Disclaimer: This is general tax advice so don’t sue me. Pretty much every year I hear about one of my pastors having problems with their taxes. Clergy taxes are confusing and complicated so it’s going to happen. What makes it 10x worse is when the pastor has way underpaid taxes and now has interest and penalties on top of a mess to clean up. Here’s what I recommend:
If you are a Brand New Clergy
Find a clergy tax professional: I provide a list below. They are few and far between. They are well worth the cost.
Use my Clergy Tax Estimator: I also link that below. This does not replace a clergy tax professional, but it could help you get a better idea if your tax professional is legit.
Fill out a practice Form 1040: This isn’t really preferred, but, if you already have some tax experience, it’s better than nothing.
If you are an Experienced Clergy
Start with Last Year: Look at your 2020 Total Tax (Line 24)…assuming your return was prepared by a clergy tax professional. Assuming your compensation and withholdings are similar to 2020, this is the number you can aim for.
Make Adjustments for Big Things: Big things that can be adjusted for would include: Being moved, getting large unexpected taxable income (e.g. Pension Rebate), adding a child or having one age out of the tax credit. For Child Tax Credits, the amount is increasing from $2,000 to $3,000 for those 7-18 and $3,600 for 0-6.
Visit with a clergy tax professional: They usually provide estimates for you and can help you for the more complicated changes.
I get a lot of calls from church treasurers. A relatively small percentage of those treasurers are frustrated with their pastor. Of those that are frustrated, it’s almost always around the subject of ARP and accountable reimbursements. So…the primary reason I teach new clergy on accountable reimbursements is to prevent the pastor from being secretly hated by their treasurer.
Here’s the source of the strife: pastors expect timely reimbursements for all their expenses, and treasurers expect timely receipts for all the pastor’s expenses. Expectations are premeditated resentments…especially when these expectations aren’t plainly expressed. Here is what I go over in this training video:
Commuting vs Business Miles: I have an actual diagram to clearly show which miles are reimbursable or not.
Ownership Issues: Who ones the stuff purchased through ARP and when this actually matters.
Receipt Systems: Keeping track of those receipts is an issue for so many people. I give a few ideas on how to make this easier.
The Road Warrior: There are some pastors that regularly travel 200+ miles a week for work. Part of the mileage reimbursement is to cover the wear and tear on the vehicle so how can you manage the reimbursement to fund your next vehicle purchase.
A few years back, I taught a class at the Clergy Leadership Academy on the subject of clergy taxes. I know that there were more than a few pastors hoping to come away from that class fully equipped to file their own taxes. I’m sure they were disappointed when I led with this statement: “My hope isn’t that you will end up as clergy tax experts. Instead, I want you to end up as excellent clients of clergy tax experts.” Taxes are a profession, not a side hobby. You can’t just pick it up in a one-hour training.
Having worked with clergy taxes for 20 years, even I don’t feel competent to file taxes for clergy…and I teach the stuff! What I have seen and what I teach on is the basic principles that can protect you from expensive mistakes and help you not pay more than your fair share. This includes:
Fundamental Problem with Clergy Taxes: There are a handful of significant ways clergy taxes differ from that of a regular employee. When you understand those, you’ll officially be smarter than Albert Einstein.
Understanding the Housing Exclusion: How it works and what expenses can be written off.
COVID Tax Credits: How the FFCRA and ERC tax credits can benefit clergy and churches.
Most Important: A list of clergy tax experts that I know and trust.
When it comes to money issues, there is always a temptation to give people advice that they’re not asking for. I remember the first year that our Board of Pensions issued rebates. A number of us at the Conference really wanted our churches to just sign those checks back over to the Conference to support our Miracle Offering. Hmmm…kind of like offering in-store credit. Have the United Methodists become the Menard’s of denominations?
As I watched how churches used that money, the thing that caught my eye the most was how Beresford Zion UMC made the decision. They met and prayed, and over the course of time they decided to put it towards upgrading their technology to better reach the unchurched. The process they used to make the decision led them to make a better decision to get the most out their unexpected windfall. Here’s what to watch our for:
Asking for Forgiveness instead of Permission: I’m sure you have good ideas on how to use the money, but it’s wrong to try to commit the money to your idea without consulting the other leaders.
Relying on Brainstorming: It’s difficult to think in a group. It’s even more difficult to think in a group talking about money.
Avoiding the Decision: Sometimes we kick the can down the road for years hoping to make the perfect decision or have everyone in perfect agreement. I kind of wonder if there aren’t ulterior motives behind this strategy of avoiding making a decision.
Disclaimer: This is general tax advice so don’t sue me. It seems like every other month there’s a government handout for churches. I don’t know about you, but the abbreviations and the paperwork can become overwhelming. Well…here’s another one. The Employee Retention Credit (ERC) is actually an older program that was overshadowed by the PPP Loans. If you never heard it or have forgotten about it, join the club. This is a credit you can receive to help retain employees even though your ministry is being impacted by COVID.
Here’s the gist of it:
Payroll Tax Credit: This is like the FFCRA in that it is a refundable credit to your payroll taxes. That means you applye for it through the Form 941.
$7,000/Employee: For the first half of 2021, you can receive up to $7,000 per employee per quarter. Doesn’t apply to clergy employees though.
Negatively Impacted: You need to have 1)had a 20% decrease in Gross Receipts in a quarter when compared to 2020, or 2)had operations fully or partially suspended due to government orders.
No Overlapping: If you receive a second PPP Loan, the wages covered by that loan aren’t eligible for ERC.
Disclaimer: This is general tax advice so don’t sue me. I personally have been slow about getting the vaccine. I can justify it that I’m relatively young and healthy. I already have had COVID and still have antibodies (verified every two months when I donate blood). But the real reason is I’m not looking forward to getting sick from the vaccine. The listed side effects are: fatigue, headache, muscle pain, joint pain, chills, nausea, vomiting, and fever. A couple of my friends had a harder time with the vaccine than they did with COVID.
But now there is some economic incentive to getting vaccinated! I recently found out that the time you take off to get vaccinated as well as the time you need to recover falls under the FFCRA tax credit. Here’s what you need to know:
Employees: Track any time you had to take off to get vaccinated or to recover. Report it to whoever does your payroll.
Self-Employed & Clergy: Track any time you had to take off to get vaccinated or to recover. Report this to your tax preparer…next January.
Most pastors make a practice of living by faith. So much so that they even take it by faith that they’re getting paid correctly. But pastors should know that payroll is a tricky part of being a church treasurer, and the pastor’s paycheck is the trickiest of the tricky. So how do you know if you are being paid correctly? In the last year, I came across two churches that incorrectly paid their pastors only to find out 12+ months later. Not fun. Even worse, the IRS added to the “not fun.”
I included a quick worksheet that was mainly aimed at helping church treasurers but would be helpful for pastors to verify and understand their paycheck. As President Reagan used to say, “Trust, but verify.”