If you're a minister or member of the clergy, your tax situation is a little different from most employees. For federal income tax purposes, ministers are generally treated as employees. However, for Social Security and Medicare taxes, they're usually treated as self-employed.
Because of this unique treatment, ministry-related expenses may still affect your self-employment tax calculation, even though most employee business expenses are no longer deductible for federal income tax purposes.
The key rule to remember is simple: clergy expenses follow the income source that generated them.
Where Do Clergy Expenses Go?
The way you enter clergy expenses depends on whether your ministry income is reported on a Form W-2 or Schedule C.
Schedule C Ministry Income
If you're reporting ministry income on Schedule C (Profit or Loss From Business), enter your ministry-related expenses directly in the Schedule C expense sections.
Common examples include:
- Professional books and publications
- Continuing education
- Office and ministry supplies
- Travel expenses
- Vehicle expenses related to ministry work
- Other ordinary and necessary business expenses
These expenses are included as part of your Schedule C business activity.
W-2 Ministry Income
If your ministry income is reported on a Form W-2, enter your work-related ministry expenses through the Employee Business Expenses (Form 2106) section of the program.
Examples of deductible ministry expenses include:
- Mileage
- Travel expenses
- Parking fees and tolls
- Books and supplies
- Continuing education
- Other ministry-related expenses
Although these expenses are entered through the Form 2106 screens, they aren't claimed as a Schedule A employee business expense deduction.
How Clergy Expenses Are Treated
For clergy members, expenses entered through Form 2106 generally flow to the worksheets used to calculate self-employment tax rather than creating an itemized deduction on Schedule A.
The program automatically applies the expenses to the appropriate clergy self-employment tax calculations.
How to Enter Clergy Expenses in the Program
Follow these steps to enter your ministry income and expenses correctly.
Step 1: Enter Your Income
Enter all clergy income first, including:
- Form W-2 income
- Schedule C ministry income (if applicable)
Step 2: Complete the Clergy Tax-Free Income Worksheet
Navigate to:
Federal → Other Taxes → Self-Employment Tax
Then:
- Select the option indicating you're a member of the clergy.
- Continue until the Clergy Worksheet is generated.
- Complete the Clergy Tax-Free Income Worksheet.
- Enter any applicable:
- Ministerial income
- Housing or parsonage allowance
- Utility expenses
This information is used to determine your self-employment tax calculation.
Step 3: Enter Employee Business Expenses (W-2 Clergy Only)
Navigate to:
Federal → Deductions → Itemized Deductions → Employee Business Expenses
During the interview:
- Answer No to:"Were you employed as an Armed Forces reservist, a qualified performing artist, a fee-basis state or local government official, or an individual with a disability claiming impairment-related work expenses?"
- Answer Yes to:"Would you like to request an exemption from self-employment tax as a minister/clergy member?"This step is required to generate the clergy worksheets used by the program.
- Enter your non-vehicle ministry expenses when prompted.
- Continue to the Vehicle Expenses section and enter any eligible mileage or vehicle expenses.
Review Your Return
After completing your entries, review your return PDF to confirm that:
- The clergy worksheets were generated.
- Ministry expenses were included in the self-employment tax calculations.
- Housing allowance and utility information were entered correctly.
- Income amounts were reported accurately.
Keep in mind that Worksheet 2, which is used to prorate certain clergy expenses, isn't supported within the program. If your situation requires clergy expense proration, you'll need to calculate the prorated amounts manually and review your return carefully before filing.
Understanding the Housing Allowance
Many ministers receive a housing allowance or live in a church-provided parsonage. While a qualifying housing allowance may be excluded from federal income tax, it generally remains subject to self-employment tax unless you have received an approved exemption from the IRS.
That's why it's important to complete the Clergy Tax-Free Income Worksheet accurately. Entering your housing allowance, parsonage information, and utility expenses correctly helps ensure your self-employment tax is calculated properly.