Many church members believe that the pastor is self-employed. Many churches treat the pastor as self-employed concerning compensation and taxes.
But the truth is that the minister serving a church is self-employed concerning Social Security and Medicare but an employee in every other way.
Minister tax experts call this a “dual tax status.” This fact has always been important but never more so than 2018.
In this blog, I will explain the most important changes and offer some key actions for the church to take.
First, Congress essentially doubled the standard deduction. In 2017, the standard deduction for a married couple was in the $12,000 range, and in 2018 it is now $24,000.
In 2017, 70% of all Americans could not itemize deductions. In 2018, it is estimated that as high as 95% of American taxpayers will not have enough to itemize.
Most of the familiar itemized deductions are still there, but the overwhelming majority of us will not be able to deduct them. Your mortgage interest, medical, property taxes and charitable giving will have less importance for most Americans tax-wise.
Second, one major deduction for ministers is completely gone. This one has not been in the news but has been reported by the ECFA, Evangelical Council on Financial Accountability. On Schedule A, Itemized Deductions, the Employee Unreimbursed Business Expense deduction is gone!
This means that a minister serving a church can no longer write off business expenses related to his church on his taxes.
Many ministers do not have an Accountable Reimbursement Plan from the church for their business expenses.
Many ministers do not want an Accountable Reimbursement Plan thinking it is too much trouble. They think they can write them off on their taxes and it will be just as good.
That statement has never been true but especially not true in 2018!
Let that soak in a little – the amount of Unreimbursed Employee Business Expenses I will be able to write off in 2018 will be $0!
Note that many ministers will still be able to use a Schedule C for their other income such as weddings, funerals, revivals and other speaking engagements. The business expenses related to those activities could still be written off on the Schedule C.
Note that these changes have no bearing on 2017 taxes, and the tax return many of us are still preparing.
Takeaways for the church
1. Churches should provide an Accountable Reimbursement Plan for ministry business expenses. The expenses have a business purpose, have written documentation that is submitted at least every 60 days and are reimbursed to the employee. No taxes are paid on the reimbursements.
2. Churches should establish a system of salary and benefits rather than salary alone. This practice will reduce taxes and provide benefits that are needed by the employee. These benefits could include retirement contributions, group term life insurance, as well as medical, dental and disability insurance. An excellent guide for best practices for the church can be found at GuideStone.org/CompensationPlanning.