A couple of years ago, my wife and I decided to refinance our home. We are budget minded people, have no credit cards and avoid debt if at all possible. Needless to say, when the rates dropped down into the low 3% range a refi was too good to pass up.
Once we began the process, we were alarmed to find out a refinance was not possible because I had not been receiving a W2 for church “income” and therefore could not claim it on the application. Even though I had other forms of income (Land surveying, teaching trumpet lessons), the amount given to me by the church I serve was a large enough portion of our family budget that without it being shown on the application I certainly did not qualify for the loan.
To be clear, I received a signed statement on church letterhead each year I have served as pastor. Our church keeps precise records. Our deacons had been told by other church treasurers along the way that this (a signed letter) was all required to be tax-code compliant. Unfortunately, this was not the case. According to the IRS, pastors are supposed to receive a W2 (or at least a 1099, depending on whom you ask. The great body of information I have read online AND the professional who does my taxes says a W2 is proper). To be fair to the aforementioned advice givers, I have used the same Tax Preparer for eight tax years -this upcoming being the ninth- and he never indicated our method of documenting my contributions from the church was a problem until the year before the attempted Refi.
So, what happened with my refinance? I learned of this at the end of the year and asked for a W2 instead, then refinanced with my bank AFTER filing my taxes. It all worked out in the end. What I learned in the process was invaluable.
A Hornet Nest
I fear the way a lot of churches file (or DON’T file) taxes across our country could be referred to as a hornet nest waiting to be stirred up. Sadly, most don’t even realize their responsibility to both the government and her pastor in the form of paperwork.
One might say, “this is America. I have freedom of religion. I don’t care WHAT the IRS says. We disagree with it so we won’t do it!” I can understand that reaction because, especially for smaller congregations, why bother with reporting what would be considered trifle? Who cares, right? But I want you to consider the admonitions found in scripture concerning taxation.
First, when Jesus was confronted with the issue of whether or not believers need to “pay tribute”, He responded by saying this:
“…lest we should offend them, go thou to the sea, and cast an hook, and take up the fish that first cometh up; and when thou hast opened his mouth, thou shalt find a piece of money: that take, and give unto them for me and thee.” Matthew 17
We’re citizens of a Kingdom not of this world. At the same time, we are to pay taxes. In another instance, Herodians (followers of Herod) asked if Jesus paid taxes. Jesus’ response was likewise to the above:
“And Jesus answering said unto them, Render to Caesar the things that are Caesar’s, and to God the things that are God’s. And they marvelled at him.” Mark 12
Finally, Paul wrote in Romans 13 that we should pay tribute and render honor where it is due in the context of secular government or rulers, as he called them.
“Wherefore ye must needs be subject, not only for wrath, but also for conscience sake. For for this cause pay ye tribute also: for they are God’s ministers, attending continually upon this very thing. Render therefore to all their dues: tribute to whom tribute is due; custom to whom custom; fear to whom fear; honour to whom honour.”
The word tribute means “annual tax levied on houses, lands, or persons.” 1 There’s really no way around it. We should obey the law when it comes to taxes. The IRS considers what a church gives their pastor income and requires certain documentation of that income. Churches and pastors should comply with the law and report this each year.
Aside from the Biblical instruction to obey laws concerning tribute and taxation, also consider how complying with these laws could save you an enormous headache later. WHAT IF you seek to provide for your pastor “full time” support? How will he get a mortgage? What if the IRS pays your deacons a visit? As of now, they seem happy to overlook small churches (again, the “why bother?” principle) but will they always do so? Our country is becoming more and more hostile to believers. Combine that with Empirical, Prosperity Gospel mega-churches and ministries with million dollar budgets doing all they can to evade tax and build wealth as if they were corporations, and you can see this might be a serious issue one day for all of us. A little proper bookkeeping now could be a great help in the future.
What Do We Need To Do?
First, let me say I am not a Professional. I am just a preacher who has a little personal experience with this. You need to talk to a professional in your area. Seriously, you NEED to talk to a pro.
