Recently, a young pastor named Michael confronted his
accountant.
"How could you let this happen?" Michael demanded of the
accountant. "How am I supposed to support my family now?"
Michael had been permanently disabled and was no longer able to
continue his ministry -- or any work for that matter. At least, he
thought, he would have a safety net with government aid.
He couldn't have been more wrong. After applying for disability,
he learned that he could expect no help at all from the United
States government (he nor his wife had ever contributed to Social
Security as an employee).
His accountant recalled the discussion they'd had a year before,
when Michael said he was going to file as a conscientious objector
to avoid paying Social Security taxes.
The accountant had explained the pitfalls of what Michael
proposed, but his client wouldn't listen. He was entirely focused
on getting out of paying the tax. "My salary is so small anyway,"
Michael defended. "Why should I give the government a chunk of the
money my family needs?"
Now, as the newly disabled Michael faced his accountant, his
outrage turned to confusion. Michael was a young man with a young
family. His decision to save a few tax dollars cost him the
opportunity to receive government support when he and his family
needed it most.
"Sometimes pastors are their own worst enemies," says Ken
Washburn, a Stockdon, California, accountant. Washburn has been
doing free tax returns for clergy members since 1953.
"I've heard every argument you can dream up for not paying
taxes," says Washburn. "Usually what happens is typical of
Michael's story. Pastors exempt themselves from taxes, then
catastrophe strikes. They go looking for help, but they already
stated to the government that they didn't want to give or receive
help when they filed for the exemption."
Washburn says he challenges pastors to think hard about the
choices they're making. "I urge my clients to make wise, godly
decisions. I urge them to live by the Lord. Be wise, obey the law.
The Bible says to give to Caesar what is Caesar's, and by honoring
the law, we're honoring God."
Too often Washburn's advice is unheeded. "So many people tend to
think that they're never going to get old or that they're
invincible. They imagine that no matter what happens, God will take
care of them."
Less Taxing Taxes
Washburn suggests the following guidelines when tax season
arrives.
1. Do it the right way. Cutting corners and finding loopholes
may sound great, but almost always these shortcuts come with big
consequences. Research your choices, get professional input, and
make sure you're willing to live with the consequences of your
decisions.
2. Look toward the future. You may begrudge the taxes you're
paying now, but think of them as an invisible insurance policy. By
paying Social Security and other taxes, you're ensuring that you,
your spouse, and your children can apply for government aid if
you're no longer able to work.
3. Get professional advice. "Imagine you're an inexperienced
mechanic. You'd get training or buy manuals before tearing into a
car, right? Think of your taxes the same way. Don't make uneducated
choices. Ask a professional. And listen to what he or she tells
you."
4. Think in fundamentals. "So many people come into my office
with the attitude 'I'm not doing what the law says because I'm
above it.' Everyone's attitude should be, 'If I'm obedient to the
law, God will honor me.' "
5. Spend time and money on research and resources if you plan to
do your own taxes. "There's a high probability you'll do your taxes
wrong, even with lots of research. In the best case, have a
qualified accountant do them for you. But if you choose to do your
own, spend a lot of time studying, and spend the money to get the
proper resources."
Check out this resource for step-by-step answers to tax
questions and preparation: 2003 Church & Clergy Tax Guide by
Richard Hammar, $17.95, Christian Ministry Resources, (708)
821-3845; www.churchlawtoday.com.
6. Fight when you're right. Often pastors get audited based on
their deductions. If you've got legitimate deductions, fight for
them.
"Giving in when you shouldn't sets a precedent for the IRS to
disallow the same deduction for pastors everywhere. A lot of the
time, if you fight, you'll win."
The Business of Taxes
Clergy members who meet the definitions of a minister for IRS
purposes have special rules and tax considerations that affect how
their income is reported.
Criteria for "Minister" -- The Internal Revenue Code uses the
following criteria to define "minister" for federal tax reporting
purposes. In 1989, though, the Tax Court ruled that only the first
factor is required, and that a balancing test is required for the
remaining four factors. Generally, if a person satisfies the
remaining four factors, he or she likely meets the definition of
"minister" for tax reporting purposes.
Here's the criteria established by the IRS for a person to be
considered a minister: be ordained, commissioned, or licensed;
administer sacraments; conduct worship services; manage a local
church or religious denomination; and be considered a religious
leader by a church or denomination.
Special Tax Rules -- Under the Internal Revenue Code, ministers
are eligible for special tax rules relating to the services they
perform in their ministry. These include:
• Housing Allowance -- This allowance is a portion of the
minister's salary that can be excluded from income taxes for
housing expenses. The housing allowance covers occupying a
church-owned property rent-free, housing costs incurred for the
rental of a home, or housing costs for ministers who purchase their
homes.
This allowance is limited to the lowest of the amounts
designated, the amount actually spent on housing, or the fair
market rental value of the property (plus utilities and
maintenance). Any amount designated but not spent or in excess of
the rental value must be included in the minister's income. This
determination is the minister's responsibility, not the church's.
