Table of Contents
This section gives information about which system (SECA or FICA) is used to collect social security and Medicare taxes from members of the clergy (ministers, members of a religious order, and Christian Science practitioners and readers) and religious workers (church employees).
The services you perform in the exercise of your ministry, of the duties required by your religious order, or of your profession as a Christian Science practitioner or reader are covered by social security and Medicare under SECA. Your earnings for these ministerial services (defined later) are subject to self-employment (SE) tax unless one of the following applies.
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You are a member of a religious order who has taken a vow of poverty.
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You ask the Internal Revenue Service (IRS) for an exemption from SE tax for your services and the IRS approves your request. See Exemption From Self-Employment (SE) Tax , later.
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You are subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. For more information, see Bilateral Social Security (Totalization) Agreements in Publication 54.
Your earnings that are not from ministerial services may be subject to social security tax under FICA or SECA according to the rules that apply to taxpayers in general. See Ministerial Services , later.
If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax, even if you perform these services as an employee of that church. However, you can request that the IRS grant you an exemption, as discussed under Exemption From Self-Employment (SE) Tax , later. For the specific services covered, see Ministerial Services , later.
If you are a member of a religious order who has not taken a vow of poverty, your earnings for ministerial services you perform as a member of the order are subject to SE tax. See Ministerial Services , later. However, you can request that the IRS grant you an exemption as discussed under Exemption From Self-Employment (SE) Tax , later.
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Work for an organization outside your religious community, and
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Perform work that is not required by, or done on behalf of, the order.
Generally, your earnings from services you perform in your profession as a Christian Science practitioner or reader are subject to SE tax. However, you can request an exemption as discussed under Exemption From Self-Employment (SE) Tax , later.
If you are a religious worker (a church employee) and are not in one of the classes already discussed, your wages are generally subject to social security and Medicare tax under FICA, not SECA. Some exceptions are discussed next.
Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. If your employer makes this election, it does not pay the employer's portion of the FICA taxes or withhold from your pay your portion of the FICA taxes. Instead, your wages are subject to SECA and you must pay SE tax on your wages if they exceed $108.28 during the tax year. However, you can request an exemption from SE tax if you are a member of a recognized religious sect, as discussed below.
Churches and church organizations make this election by filing two copies of Form 8274. For more information about making this election, see Form 8274.
You may be able to choose to be exempt from social security and Medicare taxes, including the SE tax, if you are a member of a recognized religious sect or division and work for a church (or church-controlled nonprofit division) that does not pay the employer's part of the social security tax on wages. This exemption does not apply to your service, if any, as a minister of a church or as a member of a religious order.
Make this choice by filing Form 4029. See Requesting Exemption—Form 4029 , later, under Members of Recognized Religious Sects.
To be covered under the SE tax provisions (SECA), individuals generally must be citizens or resident aliens of the United States. Nonresident aliens are not covered under SECA unless a social security agreement in effect between the United States and the foreign country determines that you are covered under the U.S. social security system.
To determine your alien status, see Publication 519, U.S. Tax Guide for Aliens.
Ministerial service, in general, is the service you perform in the exercise of your ministry, in the exercise of your duties as required by your religious order, or in the exercise of your profession as a Christian Science practitioner or reader. Income you receive for performing ministerial services is subject to SE tax unless you have an exemption as explained later. Even if you have an exemption, only the income you receive for performing ministerial services is exempt. The exemption does not apply to any other income.
The following discussions provide more detailed information on ministerial services of ministers, members of a religious order, and Christian Science practitioners and readers.
Most services you perform as a minister, priest, rabbi, etc., are ministerial services. These services include:
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Performing sacerdotal functions,
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Conducting religious worship, and
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Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination.
You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities.
A religious organization is under the authority of a religious body that is a church or denomination if it is organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith.
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Services you perform for nonreligious organizations other than the services stated above.
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Services you perform as a duly ordained, commissioned, or licensed minister of a church as an employee of the United States, the District of Columbia, a foreign government, or any of their political subdivisions. This is true even if you are performing sacerdotal functions or conducting religious worship. (For example, if you perform services as a chaplain in the Armed Forces of the United States, those services are not ministerial services.)
