Tax FAQs

Individual FAQs

No. The church must reflect the fair market value of the auto as taxable compensation of the pastor who received it.

No. These amounts must be included in taxable compensation for the staff members.

I provide a room in my home as an office. The office is used for sermon preparation even though the church provides me an office at the church. Can I claim expenses for this office as business expenses? The necessity of an office in the home will be questioned closely by the IRS because the church provides an office on the premises of the church. Further, since the total cost to provide the home is used in computing the exempt housing allowance, home office deductions for taxes, insurance, mortgage interest, etc., would be duplications. Itemized deductions are allowable for mortgage interest and taxes.

Review the church's accountable expense reimbursement plan. If you don't have a written plan, establish one.

Test expense reimbursement substantiation. Not in your church, of course, but in some other churches, the pastoral staff may not be adequately forthcoming with expense substantiation. Is the business purpose for travel recorded? For meals, does the documentation reflect not only the date and the amount, but who participated in the meal and the business purpose of the meal?

Review worker classifications. Are you treating workers as independent contractors who really have significant employee characteristics?

Review taxable and non-taxable fringe benefits. Be sure that all taxable fringe benefits—like property transfers, Christmas gifts, and more—are reflected on Forms W-2.

Check Form 1099-MISC filings. For independent contractors, is a Form 1099-MISC being filed for all applicable payments of $600 or more in a year?

Check the completeness of the Form W-4 file. Be sure there is a Form W-4 in the file for each staff member for each year.

If a church makes monthly payments to the college where the pastor's daughter attends to cover her tuition costs, are these payments tax-free?

No. These payments must be included in the pastor's taxable compensation.

Consistency is a good virtue but not when it results in the improper handling of Social Security payments. It is the responsibility of the church, not the minister, to make the correct decision on the proper way to treat ministerial Social Security.

My church withholds FICA from my pastoral compensation and matches the FICA. While I have heard that I am not subject to FICA as a minister, my church treasurer says the government is getting its money either way and there is no problem treating me as subject to FICA. Is my treasurer correct?

Your treasurer is correct that the government gets the correct amount of money either way. However, ministers are not subject to FICA and by withholding FICA and matching it, the match amount gets treated as tax-free, when it is fully taxable. This improper process results in your underpayment of income tax because the matched amount is not reported in compensation on the Form W-2.

As part of my pastoral compensation package, my church regularly reimburses the amount of my Social Security, which I have paid quarterly and counts as income for income tax purposes. Would it be possible for me to have the church treasurer “withhold” this amount and pay it for me in lieu of quarterly payments? If so, what is the best way to handle this?

Yes, this is possible. The church would need to withhold the amount you desire to have withheld as federal income taxes—not as Social Security tax. The church would remit the federal income tax withheld to the IRS and report the amount on the quarterly Form 941.

Our pastor annually attends an orphan’s conference, because our church is significantly involved in orphan ministry. His wife travels with him to the related conference each year, and he turns in his wife’s travel expenses for reimbursement. Should our church reimburse these expenses?

The answer is one of my favorite ones: It depends. If your pastor’s wife is attending the sessions at the orphan’s conference for the purpose of providing information to participants in the orphan ministry at your church, I believe you have a sound basis to reimburse the expenses relating to her participation in the conference (registration, travel, meals, lodging, etc.). However, if she is merely accompanying her husband (even if she is attending some of the sessions), there is little basis to consider her expenses as church-related. If the church reimburses expenses unrelated to church purposes, the amount constitutes additional compensation to the pastor.

IRS officials have informally stated that the IRS will treat iPads and other tablet-type devices in the same manner as cell phones for tax purposes. Earlier, the IRS announced relaxed rules related to the tax treatment of employer-provided cell phones and reimbursements for cell phones. The lines of distinction between cell phones and tablet devices are difficult if not impossible to draw. Much of what can be done on a smart phone can be done on a tablet computer and vice versa.

