Taxation and churches have a history. Since 1776, when the United States was founded, churches have not been paying taxes. The organizations were exempted from a donation and building taxation. Churches are not allowed to withhold the minister’s Social Security and Medicare. However, the pastors are forced to estimate their tax payments and give the FICA taxes. The revenue authority thus came up with some guidelines on what the churches need to do. The documents do not contain tax-saving strategies. In this article, we discuss the church and clergy taxes.
Using accountable plans ensures a minister receives tax-free reimbursements for expenses. Before the tax reform bill of 2018, the ministers ensured unreimbursed pocket expenses got claimed on schedule when filing.
Using accountable plans allow a church to choose an element the pastor will get free tax reimbursement. This will show the clergy tax deductions schedule.
The next strategy is to work on schedule C. Each year, independent contractors use schedule C form to do their loss and profit accounting. There is dual tax status for clergies. Like independent contractors, clergies must pay estimated fees. When employed, you have to report the income and expenses using form C. One must track their outside earning to cut on taxable income.
The majority of clergy learn the use of QSEHRA, known to give them the clergy tax guide. The religious organizations can now apply the plans to act as substitutes to traditional health benefits. It is similar to the accountable plans. The institutions might apply this plan to show the eligible tax to be reimbursed. Pastors in churches need to try QSEHRA in establishing their compensation packages.
The clergy can also do the smart retirement planning and cut on the taxes payable. By using individual retirement accounts, it will reduce income taxation. This will take advantage of your tax deducted and which is available for contribution. Those retiring use the strategic fund kept in tax-deferred retiree accounts. Those that lack expertise will hire accountants and see the benefits when retiring. These accounting experts see that retirement and investment funds are maximized and even help in minimizing the taxation liabilities.
The pastors need to calculate the house allowance. When the clergy housing allowance is more than the normal house charges, the extra goes to the income, and this means paying income tax. One can create the housing allowance worksheet when calculating.
The church taxation remain complex, and that is why people get bad advice. That is why you need to use a church tax expert to do the clergy taxes. Try the services of Ascension to be on the safe side.