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Services you perform in a government- owned and operated hospital. (These services are considered performed by a government employee, not by a minister as part of the ministry.) However, services that you perform at a church-related hospital or health and welfare institution, or a private nonprofit hospital, are considered to be part of the ministry and are considered ministerial services.
Services you perform as a member of a religious order in the exercise of duties required by the order are ministerial services. The services are considered ministerial because you perform them as an agent of the order.
For example, if you are directed to perform services for another agency of the supervising church or an associated institution, you are considered to perform the services as an agent of the order.
However, if you are directed to work outside the order, the employment will not be considered a duty required by the order unless:
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Your services are the kind that are ordinarily performed by members of the order, and
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Your services are part of the duties that must be exercised for, or on behalf of, the religious order as its agent.
Example.
Pat Brown and Chris Green are members of a religious order and have taken vows of poverty. They renounce all claims to their earnings. The earnings belong to the order.
Pat is a licensed attorney. The superiors of the order instructed her to get a job with a law firm. Pat joined a law firm as an employee and, as she requested, the firm made the salary payments directly to the order.
Chris is a secretary. The superiors of the order instructed him to accept a job with the business office of the church that supervises the order. Chris took the job and gave all his earnings to the order.
Pat's services are not duties required by the order. Her earnings are subject to social security and Medicare tax under FICA and to federal income tax.
Chris' services are considered duties required by the order. He is acting as an agent of the order and not as an employee of a third party. He does not include the earnings in gross income, and they are not subject to income tax withholding, social security and Medicare tax, or SE tax.
You can request an exemption from SE tax if you are a member of the clergy (minister, member of a religious order, or Christian Science practitioner or reader) or a member of a recognized religious sect.
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You elected to be covered under social security by filing Form 2031, Revocation of Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners, for your 1986, 1987, 2000, or 2001 tax year.
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You elected before 1968 to be covered under social security for your ministerial services.
Table 2. The Self-Employment Tax Exemption Application and Approval Process
| Who Can Apply | ||
|---|---|---|
| Members of the Clergy | Members of Recognized Religious Sects | |
| How | File Form 4361 | File Form 4029 |
| When | File by the due date (including extensions) of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment (at least part from ministerial services) | File anytime |
| Approval | If approved, you will receive an approved copy of Form 4361 | If approved, you will receive an approved copy of Form 4029 |
| Effective Date | For all tax years after 1967 in which you have at least $400 of net earnings from self-employment | First day of first quarter after the quarter in which Form 4029 was filed |
To claim the exemption from SE tax, you must meet all of the following conditions.
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You file Form 4361, described later under Requesting Exemption—Form 4361 .
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You are conscientiously opposed to public insurance because of your individual religious considerations (not because of your general conscience), or you are opposed because of the principles of your religious denomination.
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You file for other than economic reasons.
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You inform the ordaining, commissioning, or licensing body of your church or order that you are opposed to public insurance if you are a minister or a member of a religious order (other than a vow-of-poverty member). This requirement does not apply to Christian Science practitioners or readers.
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You establish that the organization that ordained, commissioned, or licensed you, or your religious order, is a tax-exempt religious organization.
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You establish that the organization is a church or a convention or association of churches.
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You did not make an election discussed earlier under Who cannot be exempt .
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You sign and return the statement the IRS mails to you to certify that you are requesting an exemption based on the grounds listed on the statement.
To request exemption from SE tax, file Form 4361 in triplicate (original and two copies) with the IRS.
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Minister,
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Member of a religious order, or
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Christian Science practitioner or reader.
Example 1.
Rev. Lawrence Jaeger, a clergyman ordained in 2010, has net self-employment earnings of $450 in 2010 and $500 in 2011. He must file his application for exemption by the due date, including extensions, for his 2011 income tax return. However, if Rev. Jaeger does not receive IRS approval for an exemption by April 17, 2012, his SE tax for 2011 is due by that date.
Example 2.
Rev. Louise Wolfe has $300 in net self-employment earnings as a minister in 2010, but earned more than $400 in 2009 and expects to earn more than $400 in 2011. She must file her application for exemption by the due date, including extensions, for her 2011 income tax return. However, if she does not receive IRS approval for an exemption by April 17, 2012, her SE tax for 2011 is due by that date.