On September 14, 2011, the IRS released guidance stating the value of employer-provided cell phones is excludable from the employee's income as a fringe benefit. Notice 2011-72 provides that employer provided cell phones are excluded from the employee's income as working condition fringe benefits, and that substantiation requirements for deduction under section 162 are considered satisfied. This applies for tax years beginning after December 31, 2009.

This guidance applies only to cell phones provided for "substantial reasons relating to the employer's business, other than providing compensation to the employee." Cell phones provided for employee morale or good will, or to recruit prospective employees, are not provided for "non-compensatory business purposes."

The IRS has released a memorandum for field examiners which addresses the treatment of reimbursements for the business use of an employee's personal cell phone. Before making reimbursements, churches should generally require employees to submit a copy of the monthly bill with evidence that the bill has been paid.

If a church does not have a substantial noncompensatory business reason for providing a cell phone to an employee, or reimbursing the employee for business use of his or her personal cell phone, the value of the use of the phone, or the amount of the reimbursement is includible in gross income, reportable on Forms 941 and W-2, and for lay employees is subject to federal and state employment tax withholding.

Yes. Eligible educators may deduct the cost of classroom supplies on their federal return—up to $300 for 2022.

The church must file Form 8941 and carry the credit to Form 990-T (the Exempt Organization Business Tax Return). Even though the church does not owe any business income tax, the credit may be claimed.

We have an employee who is subject to the Fair Labor Standards Act (FLSA). We are considering calling her an independent contractor. Will that exempt the individual from the FLSA?

No. Calling someone an independent contractor is not enough. It's not the title that makes someone an independent contractor, it's the degree of control he or she has over the work performed; who decides where and how the work is performed, who supplies the equipment, etcetera? If it's the church, the worker likely isn't an independent contractor.

For a more-detailed discussion of "who is an employee" vs "who is an independent contractor," see Memo #2—Church Employees or Independent Contractors?

Our professional advisors have helped us to determine that certain church staff members paid on an hourly basis are subject to the Fair Labor Standards Act (FLSA), and we must pay them overtime for hours in excess of 40 hours a week. If we pay "covered" staff member on a salary instead of an hourly basis, will this exempt the employees from the FLSA?

No. Changing the payment does not make an employee exempt.

Our church provides health insurance to our pastors but not to the other staff. We understand this is permissible under current law but what about under the new health care reform?

You have asked a very difficult question. Under current law, all self-insured health plans are already subject to nondiscrimination and coverage rules set forth in section 105(h) of the Internal Revenue Code. These requirements applied for many years before the health reform legislation was passed. Fully-insured plans (to which you are possibly referring) have not been subject to the nondiscrimination rules. If your current plan is a fully-insured plan, your practice of providing health insurance for pastors and not other staff is permissible.

However, the health reform legislation expands the scope of section 105(h) nondiscrimination and coverage rules for fully-insured plans:

  1. Fully-insured plans (except for fully-insured grandfathered plans) will become subject to the same rules as now apply to the self-funded plans effective for plan years beginning on or after September 23, 2010 (which is January 1, 2011, in the case of a calendar year plan).
  2. Fully-insured grandfathered plans, as long as they retain their grandfathered status, will not be subject to the section 105(h) nondiscrimination and coverage rules.

So, if you have a fully insured plan and you have not made any changes since the passage of the health care bill (March 23, 2009), your plan is generally grandfathered, so that the new nondiscrimination provisions would not affect you until you lose grandfathered status.

The church I pastor is very small, and I receive no compensation for services. May I deduct my out-of-pocket expenses related to serving the church as charitable contributions?

Yes. These expenses are deductible on Schedule A as non-cash charitable contributions.

I provide a room in my home as an office. The office is used for sermon preparation even though the church provides me an office at the church. Can I claim expenses for this office as business expenses?

The necessity of an office in the home will be questioned closely by the IRS because the church provides an office on the premises of the church. Further, since the total cost to provide the home is used in computing the exempt housing allowance, home office deductions for taxes, insurance, mortgage interest, etc., would be duplications. Itemized deductions are allowable for mortgage interest and taxes.