Additionally, while the housing allowance is excludable from
regular income tax, it can be included as part of the computation
of the self-employment earnings of the minister, if it's not
otherwise exempt.
The housing allowance should be adopted by the church board,
recorded in the minutes, and designated in advance of each calendar
year. If the housing allowance hasn't been designated in advance,
it needs to be done immediately. Amendments can be made if the
designated amount is too low, but amendments only affect future
payments.
• Exemption From Social Security Tax -- This exemption is
available to ministers who are conscientiously opposed to Social
Security coverage relating to their ministerial services. These
conditions must be met to make this election:
1. The church or denomination that ordained, commissioned, or
licensed the minister is a tax-exempt religious organization.
Religious associations that aren't churches don't meet this
definition.
2. The minister must file an exemption application (Form 4361)
with the IRS and certify that he or she, because of religious
principles, is conscientiously opposed to the acceptance of any
public insurance. Form 4361 must be filed by the due date of the
federal tax return (including extensions) of the second year in
which a minister has ministerial net earnings from self-employment
of $400 or more. The housing allowance, though not taxable income,
is included as ministerial earnings for determining whether the
$400 threshold is met.
3. Applicants must inform their ordaining, commissioning, or
licensing body that they're opposed to Social Security
coverage.
• Self-Employed Status -- This status is required for ministers
unless they're exempted from Social Security tax. Ministers pay the
self-employment tax rather than the employee's share of Social
Security and Medicare taxes -- even if ministers report on their
income tax returns their compensation as an employee.
It's better if churches treat ministers as employees for Social
Security purposes and withhold the employee's share of Social
Security and Medicare taxes from his or her wages. A
minister-employee who enters into a voluntary withholding agreement
with the church may have additional withholding to cover
self-employment taxes. A church whose minister elects voluntary
withholding (and who's not exempt from Social Security taxes)
simply withholds an additional amount from each payment and reports
this as additional income tax withheld (not FICA tax).
• Exemption From Income Tax Withholding -- Ministers may elect
to be exempt from having income tax withheld from their
compensation for ministerial services. This occurs through an
exception to the regulations that require every employer to
withhold federal income tax. If a minister doesn't have the church
withhold taxes, he or she should personally pay taxes through
quarterly estimated tax payments. cm
Becky DaVee is a CPA/Shareholder for Stanfield & O'Dell,
P.C., in Tulsa, Oklahoma.
NOT A CHURCH, INC.
In 2000, U.S. District Judge Sarah Evans Barker ordered federal
marshals to seize the Indianapolis Baptist Temple (IBT) to satisfy
$6 million in tax debts. The church's pastor argued that the church
had redefined itself as a New Testament church and was therefore
accountable only to God -- not the government -- and would never
pay the withholding, Medicare, and Social Security taxes it stopped
paying in 1983.
Who won? -- The government. The 2,000-member church was evicted
from its 22-acre campus in February 2001. Though the seizure was
peaceful, some church members were physically carried out of the
church by U.S. marshals.
The Government's Take -- "Defendant apparently believes it can
evade federal tax law by metamorphosing into various different
forms of entity," said Barker in her ruling. "On this, it is sadly
mistaken."
The Filer Speaks -- Since the church was seized, IBT continues
its ministry as a "church without walls," according to Pastor Greg
Dixon. "We still function as a New Testament church. We've tried to
take what happened to us and turn it into something positive. Now
instead of throwing open our doors and saying 'come to us,' we go
to the people." Membership has increased, and Dixon expects it to
continue to grow as the church broadens its outreach programs.
"One of our goals for 2003 is to find a place of worship that's
more permanent," says Dixon. For now, however, the church will
continue to rent facilities at a local school.
THIS HOUSE IS YOUR HOUSE
Pastor Rick Warren of Saddleback Valley Community Church in
Mission Viejo, California, claimed an $80,000 housing allowance.
The IRS said he could only claim the fair market value for his home
of $59,500. The dispute morphed into a challenge over the
constitutionality of the clergy housing allowance. If the courts
ruled the housing allowance unconstitutional, it was estimated that
clergy members would face a $2.3 billion tax increase over five
years.
Who Won? -- Rick Warren and clergy members everywhere. The Tax
Court ruled that the housing allowance exclusion wasn't limited to
the fair market value of the minister's home and that a church
could designate 100 percent of a minister's salary as housing
allowance.
President Bush signed the Clergy Housing Clarification Act on
May 20, 2002, to protect the long-standing housing tax exemption
for ordained ministers and clergy. However, the new 2002 tax law
reinstated the fair market value criteria.
The Filer Speaks -- "While we're gratified that this rewritten
statute will correct the unfairness we fought for, I have little
doubt that those who oppose pastors and the work of the church will
eventually raise the constitutional question again," wrote Warren
in a www.pastors.com article.
The Government's Take -- Law professor Erwin Chemerinsky told
the Los Angeles Times, "Government can't subsidize religion.
Religion is treated differently by the Constitution. If the
government wants to subsidize journalists because it feels they
aren't paid enough, I don't have any problem with that. But if they
want to do the same thing with regards to religion, they
can't."
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