Example 3.
In 2008, Rev. David Moss was ordained a minister and had $700 in net self-employment earnings as a minister. In 2009, he received $1,000 as a minister, but his related expenses were over $1,000. Therefore, he had no net self-employment earnings as a minister in 2009. Also in 2009, he opened a book store and had $8,000 in net self-employment earnings from the store. In 2010, he had net self-employment earnings of $1,500 as a minister and $10,000 net self-employment earnings from the store.
Rev. Moss had net earnings from self-employment in 2008 and 2010 that were $400 or more each year, and part of the self-employment earnings in each of those years was for his services as a minister, so he must file his application for exemption by the due date, including extensions, for his 2010 income tax return.
If you are a member of a recognized religious sect, or a division of a recognized religious sect, you can apply for an exemption from payment of social security and Medicare taxes on both your self-employment income and the wages you earn from an employer who also has an exemption.
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You must file Form 4029, discussed later on this page under Requesting Exemption—Form 4029 .
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As a follower of the established teachings of the sect or division, you must be conscientiously opposed to accepting benefits of any private or public insurance that makes payments for death, disability, old age, retirement, or medical care, or provides services for medical care.
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You must waive all rights to receive any social security payment or benefit and agree that no benefits or payments will be made to anyone else based on your wages and self-employment income.
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The Commissioner of Social Security must determine that:
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Your sect or division has the established teachings as in (2) above,
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It is the practice, and has been for a substantial period of time, for members of the sect or division to provide for their dependent members in a manner that is reasonable in view of the members' general level of living, and
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The sect or division has existed at all times since December 31, 1950.
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To request the exemption, file Form 4029 in triplicate with the Social Security Administration at the address shown on the form. The sect or division must complete part of the form.
Generally, under FICA, the employer and the employee each pay half of the social security and Medicare tax. Both the employee and the employer, if they meet the eligibility requirements discussed earlier, can apply to be exempt from their share of FICA taxes on wages paid by the employer to the employee.
A partnership in which each partner holds a religious exemption from social security and Medicare is an employer for this purpose.
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Form 941, Employer's QUARTERLY Federal Tax Return: check the box on line 4 and enter “Form 4029” in the empty space below the check box.
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Form 943, Employer's Annual Federal Tax Return for Agricultural Employees: enter “Form 4029” to the right of the wage entry spaces on lines 2 and 4.
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Form 944, Employer's ANNUAL Federal Tax Return: check the box on line 3 and enter “Form 4029” in the empty space below the check box.
There are two methods for figuring your net earnings from self-employment as a member of the clergy or a religious worker.
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Regular method.
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Nonfarm optional method.
Most people use the regular method. Under this method, figure your net earnings from self-employment by totaling your gross income for services you performed as a minister, a member of a religious order who has not taken a vow of poverty, or a Christian Science practitioner or reader. Then, subtract your allowable business deductions and multiply the difference by 92.35% (.9235). Use Schedule SE (Form 1040) to figure your net earnings and SE tax.
If you are an employee of a church that elected to exclude you from FICA coverage, figure net earnings by multiplying your church wages shown on Form W-2 by 92.35% (.9235). Do not reduce your wages by any business deductions when making this computation. Use Schedule SE (Form 1040), Section B, to figure your net earnings and SE tax.
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Salaries and fees for your ministerial services (discussed earlier),
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Offerings you receive for marriages, baptisms, funerals, masses, etc.,
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The value of meals and lodging provided to you, your spouse, and your dependents for your employer's convenience,
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The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you, and
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Any amount a church pays toward your income tax or SE tax, other than withholding the amount from your salary. This amount is also subject to income tax.
Example.
Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. His church owns a parsonage that has a fair rental value of $12,000 per year. Pastor Adams is given the use of the parsonage. He is not exempt from SE tax. He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes.
The results would be the same if, instead of the use of the parsonage and receipt of the rental allowance for utilities, Pastor Adams had received an annual salary of $51,000 of which $17,000 ($5,000 plus $12,000) per year was designated as a rental allowance.
