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In order to get the largest refund possible as a minister, it is important to understand the basics of how a minister’s tax return may be different from other returns.
1. Most ministers are considered employees for Federal Income Tax purposes and are paid on a W-2. However, some ministers are self-employed such as some traveling evangelists and interim pastors. In these cases, you would receive a 1099- MISC and you would be required to report your income and expenses on a Schedule C. Also, many ministers that are employees of the church may be self-employed for other reasons such as speaking at guest appearances at other churches or performing services directly for individuals (such as weddings and funerals).
2. Even if you are considered an employee of the church and you receive a W-2 you will have to pay self-employment taxes on the income. Minister must pay self-employment tax unless they have filed a timely exemption application, Form 4361. You may file a timely form 4361 if you are opposed on the basis of religious consideration to the acceptance of benefits under the Social Security program. However, you are not exempt from paying Social Security Tax or Medicare tax on income you receive as a minister in any duty you perform that is considered self-employment income (such as weddings, funerals, and guest speaking appearances at other churches).
3. If you itemize and you are paid as an employee you may be able to deduct unreimbursed business expenses you incurred on your Schedule A.
4. You will need to use Schedule C or Schedule C-EZ to report earnings from marriages, baptisms, and funerals.
5. One of the most important benefits of being a minister is that you can qualify for a housing allowance. A housing allowance is used to pay for housing related expenses which include mortgage payments, rent, utilities, repairs, furnishings, insurance, property taxes, additions and maintenance. Ministers who own or rent their home do not pay Federal Income Taxes on the amount of compensation that their employing church designates as a housing allowance ahead of time. Although you do not have to pay Federal Income Taxes on your housing allowance it is subject to Self- Employment tax.