revenue Service to be an employee of the church. The church treasurer is expected to provide the pastor with a Form W-2 at the end of each year showing the “actual” salary.
Housing, auto, and other allowances should not be included on this form. If the minister does not spend all of one or more of those allowances, he should self-report the difference as income in his personal income tax reporting.
The minister must report his salary using the quarterly Form 941. Also, the minister is responsible to pay all applicable FICA taxes. Calculate this on Schedule SE and pay this tax when the Form 1040 is filed.
Taxes Withheld
The church treasurer or bookkeeper may withhold a sufficient amount from the pastor’s salary to cover federal and state income taxes, plus enough for self-employment taxes. The amounts withheld must be reported to the proper agencies and on time.
A young pastor may hesitate to discuss these matters with a church treasurer, especially if he is the only church employee. That is why it would be wise to purchase and read a minister’s tax guide every year. Mark clearly the requirements for the church, and then share it with the treasurer or bookkeeper.
The records are not as complicated as they may appear to a dedicated, volunteer church treasurer. The young preacher must explain the forms carefully and kindly.
Understand Clergy Compensation
Besides the salary provided by the church, your pastorate should provide, other benefits, such as medical insurance, auto allowance, housing provision and ministry allowances. An expense reimbursement plan should cover the cost of documented expenses.
If documented correctly, reimbursements do not have to be reported for tax purposes. The preacher should record auto expenses, hospitality expenses, depreciation on personal office equipment, subscriptions, books, long-distance phone calls for the church or ministry, etc. The IRS provides reasonable methods for these expenses to be documented.
My Salary is Small!
Most ministers do not receive adequate pay. Nor are they reimbursed for the time and energy expended on behalf of the church. That is why it is important for the young preacher and his family to stretch every dollar as far as possible. A workable budget, a satisfactory bookkeeping system, and an detailed plan for paying taxes are essential to the pastor’s financial health. I challenge you to start today.
About the Writer:Dennis Wiggs retired in 2004 after many years in ministry.
Adapted from Contact magazine, March 1999.