Example.
Paul Jones was the minister of a U.S. church in Mexico. He earned $35,000 in that position and was able to exclude it all for income tax purposes under the foreign earned income exclusion. The United States does not have a social security agreement with Mexico, so Mr. Jones is subject to U.S. SE tax and must include $35,000 when figuring net earnings from self-employment.
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Offerings that others made to the church.
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Contributions by your church to a tax-sheltered annuity plan set up for you, including any salary reduction contributions (elective deferrals) that are not included in your gross income.
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Pension payments or retirement allowances you receive for your past ministerial services.
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The rental value of a parsonage or a parsonage allowance provided to you after you retire.
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Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.
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You must adequately account to your employer for these expenses within a reasonable period of time.
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You must return any excess reimbursement or allowance within a reasonable period of time.
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Excess reimbursements you fail to return to your employer.
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Reimbursement of nondeductible expenses related to your employer's business.
If a husband and wife are both duly ordained, commissioned, or licensed ministers of a church and have an agreement that each will perform specific services for which they are paid jointly or separately, they must divide the self-employment income according to the agreement.
If the agreement is with one spouse only and the other spouse is not paid for any specific duties, amounts received for their services are included only in the self-employment income of the spouse having the agreement.
For 2010, the maximum net earnings from self-employment subject to social security (old age, survivors, and disability insurance) tax is $106,800 minus any wages and tips you earned that were subject to social security tax. The tax rate for the social security part is 12.4%. In addition, all of your net earnings are subject to the Medicare (hospital insurance) part of the SE tax. This tax rate is 2.9%. The combined self-employment tax rate is 15.3%.
You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. In general, the nonfarm optional method is intended to permit continued coverage for social security and Medicare purposes when your income for the tax year is low.
You may use the nonfarm optional method if you meet all the following tests.
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You are self-employed on a regular basis. This means that your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. The net earnings can be from either farm or nonfarm earnings or both.
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You have used this method less than 5 years. (There is a 5-year lifetime limit.) The years do not have to be consecutive.
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Your net nonfarm profits were:
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Less than $4,851, and
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Less than 72.189% of your gross nonfarm income.
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If you meet the three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method.
Table 3.Figuring Nonfarm Net Earnings
| IF your gross nonfarm income is ... | THEN your net earnings are equal to ... |
| $6,720 or less | Two-thirds of your gross nonfarm income. |
| More than $6,720 | $4,480. |
Some income and expense items are treated the same for both income tax and SE tax purposes and some are treated differently.
Note.
For purposes of this section, references to members of the clergy are only to ministers or members of a religious order.
The tax treatment of offerings and fees, outside earnings, rental allowances, rental value of parsonage, earnings of members of religious orders, and foreign earned income is discussed here.
If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc., in addition to your salary. If the offering is made to the religious institution, it is not taxable to you.
If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. For more information, see Publication 526.
Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services. Services include:
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Ministerial services, discussed earlier,
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Administrative duties and teaching at theological seminaries, and
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The ordinary duties of a minister performed as an employee of the United States (other than as a chaplain in the Armed Forces), a state, possession, political subdivision, or the District of Columbia.
This exclusion applies only for income tax purposes. It does not apply for SE tax purposes, as discussed earlier under Amounts included in gross income under Self-Employment Tax: Figuring Net Earnings.
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The amount is used to provide or rent a home, and
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The amount is not more than reasonable pay for your services.
Example.
Rev. Joanna Baker is a full-time minister. The church allows her to use a parsonage that has an annual fair rental value of $24,000. The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. Her actual utility costs during the year were $7,000.
For income tax purposes, Rev. Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage).
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The amount actually used to provide a home,
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The amount officially designated as a rental allowance, or
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The fair rental value of the home, including furnishings, utilities, garage, etc.
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Your reasonable salary,
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The fair rental value of the home plus utilities, or
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The amount actually used to provide a home.
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You are an ordained minister.
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You perform ministerial services at churches located away from your community.
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You actually use the rental allowance to maintain your permanent home.
Your earnings may be exempt from both income tax and SE tax if you are a member of a religious order who:
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Has taken a vow of poverty,
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Receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and
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Renounces the earnings and gives them to the order.
