Ask the taxgirl: Pastors and Deductions

Taxpayer asks:

I read this article today and it seemed very aggressive, bordering on overly aggressive. Can you comment?

The tithe situation here just seems too good to be true. Next, my understanding that pastors are considered self-employed only for purposes related to the SE tax, not for deducting expenses. Therefore the home office must be for the employer’s convenience, not the employees. Can a pastor with a church office make a case for his home office being at his employer’s convenience?

Taxgirl says:

My readers send me a number of links and I am often asked to comment on posts like the one in your question. I tend not to post links publicly if there’s not value in them – especially if I’m being baited or if I feel like my response would just be critical.

But this is a pretty interesting question and I get the feeling that you’re actually looking for an answer and not just a critique. So I’m going to oblige.

The long and short of it is that I agree with many of your points. The IRS does assign a kind of “dual” status for ministers (and in fact all clergy but I’m going to refer to ministers in this post) but it’s not as easy-breezy as the author implies. Ministers may be considered self-employed for the purposes of FICA but that doesn’t confer special treatment by allowing them to otherwise classify their relationship with the church. If a minister receives wages from the church and has established an employee-employer relationship, the IRS will expect that expenses and benefits be reported as such. This means that business and professional expenses would be deducted on Schedule A, not Schedule C. Those expenses are subject to the normal reporting requirements.

A minister who clearly has independent status (such as a traveling minister who serves many churches) or who also performs “a la carte” independent services (such as officiating at weddings not connected with his ministerial duties at the church) may receive one or more forms 1099 and may file a Schedule C. But otherwise, wages are reported on a form W-2 and the regular rules apply.

So now let’s get to the tithe as a business expense. On its face, I would agree that a tithe could meet the criteria as “ordinary and necessary.” It is, in fact, common and accepted in many religions to tithe. And by qualifying it in a contract, it could be viewed as helpful and appropriate for your trade or business. But it would not qualify as a business expense reportable on Schedule C for ministers classed as employees.

Quite frankly, even if it did qualify, I think it’s a case of the tax tail wagging the dog. No matter how you characterize, it’s still a 10% cut in salary if you’re required by contract to pay it out to the church. A SE savings doesn’t make up for a required outlay as a condition of employment. Is it worth it to tie yourself to a condition of employment? Not to mention the whole lack of warm fuzzies I get at the idea that my pastor would be required to give money back to the church. Is that just a case of robbing Peter to pay… Peter?

However, believe it or not, creating an employment contract that requires you to turn over a portion of your salary to a charitable organization could actually qualify the tithe as a charitable donation. Even though there’s clearly an expectation of something in return (in this case, a job) the IRS has specifically addressed this very situation and determined that it may be allowable. It’s also worth noting that while there’s an upper limit to the amount of charitable deductions that you can take, there is no threshold to meet as with unreimbursed employee expenses.

With respect to the home office, I agree with your comments about the commute. To qualify for the home office deduction, the home office must be:

  1. regularly and exclusively used for business activity; and
  2. your principal place of business.

I think it’s a tough argument to make for many ministers that a home office qualifies as the “principal” place of business. Generally, a church is the place where most of the work takes place.

Additionally, a home office is, as you correctly point out, for the convenience of the employer, not the employee. I know of few churches which do not have suitable space available for ministers. If the space is available, the employee may not opt to work from home (as a choice) and claim a home office deduction. This isn’t restricted to churches – that’s the rule.

You can’t deduct the cost of commuting to your place of work. If your home office is for your convenience – and not for the convenience of the church – traveling to the church would be considered a commute and therefore wouldn’t qualify as a business expense.

And again, the restrictions relating to home office and commuting are for the minister as an employee, not as an independent contractor. You can’t act as though you’re an independent contractor when you’re an employee, minister or not.

If you’re interested in finding out more, check out Weber v. Commissioner, 103 T.C. 378 (1994), aff’d 60 F.3d 1104 (4th Cir. 1995). This is more or less the case as far as the IRS is concerned on the tax treatment of ministers. In that case, which the IRS won, a Methodist minister claimed to be self-employed for the purpose of income tax and Social Security. The case, which was upheld on appeal, found that the employee test for income tax purposes is the same for ministers as regular folks, regardless of Social Security status.

I hope that clears up any confusion. Thanks for writing in!

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

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1 thought on “Ask the taxgirl: Pastors and Deductions

  1. I’m trying to make sense of this sentence: “However, believe it or not, creating an employment contract that requires you to turn over a portion of your salary to a charitable organization could actually qualify the tithe as a charitable donation.”

    Did you mean to say DISqualify or am I missing the meaning?

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