There are a number of different reasons for Clergy Taxes being more complex than the average return.
First, Clergy are treated differently from every other employee in regards to their compensation. Clergy have a unique “dual status”- they are treated like employees for income tax, and they are treated like independent contractors for Social Security and Medicare taxes. This unique treatment can cause a lot of confusion for those who are not familiar with the rules.
Second, different Churches offer very different types of compensation packages. One church may have an accountable reimbursement plan for auto expenses, while another may have a non-accountable plan. These are treated very differently on the 1040 return. So, even if you are familiar with the dual tax status of Clergy, you also need to be aware of the drastically different tax treatment of different compensation packages.
Third, even when different Churches do offer the same compensation, they seldom agree on HOW to report it. For example, one Church may decide to list the Social Security allowance on the W-2 as a separate item. Another Church may include the allowance in the wages on the W-2 and not break it out. Another may leave the Social Security allowance off the W-2 entirely. This lack of a consistent procedure means that a new payroll administrator may not know how income needs to be reported, especially if it was done differently at their last position.
On top of all this, we have an additional complication- Those serving the Church may not have the same drive, passion or experience when it comes to doing payroll. At very small churches, the payroll administrator could literally be the volunteer who drew the short straw. Regardless of the reason, we find that Clergy W-2s have a higher error rate than non-Clergy W-2s, and they often need to be corrected.
During tax season, these factors all come together in a perfect storm, where complex forms are being issued by people who are unfamiliar with them and have no standard procedure to follow as a guide. The true value of a tax preparer in this situation is not cobbling together a return, but being able to guide the ship to a safe harbor by asking critical questions and recognizing if the information appears accurate or not.
We believe all churches and clergy should get the tax, payroll and HR support they need. We have the knowledge, training, and resources. Choose from a variety of plans designed to support your ministry.< Back
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369
Tel: (888) 421-0101
Fax: (888) 876-5101