See Members of Religious Orders , earlier, under Social Security Coverage.
Certain income may be exempt from income tax if you work in a foreign country or in a specified U.S. possession. Publication 54 discusses the foreign earned income exclusion. Publication 570, Tax Guide for Individuals With Income From U.S. Possessions, covers the rules for taxpayers with income from U.S. possessions. You can get these free publications from the Internal Revenue Service or from most U.S. Embassies or consulates.
The tax treatment of ministerial trade or business expenses, expenses allocable to tax-free income, and health insurance costs is discussed here.
When you figure your income tax, you must itemize your deductions on Schedule A (Form 1040) to claim allowable deductions for ministerial trade or business expenses incurred while working as an employee. You also may have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses).
These expenses are claimed as miscellaneous itemized deductions and are subject to the 2%-of-adjusted-gross-income (AGI) limit. See Publication 529 for more information on this limit.
However, any of your employee business expenses that are allocable to tax-free income will not be deductible (discussed next).
If you receive a rental or parsonage allowance that is exempt from income tax (tax free), you must allocate a portion of the expenses of operating your ministry to that tax-free income. You cannot deduct the portion of your expenses that is allocated to your tax-free rental or parsonage allowance.
Example.
Rev. Charles Ashford received $40,000 in earnings for ministerial services consisting of a $28,000 salary for ministerial services performed as an employee, $2,000 for weddings and baptisms performed as a self-employed person, and a $10,000 tax-free parsonage allowance. He incurred $4,000 of unreimbursed expenses connected with his earnings for ministerial services. $3,500 of the $4,000 is for employee expenses related to his ministerial salary, and $500 is related to the weddings and baptisms he performed as a self-employed person.
The nondeductible (tax-free) portion of expenses related to Rev. Ashford's ministerial salary is figured as follows:
The nondeductible (tax-free) portion of expenses related to Rev. Ashford's wedding and baptism income is figured as follows:
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A list of each item of taxable ministerial income by source (such as wages, salary, weddings, baptisms, etc.) plus the amount.
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A list of each item of tax-free ministerial income by source (parsonage allowance) plus the amount.
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A list of each item of otherwise deductible ministerial expenses plus the amount.
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How you figured the nondeductible part of your otherwise deductible expenses.
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A statement that the other deductions claimed on your tax return are not allocable to your tax-free income.
If you are self-employed, you may be able to deduct the amount you paid in 2010 for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents.
If you qualify, you can take this deduction as an adjustment to income on Form 1040, line 29. See the instructions for Form 1040 to figure your deduction.
The following special rules apply to the self-employed health insurance deduction.
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The expenses taken into account for purposes of this deduction are not allowed
as a medical expense deduction on
Schedule A. -
The deduction is not allowed for any month you are eligible to participate in a subsidized plan of your (or your spouse's) employer.
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The deduction cannot exceed your net earnings from the business under which the insurance plan is established. Your net earnings under this rule do not include the income you earned as a common-law employee (discussed earlier) of a church.
The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her wages or salary. However, your salary is not subject to federal income tax withholding if both of the following conditions apply.
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You are a duly ordained, commissioned, or licensed minister, a member of a religious order (who has not taken a vow of poverty), or a Christian Science practitioner or reader.
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Your salary is for ministerial services (see Ministerial Services , earlier).
If your salary is not subject to withholding, or if you do not pay enough tax through withholding, you may need to make estimated tax payments to avoid penalties for not paying enough tax as you earn your income.
You generally must make estimated tax payments if you expect to owe taxes, including SE tax, of $1,000 or more, when you file your return.
Determine your estimated tax by using the worksheet in Form 1040-ES. Then, using the Form 1040-ES payment voucher, pay the entire estimated tax for 2011 or the first installment by April 18, 2011. The April 18 date applies whether or not your tax home and your abode are outside the United States and Puerto Rico. For more information, see chapter 2 of Publication 505, Tax Withholding and Estimated Tax.
If you perform your services as a common-law employee of the church and your salary is not subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and SE tax that may be due.