But from my experience, it’s not that complicated, really. A pastor, even though he is supposed to receive a W2, is not cut taxes by the church each year. Churches don’t have to fool with that. A pastor is in a very unique position as far as taxation/documentation is concerned. He receives a W2 but he still files as if he is Self Employed. That means that he pays the entire portion of his Social Security, rather than splitting this tax with his “employer” as most tax payers. (Note: I understand that WE, ministers, do not consider ourselves employees nor do we consider churches our employers. That doesn’t change how the IRS defines us. I am using their terms).
Churches are to tabulate everything considered wages by the IRS given to their pastor in a single year and issue him a W2 with that dollar amount shown. Pastors are supposed to pay taxes quarterly on church income just as any other person deemed by the IRS as self employed. A pastor must also claim money given to him by other churches where compensation was given (Annual Meetings, Association Meetings, weddings, funerals, etc).
In addition to providing a W2 to their pastor, churches are required to give a 1099 to any speaker (a guest preacher, for example) given over $600 in a year’s time. Unfortunately, if giving a preacher a W2 is rare, giving a guest speaker a 1099 is MORE rare. We just don’t realize it’s our legal responsibility according to the laws of the land.
I venture to say most reading this were totally unaware of these rules (just like me, prior to my failed attempt at refinancing my mortgage). Take a few moments to do a Google search on the issue and then talk to a professional. Please, don’t shoot the messenger. 🙂
Some Helpful Tidbits
Here are some helpful things I have learned including deductions that could help preachers at tax time. These are deductions common on my tax returns. Again, I am not a professional. I am passing on what my professional advises me.
- Housing Allowance: A Church can stipulate a portion of contributions given to their pastor as a Housing Allowance. He will still have to pay Self Employment tax on the full total but Housing Allowances are exempt from Income Tax (unbelievers often criticize this exemption, but few realize pastors file Self Employed and pay the full Social Security tax, not being split between employer/employee like everyone else). The church must approve this in conference and you can report this amount on the W2.
- Mileage to Special Events: While a pastor isn’t supposed to claim mileage to the church he serves, he can claim mileage to events outside of his home church. This includes travel for hospital visits, funerals, weddings, Association Meetings, Annual Meetings, Preacher Meetings, or any time he “fills in” as a guest speaker at another church body.
- Per Diem: For each night spent away from home, a pastor can claim per diem.
- Lodging: If a hotel stay is required, you can claim this total (up to an IRS approved, dollar amount).
- Books, Education, Materials, Dry Cleaning: Pastors can claim any ministry related purchases or expenses.
- Utilities: As pastors, we study, email, write articles, manage internet and newsletter ministries, and even counsel at home. A percentage of your utility and phone expenses may qualify as a deduction.
- Charitable Giving: You can deduct contributions made to churches or other nonprofits.
- Keep Detailed Records: Keep a journal or spreadsheet of ministry trips. Include date, Church and City/State, Odometer readings, meal locations and prices, hotel stays, expenses and I even keep record of sermon topics or prayers.
- Leave Some Unclaimed? The professional who does my taxes each year recommends I leave some things unclaimed as it reduces my chances of being audited AND ALSO shows the IRS I am not trying to cheat them in the case of an actual audit. The smaller deductions I don’t bother with.
- Seek Professional Help: The cost of using a professional is minimal to the headache of figuring your own taxes, an audit, fees and fines.
Maybe the above blog entry can help you. I don’t like the paperwork nor do I enjoy paying taxes any more than you. Yet that’s the reality of the world in which we live. I will take bookkeeping over a nest of hornets any day.
Of course, this post not intended to be legal advice in any way or form but is meant to be used as a reference work only, which may or may not help you make informed decisions concerning your church or ministry. It is not to be used in replacement of or as a substitute for a lawyer or CPA. As always, you should seek the counsel of a competent lawyer or CPA. The authors and or publishers are not responsible for any legal repercussions, adverse effects or consequences resulting from the use of any of the information discussed in this site.