Should a church ordain or license someone in order that the church can designate a housing allowance for that person?
A church should never ordain or license anyone to make that person eligible for a Minister’s housing allowance. Ordination or licensing clergy should be only for theological reasons, not for tax reasons. The IRS does not automatically consider someone a Minister for Tax Purposes simply because that person is ordained or licensed.
As a practical matter most ordained Ministers serving a church will answer yes to all the questions. Many licensed and commissioned Ministers cannot meet all of the criteria, but some can. Taxpayers must make their own decisions about whether they are Ministers for Tax Purposes. If they need help, they should consult a competent tax advisor with experience in Ministerial tax issues.
Many taxpayers are familiar with Form 1040, but employees and self-employed taxpayers complete the tax return differently. Employees may deduct unreimbursed business expenses on Schedule A only if they can itemize their deductions. Taxpayers who are self-employed for income tax purposes report income and business expenses on Schedule C whether they itemize or not.
What can happen to Ministers who incorrectly file a return as self-employed instead of as an employee?
The IRS can reclassify Ministers as employees for income tax purposes. Remember that employees may only deduct business expenses if they can itemize them. If the IRS reclassifies a Minister as an employee, the Minister may lose the business expense deduction and could also owe back taxes along with penalties and interest to the IRS.
Can churches classify paid workers as independent contractors to avoid paying FICA or withholding income taxes from their salaries?
No. Churches cannot classify paid workers as independent contractors to “save money”; they must follow the law. Some Ministers may think they will save money on taxes if they treat themselves as self-employed for income tax purposes rather than as an employee. This is not often the case, but overall, Ministers and churches should follow the IRS rules.
Churches must pay their share and withhold the employee’s share of FICA for non-Ministerial employees. Churches cannot classify non-Ministerial employees as self-employed to avoid paying FICA.
Few churches qualify for an exemption from paying FICA for their non-Ministerial employees. Churches have one chance to gain exemption from paying FICA for their non- Ministerial employees and the churches taking this route must certify that they are opposed for religious reasons to making the payment for Social Security taxes. This is something that few, if any, churches can do. When a church elects to shift the burden of paying Social Security taxes to their employees, the employees must then pay SECA taxes as if they are self-employed.
The Social Security Administration sends annual statements to workers and former workers aged 25 and older. All taxpayers should carefully review their statement. Any errors can be reported and corrected more easily sooner rather than later. Statements can also be requested at SSA.gov.
A 403(b)(9) is a defined contribution plan specifically designed for the unique needs of churches, church organizations or their missions. While similar to other 403(b) and 401(k) plans, 403(b)(9) plans are not subject to certain ERISA requirements, such as annual 5500 reporting. In addition, 403(b)(9) plans offer retired Ministers the ability to have retirement distributions designated as housing allowance.
All employees are eligible to participate unless the plan specifically excludes them.