You must file an income tax return for 2010 if your gross income was at least the amount shown in the third column of Table 4.
Table 4.2010 Filing Requirements for Most Taxpayers
| IF your filing status is ... | AND at the end of 2010 you were ...* |
THEN file a return if your gross income was at least ...** | |||
|---|---|---|---|---|---|
| single | under age 65 65 or older |
$9,350 10,750 |
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| married filing jointly*** | under 65 (both spouses) 65 or older (one spouse) 65 or older (both spouses) |
$18,700 19,800 20,900 |
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| married filing separately | any age | $3,650 | |||
| head of household | under 65 65 or older |
$12,050 13,450 |
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| qualifying widow(er) with dependent child | under 65 65 or older |
$15,050 16,150 |
|||
| * If you were born on January 1, 1946, you are considered to be age 65 at the end of 2010. | |
| ** Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Do not include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2010, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). If (a) or (b) applies, see the instructions for Form 1040, lines 20a and 20b, to figure the taxable part of social security benefits you must include in gross income. | |
| *** If you did not live with your spouse at the end of 2010 (or on the date your spouse died) and your gross income was at least $3,650, you must file a return regardless of your age. |
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You are not exempt from SE tax, and you have net earnings from self-employment (discussed earlier under Self-Employment Tax: Figuring Net Earnings ) of $400 or more in the tax year,
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You are exempt from SE tax on earnings from ministerial services and you have $400 or more of other net earnings subject to SE tax, or
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You had wages of $108.28 or more from an electing church or church-controlled organization (see Coverage of Religious Workers (Church Employees) , earlier, under Social Security Coverage).
Retirement savings arrangements are plans that offer you a tax-favored way to save for your retirement. You generally can deduct your contributions to the plan. Your contributions and the earnings on them are not taxed until they are distributed.
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Qualified retirement plan (also called a Keogh or H.R. 10 plan).
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SEP (simplified employee pension plan).
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SIMPLE (savings incentive match plan for employees) plan.
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If you are self-employed, deduct your contributions on Form 1040, line 28.
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If you are not self-employed and your employer does not exclude your contributions from your earned income, deduct your contributions on Form 1040, line 36. Enter the amount of your deduction and “403(b)” on the dotted line next to line 36.
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You were born after January 1, 1993.
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You were a full-time student in 2010.
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Someone, such as your parent(s), claims an exemption for you on his or her 2010 tax return.
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Your adjusted gross income for 2010 is more than:
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$55,500, if your filing status is married filing jointly,
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$41,625, if your filing status is head of household, or
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$27,750, if your filing status is single, married filing separately, or qualifying widow(er) with dependent child.
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Foreign earned income,
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Foreign housing costs,
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Income of bona fide residents of American Samoa, and
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Income of bona fide residents of Puerto Rico.
The earned income credit is a credit for certain people who work. If you qualify for it, the earned income credit reduces the tax you owe. Even if you do not owe tax, you can get a refund of the credit.
You cannot take the credit if your earned income (or adjusted gross income) is:
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$13,460 or more ($18,470 or more if married filing jointly) and you do not have a qualifying child,
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$35,535 or more ($40,545 or more if married filing jointly) and you have one qualifying child,
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$40,363 or more ($45,373 or more if married filing jointly) and you have two qualifying children, or
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$43,352 or more ($48,362 if married filing jointly) and you have three or more qualifying children.
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Wages, salaries, tips, and other taxable employee compensation (even if these amounts are exempt from FICA or SECA), and
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Net earnings from self-employment that are not exempt from SECA (you do not have an approved Form 4029 or 4361) with the following adjustments.
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Subtract the amount you claimed (or should have claimed) on Form 1040, line 27, for one-half of your SE tax.
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Add the amount you claimed on Form 1040, line 29, for the self-employed health insurance deduction.
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Add any amount from Schedule SE, line 4b and line 5a.
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Rev. John White is the minister of the First United Church. He is married and has one child. The child is considered a qualifying child for the child tax credit. Mrs. White is not employed outside the home. Rev. White is a common-law employee of the church, and he has not applied for an exemption from SE tax.
