When it comes to taxes and savings, what you don’t know can hurt you financially. Since we all are now, or soon will be, thinking about income taxes, here is some information to consider:
1. Compare your paychecks to your clergy compensation form.
Make sure you are getting paid the correct amount.
Try to get your treasurer to write all of the paychecks for a calendar year in that calendar year. Getting your December paycheck in January leads to extra W-2 calculation problems!
2. Compare your W-2 to your paychecks and your clergy compensation form.
Make sure the Box 1 “wages, tips, and other compensation” number totals:
Cash salary after subtracting any salary reduction agreement amounts for:
“before-tax (tax-deferred)” pastor’s pension contributions and
“dependent care” reimbursement account and
medical reimbursement account
minus the amount of your cash salary that is designated as housing allowance/exclusion, and
plus any amounts received as social security or health insurance allowances.
Note: The W-2 Box 1 number should not include any cash housing allowance if your primary residence is somewhere other than the church’s parsonage.
IRS Form W-2 Box 2 (“federal income tax withheld”) should be blank unless you have signed an IRS Form W-4 to elect voluntary federal income tax (FIT) withholding. In this case, the church treasurer should be remitting your FIT amount withheld instead of your making quarterly estimated tax payments with IRS Form 1040-ES.
IRS Form W-2 Boxes 3, 4, 5, and 6 must be blank. These boxes apply only to lay people. If you are a licensed, commissioned, or ordained pastor, these boxes do not apply to you.
If you signed a salary reduction agreement to make “pastor’s contributions to UMPIP” that are “before-tax (tax-deferred)” (Fund 35/36 in the Dakotas), that amount should appear in IRS Form W-2 Box 12 with Code “E”.
If your “pastor’s contribution to UMPIP” was designated as “ROTH (taxable now)” (Fund 45/46 in the Dakotas), then that amount should appear in IRS Form W-2 Box 12 with Code “BB.”
In IRS Form W-2 Box 13, the box labeled “retirement plan” should be checked.
3. Debt-reduction assistance, moving expenses paid by the conference, and wellness incentives are taxable income for both income tax and self-employment tax.
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 the Minnesota Conference, reporting the amount of that debt-reduction in Box 7, “Nonemployee compensation.”
4. Keep track of all the miles for which your church reimburses you each year. For 2020, the IRS standard mileage rate is $0.575, and $0.27 of this is depreciation.
5. What if you cannot e-file (electronically file) your tax return(s) and, therefore, must file by paper? It is probably because the IRS’s database of employer identification numbers (EIN) and employer names (the church’s EIN and name on your W-2) do not match what the church put on your W-2.
6. Clergy in Minnesota, active or retired, who own their primary residence and have registered that residence as their “homestead,” or who rent their primary residence, should check out Minnesota Department of Revenue Form M1PR, “Homestead Credit Refund (for Homeowners) and Renter’s Property Tax Refund.” If you qualify for one of these refunds and do not register the home you own as your “homestead” and do not file the M1PR return, then you are leaving money on the table.
7. Keep your tax returns and all records related to them (income and deductions) for at least seven years.
Own a house? Keep records as long as you own the house and any replacement property, plus seven years.
Own investments? Keep statements as long as you own the investment, plus seven years.
Sell a vehicle you used for business? Keep records for seven years after the sale.
Trade in a vehicle you used for business? Keep records for seven years after the trade in.
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 37 years and now resides in Anoka, Minnesota.