Understanding Taxes for Ministers
Explore the complex world of taxes for ministers, covering topics such as denial, anger, bargaining, depression, and acceptance. Learn about current and future tax obligations, including federal income tax, state income tax, Medicare tax, Social Security tax, and self-employment tax. Discover key differences in tax implications between regular and ministerial earnings, and get practical steps to navigate your new tax responsibilities.
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TAXES FOR MINISTERS AN EXERCISE IN DENIAL, ANGER, BARGAINING, DEPRESSION AND ACCEPTANCE
GIVE ME THE BROAD STROKES Q: Will I continue to pay taxes? A: Yes, in order to avoid prison Q: Do I continue to file a tax return? A: Yes, see above Q: Do I pay more of my income to taxes? A: Maybe; maybe not Q: Thanks, that was helpful. A: You are welcome.
GIVE ME THE BROAD STROKES CONTINUED Q: What taxes do I pay currently that are related to my BGCO wages? A: Federal income tax, state income tax, Medicare tax, social security tax Q: What taxes will I pay in the future? A: Federal income tax, state income tax, Medicare tax, social security tax, self-employment tax Q: Wait, will I now be self-employed? A: No; at least not with respect to your wages from the BGCO Q: But, I pay self-employment tax? A: Yes, it replaces the Medicare & SS taxes
REGULAR EARNINGS - TAX BIN Federal Income tax Medicare tax Social Security tax State Income tax My Tax Bill
MINISTRY EARNINGS - TAX BIN Medicare tax Federal Income tax State Income tax Social Security tax Self- employment tax My Tax Bill
Medicare (1.45%) Employer Paid Taxes (7.65%) Social Security (6.2%) Self- employment tax (15.3%) Medicare (1.45%) Employee Paid Taxes (7.65%) Social Security (6.2%)
Regular Employee Ministerial Employee Income Taxes (?%) Income Taxes (?%) Self-Employment Taxes (15.3%) FICA (7.65%)
THE FINER POINTS Q: What are my next steps to prepare for my new tax life? A: Step 1: Learn about the housing allowance; Step 2: Designate a housing allowance with the BGCO; Step 3: Estimate your taxes for the next year & tell Kent how much to withhold; Step 4: Find a qualified tax preparer who knows ministers taxes (Turbo Tax also an option) Step 5: Pay your taxes
HOUSING ALLOWANCE Q: If the BGCO is giving me a housing allowance, does that mean I will be getting paid more? A: Ha! No. Q: Housing allowance, what is it good for? #WIIGF A: Your personal housing expenses can be used to reduce your taxable income for income taxes (but not self-employment taxes). Think of the housing allowance as a shield that protects some of your income from the federal and state income taxmen, but not the self-employment taxman.
HOUSING ALLOWANCE ELIGIBLE EXPENSES Rent or mortgage payment on the primary residence (not the vacation home) Homeowner s insurance or renter s insurance Taxes on the home Utilities Yard service, pest control, security monitoring, maid service Furniture, appliances, decorations, home repair tools, pots, pans, sheets, curtains, rugs, silverware, dish soap, air freshener, vacuum cleaner, windex, lawn mowers (excludes animals)
HOUSING ALLOWANCE - MAXIMUM Maximum = Fair Market Rental Value (FMRV) of the Home Plus Furnishings Plus Utilities Here s an example: FMRV = (100,000) * 12% = $12,000 Furnishings (1/2 of previous step) = $6,000 Utilities (estimate based on actual use) = $5,000 Total maximum annual housing allowance = $23,000
HOUSING ALLOWANCE CONTINUED Q: Can my housing allowance designation exceed my BGCO salary? A: No, but you may be eligible to designate your entire salary as housing allowance. Q: Do I need to keep track of how much I end up spending on housing allowance items? A: Yes Q: Do I turn in receipts to the BGCO for housing expenses? A: No
HOUSING ALLOWANCE CONTINUED Q: What if I don t spend my entire housing allowance? A: No penalties. Any unused portion is subject to income tax. Q: What if I spend more on eligible housing allowance expenses than the designated amount I turned into the BGCO before the year? A: The housing allowance you claim on your tax return cannot be more than the designated amount requested from the BGCO.
HOUSING ALLOWANCE DESIGNATION Q: How do I tell Kent how much I want for my housing allowance? A: Ask him for the form Q: Can I change my housing allowance designation? A: Yes, you will have a chance to change it every year. Changes mid-year must be submitted for approval.
ESTIMATING YOUR TAXES FOR NEXT YEAR https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ https://smartasset.com/taxes/oklahoma-tax-calculator Example: Single, Age 40, no children $35,000 salary $10,000 housing allowance No other sources of income No salary reduction for retirement contributions or FSA contributions
BGCO Wages are entered as $0. If other W-2 income, add it in here.
Blasphemy! Enter housing allowance designation as alimony paid.
Enter entire salary, including housing allowance. You may deduct any pre-tax deductions such as FSA contributions & retirement contributions you made from your salary.
This is your FEDERAL tax burden only. This does not include state income taxes.
This is your STATE tax burden only.
TAXES ON $35,000 AS A MINISTERIAL EMPLOYEE Your Income Taxes Tax Type Federal & SE State Total Income Taxes Marginal Tax Rate Effective Tax Rate Tax Amount $6,318 5.25% 2.88% $719 $7,037
TAXES ON $35,000 AS A REGULAR EMPLOYEE Your Income Taxes Tax Type Federal FICA State Total Income Taxes Marginal Tax Rate Effective Tax Rate Tax Amount 15.00% 9.24% $3,234 7.65% 7.65% $2,678 5.25% 3.55% $1,244 $7,156
CHOOSING A TAX PREPARER Ask other ministers in your community for recommendations. If possible, use a certified public accountant (CPA) who specializes in tax law and who is familiar with the rules that apply to ministers. A CPA has completed a rigorous educational program and is subject to strict ethical requirements. Ask local tax professionals if they work with ministers and, if so, with how many. Ask local tax professionals a few questions to test their familiarity with ministers tax issues. For example, ask whether ministers are employees or self-employed for Social Security. Anyone familiar with ministers taxes will know that ministers are self-employed for Social Security with respect to their ministerial duties. Or, ask a tax professional if a minister s church salary is subject to income tax withholding. The answer is no. Anyone familiar with ministers taxes should be able to answer these questions correctly.
MINISTERS TAX GUIDE http://www.guidestone.org/LearningCenter/Ministry/MinistersTaxGuide.aspx Questions? Kent Gamble ext. 4550 / kgamble@bgco.org Thomas Jordan ext. 4505 / 405.516.4858 / tjordan@bgco.org