The church paid Rev. White a salary of $31,000. In addition, as a self-employed person, he earned $4,000 during the year for weddings, baptisms, and honoraria. He made estimated tax payments during the year totaling $7,000. He taught a course at the local community college, for which he was paid $3,400.
Rev. White owns a home next to the church. He makes a $650 per month mortgage payment of principal and interest only. He paid $1,800 in real estate taxes for the year on the home. The church paid him $800 per month as his parsonage allowance (excluding utilities). The home's fair rental value for the year (excluding utilities) is $9,840. The utility bills for the year totaled $960. The church paid him $100 per month designated as an allowance for utility costs.
The parts of Rev. and Mrs. White's income tax return are explained in the order they are completed. They are illustrated in the order that Rev. White will assemble the return to send it to the IRS.
The church completed its Form W-2 for Rev. White as follows.
The community college gave Rev. White a Form W-2 that showed the following.
Some of Rev. White's entries on Schedule C-EZ are explained here.
Rev. White fills out Form 2106-EZ to report the unreimbursed business expenses he had as a common-law employee of First United Church.
Rev. White fills out Schedule A as explained here.
After Rev. White prepares Schedule C-EZ and Form 2106-EZ, he fills out Schedule SE (Form 1040). He reads the chart on page 1 of the schedule and determines that he can use Section A—Short Schedule SE to figure his self-employment tax. Rev. White is a minister, so his salary from the church is not considered church employee income. Thus, he does not have to use Section B—Long Schedule SE. He fills out the following lines in Section A.
Rev. White fills out Form 1040, Schedule M, to claim the making work pay credit as follows:
After Rev. White prepares Form 2106-EZ and the other schedules, he fills out Form 1040. He files a joint return with his wife. First, he fills out the address area and completes the appropriate lines for his filing status and exemptions. Then, he fills out the rest of the form as follows.
Attachment 1 (Worksheets 1, 2, and 3) shows the computation of expenses that are nondeductible because they are allocable to tax-free ministerial income and the allowance deductions.
Attachment 2 (Worksheet 4) shows the computation of net self-employment income.
Forms W-2, (2) for John E. White
Form 1040, page 1 for John E. and Susan R. White
Form 1040, page 2
Schedule A (Form 1040)
Schedule C–EZ (Form 1040)
Schedule SE (Form 1040)
Form 2106-EZ
Schedule M
Attachment 1—John E. White011-00-2222 Worksheet 1.Figuring the Percentage of Tax-Free Income
Note. For each line, enter the appropriate amount in all boxes that are not shaded. |
| Source of Income |
(a) Taxable |
(b) Tax-free |
(c) Total | |||
| 1 | W-2 salary as a minister (from box 1 of Form W-2) | 1 | 31,000 | 31,000 | ||
| 2 | Gross income from weddings, baptisms, writing, lecturing, etc. (from line 1 of Schedule C or C-EZ) | 2 | 4,000 | 4,000 | ||
| Note. Complete either lines 3a–3e or lines 4a–4i. | ||||||
| •If your church provides you with a parsonage, complete lines 3a–3e. | ||||||
| •If, instead of providing a parsonage, your church provides you with a rental or parsonage allowance, complete lines 4a–4i. |
||||||
| 3a |
FRV* of parsonage provided by church | 3a | ||||
| b |
Utility allowance, if any | 3b | ||||
| c |
Actual expenses for utilities | 3c | ||||
| d | Enter the smaller of line 3b or 3c | 3d | ||||
| e |
Excess utility allowance (subtract line 3d from line 3b) | 3e | ||||
| 4a |
Parsonage or rental allowance | 4a | 9,600 | |||
| b | Utility allowance, if separate | 4b | 1,200 | |||
