I have learned many things in my 38 years of preparing income tax returns for clergy. When it comes to taxes and savings, what you don’t know can hurt you.
The most important recommendation for brand new clergy? Do NOT opt out of Social Security. This article is a must-read. You will not be able to save as much elsewhere to make up for the loss of Social Security and Medicare benefits. Opting out is irrevocable. United Methodist retiree benefits assume Social Security and Medicare coverage.
The rest of this information pertains to all active clergy:
There are a number of forms you must complete at your fall church/charge conferences. Keep signed copies of each form in your tax records.
Do the following every fall:
Review UMPIP election choices prior to the start of a new year (and a new tax season) even if you are not making changes. Keep a copy of the elections you make for your tax records.
You must make health account elections—flexible spending account or health savings account—every year. These elections do not carry over from year to year! The funds may carry forward depending upon the account.
Review and update your beneficiary designation form with Wespath whenever there has been a change in marital status, name change, birth of a child, or death of a beneficiary.
Review your Wespath quarterly statements to ensure your church or conference sent the UMPIP funds to Wespath in full and in a timely manner.
As you begin serving in a new appointment or a new year, make sure a housing allowance resolution is adopted and it specifies you as the pastor. Learn which expenses qualify as housing allowance expenses for tax purposes and save your receipts!
Make sure there is an accountable reimbursement plan (ARP) in place at your church and use it.
Under an ARP, you must properly account to the church in accordance with IRS rules and document reimbursement claims by including all information that the IRS requires. Again, save your receipts!
Church business expenses that are not reimbursed can still be deducted from self-employment taxable Income.
100 percent of all other non-reimbursed business expenses can be deducted from self-employment taxable income. Exception: Only 50 percent of non-reimbursed business meals can be deducted from self-employment taxable income.
All conference-paid moving expenses are taxable income for both income tax and self-employment tax for both active clergy and clergy moving into retirement.
Make sure to save enough to cover those increases in taxes.
Increase your quarterly estimated payments accordingly.
You should receive an IRS Form 1099-MISC, “Miscellaneous Income,” from your conference office reporting the moving expense in Box 7, “Nonemployee Compensation.”
Clergy must pay federal and state estimated tax payments (IRS Form 1040-ES), which are due April 15, June 15, September 15, and January 15 for each calendar year.
If you do not make these estimated tax payments on time, you may owe an underpayment penalty on top of the amount due with your tax return (deadline to file is April 15).
Your income tax rate may be as low as 10 percent or 12 percent, but your self-employment tax rate will be an additional 15.3 percent on not just your cash salary, but also on:
The total amount of your salary that is designated as housing allowance/exclusion, and
The amount paid by the church for parsonage utilities, and
The fair rental value of the parsonage in which you live, or
The housing allowance paid to you instead of living in a parsonage.
Set aside enough of your salary to make your federal estimated tax payments.
These are just a few of many tips needed to navigate the complex world of clergy taxes. My final recommendation? Engage a tax accountant knowledgeable in clergy tax preparation!
Your conference treasurer (Minnesota: Barb Brower and Dakotas: Jeff Pospisil) or conference benefits officer (Minnesota: Jean Edin and Dakotas: Leana Stunes) may be able to answer additional questions. Otherwise, check in with your personal tax accountant.
Marilyn Ziegler Perry, CPA, is the spouse of retired United Methodist Pastor Stephen Perry, who served for 33 years in the Dakotas Conference. Marilyn served two 12-year terms on the South Dakota, then Dakotas, Conference Board of Pensions, along with other roles in the Dakotas Annual Conference. She has operated her own accounting practice for the last 36 years and now resides in Anoka, Minnesota.