As a minister, you occupy a unique role in your community. You also occupy a unique role within the U.S. tax code. Ministers are one of a handful of occupations that are considered a hybrid worker for tax purposes. While you are treated as an employee of a church in some ways, you are largely considered to be self-employed for income taxes. What does this mean for you? Here are three keys to avoiding a tax bill due at the end of the year.
Pay Self-Employed Taxes As You Go
Ministers, like most other Americans, must pay income taxes on their earnings. But as a self-employed worker, they are also subject to self-employment taxes. Self-employment taxes take the place of payroll taxes for workers employed by someone else. For those workers, the employer pays half the total contribution to Medicare and Social Security taxes while the employee pays the other half.
As a self-employed person, the minister must pay both halves of this mandatory contribution. If you are subject to this tax, bear in mind that it can be a hefty bill — up to 15.3% of your income — due on April 15. Installments should generally be made (known as estimated taxes) on a quarterly basis. By paying in advance, you will have satisfied your tax burden as you earn.
Avoid Extra Taxable Income
Different income sources are treated differently for self-employed ministers. Your housing allowance, for instance, is considered income for the self-employment tax but not for income tax. If you take full advantage of paid housing rather than an additional salary, you reduce your overall tax bill.
Many ministers are also paid for travel expenses. The church may opt to provide a set allotment annually or monthly that the minister can then use at their discretion. While this may be easier, the allowance is taxable for income tax and self-employment tax. Instead, avoid both taxes by opting to provide travel receipts and be reimbursed by the church. This method is not taxable income.
Work With a Professional
Because a minister's income tax situation is fraught with unusual rules and forms, it's smart to work with an experienced tax preparer. This preparer should have experience working with clients who are also ministers and keep abreast of annual tax law changes. Consider scheduling a meeting mid-year to determine if you are paying enough into your self-employment taxes through quarterly estimated payments and to discuss any changes you expect during the tax year.
While you may have to spend a little more time working through your tax obligation as a self-employed but hybrid worker, you can meet the challenge. With a quality tax preparer on your team, you can take care of these necessary matters quickly and return to caring for your congregation. Learn more by contacting tax preparation services.