Untangling the web of how ministers are taxed can be daunting, especially for new ministers or those entering a new church or housing allowance agreement.
To understand the exemption, you need to know that clergy are dual status taxpayers. That means that they are considered employees of the church regarding income tax, but they are considered self-employed regarding Social Security, Medicare, FICA, and SECA.
What is the Exemption?
As a minister, you are taxed on self-employment for both your salary and housing allowance amounts. This exemption would remove self-employment tax for your ministry income from your personal return each year.
The IRS’ Form 4361 is the “Application for Exemption for Self-Employment Tax for Use by Ministers…” If you qualify, apply, and are approved by the IRS for this exemption, you would be granted an exemption from paying Self-Employment tax on your ministry income.
What are the Requirements?
The most basic requirement is proving to the IRS that you are clergy. You must be an ordained, commissioned or licensed as a minister of a church. You will need to provide the date of that ordination/commission/license as well as the address. You will need to prove that the church is exempt from federal income tax.
What Should I Consider Before Applying?
This exemption does come with a cost. If you are not paying into social security, you do not get those benefits back from that income when you draw from social security. This is a decision that each individual minister needs to make for themselves and their family.
In addition, you will need to certify the below statement directly from the Form 4361.
How Do I Apply for the Exemption?
On the second tax year that includes a $400+ housing allowance, the Form 4361 will need to be attached to the return. The IRS will then review the application, contact you to certify your decision, you will return the certification, then the IRS will determine if you will be approved. They will send you your complete Form 4361 marked “Approved.” Keep this in your permanent records for you tax advisor.
Once you are approved, you may be entitled for a refund of self-employment tax paid in earlier years, per the Form 4361 Instructions.
Where Do I Go from Here?
A trusted tax advisor who specializes in clergy taxation is so important to help you navigate the rules of applying as well as making sure you are not taxed inappropriately. Wisdom has an excellent tax team who specializes in helping Clergy with their unique tax situation. Contact Us or Email Allison to have Wisdom’s expert tax team take care of your tax needs.