Estimating Tax Prepayments for Members of the Clergy

16 December 2016
 Categories: , Blog

There are some rather unique tax-filing considerations for members of the clergy. Ministers in all established faiths are not subject to the regular tax-withholding requirements. As a consequence, ministers who wish to prepay their taxes in advance throughout the year must take specific actions to ensure that the amount of their prepayments is sufficient.

Despite the lack of withholding, members of the clergy are generally treated as church employees for income-tax purposes. For social security and Medicare purposes, however, ministers are treated as self-employed individuals. To avoid a large balance coming due at the end of the year, the combined taxes can be estimated and paid in advance on a quarterly basis.

No income tax on housing allowance

Another complicating factor in the preparation of a clergy tax return is the treatment of a housing allowance. Housing and utilities provided to a minister are not taxable for income-tax purposes. However, a housing allowance is included as income when calculating amounts for social security and Medicare. The treatment of a housing allowance is actually quite favorable since you avoid income tax while receiving credit for social-security contributions.

Minimum prepayment thresholds

Quarterly payments can be submitted to the IRS with Form 1040-ES, but you don't necessarily have to prepay the full amount of your tax by the end of each year. There is generally no penalty associated with a tax underpayment if your final balance due is less than $1,000. Even if you owe more than $1,000 at the time of tax preparation, there is usually no underpayment penalty if your prepayments for the year are at least 90 percent of your total tax.

Calculating payments

The instructions for Form 1040-ES include a worksheet for estimating your tax prepayments. A tax-rate schedule is included to determine your regular income tax. The form contains a separate worksheet for calculating self-employment tax, which is your social-security tax and Medicare tax combined. In addition to the worksheets, Form 1040-ES also consists of four payment vouchers that can be submitted each quarter throughout the year.

Even though ministers are not subject to mandatory withholding, you can voluntarily agree to allow your church to withhold income tax. Although your church cannot specifically withhold social-security benefits or Medicare, it may withhold enough regular income tax to cover the total of all tax reported on your Form 1040. Contact a tax service for more information on estimating taxes for the clergy.

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