| c | Total allowance (add lines 4a and 4b) | 4c | 10,800 | |||
| d |
Actual expenses for parsonage | 4d | 9,600 | |||
| e | Actual expenses for utilities | 4e | 960 | |||
| f | Total actual expenses for parsonage and utilities (add lines 4d and 4e) |
4f | 10,560 | |||
| g | FRV* of home, plus the cost of utilities | 4g | 10,800 | |||
| h |
Enter the smaller of line 4c, 4f, or 4g | 4h | 10,560 | 10,560 | ||
| i |
Excess allowance (Subtract line 4h from line 4c) | 4i | 240 | 240 | ||
| 5 |
Ministerial income (for columns (a), (b), and (c), add lines 1 through 4i) |
5 | 35,240 | 10,560 | 45,800 | |
| 6 |
Percentage of tax-free income:Total tax-free income$10,560 Total income$45,800 |
= | 23%** | |||
| *FRV (Fair Rental Value): As determined objectively and between unrelated parties, what it would cost to rent a comparable home (including furnishings) in a similar location. |
| ** This percentage of your ministerial expenses will not be deductible. Use Worksheets 2 and 3 to figure your allowable deductions. |
Attachment 1—John E. White011-00-2222 (continued) Worksheet 2.Figuring the Allowable Deduction for Schedule C or C-EZ Expenses
| 1 |
Percentage of expenses that are nondeductible (from Worksheet 1, line 6): 23 % | |||
| 2 |
Business use of car: 490 miles × 50¢ (.50) | 2 | 245 | |
| 3 |
Meals and entertainment: $ × 50% (.50) | 3 | ||
| 4 |
Other expenses (list item and amount) | |||
| a |
Marriage and family booklets | 4a | 87 | |
| b |
4b | |||
| c |
4c | |||
| d |
4d | |||
| e |
4e | |||
| f |
Total other expenses (add lines 4a through 4e) | 4f | 87 | |
| 5 |
Total Schedule C or C-EZ expenses (add lines 2, 3, and 4f) | 5 | 332 | |
| 6 |
Nondeductible part of Schedule C or C-EZ expenses (multiply line 5 by the percent in line 1) | 6 | 76 | |
| 7 |
Deduction allowed.* Subtract line 6 from line 5. Enter the result here and on Schedule C, line 27, or Schedule C-EZ, line 2. | 7 | 256 | |
Worksheet 3.Figuring the Allowable Deduction for Form 2106 or 2106-EZ Expenses
| Column A | Column B | |||
| 1 | Percentage of expenses that are nondeductible (from Worksheet 1, line 6): 23 % | |||
| 2 | Use of car for church business: 2,774 miles × 50¢ (.50) | 2 | 1,387 | |
| 3 | Meals and entertainment | 3 | ||
| 4 | Other expenses (list item and amount) | |||
| a | Professional publications and booklets | 4a | 231 | |
| b | 4b | |||
| c | 4c | |||
| d | 4d | |||
| e | 4e | |||
| 5 | Total expenses. In column A, add lines 2 and 4a through 4e and enter the result. In column B, enter the amount from line 3. | 5 | 1,618 | |
| 6 | Enter reimbursements received for other expenses (Column A) and meals and entertainment (Column B) that were not included in box 1 of Form W-2 | 6 | ||
| 7 | Total Form 2106 or 2106-EZ unreimbursed expenses (subtract line 6 from line 5) | 7 | 1,618 | |
| 8 | In Column A, enter the amount from line 7. In Column B, multiply line 7 by 50% (.50) | 8 | 1,618 | |
| 9 | Add the amounts on line 8 of both columns and enter the total here | 9 | 1,618 | |
| 10 | Nondeductible part of Form 2106 or 2106-EZ expenses (multiply line 9 by the percent in line 1) | 10 | 372 | |
| 11 | Ministerial employee business expense deduction allowed.* Subtract line 10 from line 9. Enter the result here and on Form 2106, line 10, or Form 2106-EZ, line 6. | 11 | 1,246 | |
Attachment 2—John E. White011-00-2222 Worksheet 4.Figuring Net Self-Employment Income for Schedule SE (Form 1040)
| 1 |
W-2 salary as a minister (from box 1 of Form W-2) | 1 | 31,000 | |
| 2 |
Net profit from Schedule C, line 31, or Schedule C-EZ, line 3 | 2 | 3,744 | |
| 3a |
Parsonage or rental allowance (from Worksheet 1, line 3a or 4a) | 3a | 9,600 | |
| b |
Utility allowance (from Worksheet 1, line 3b or 4b) | 3b | 1,200 | |
| c |
Total allowance (add lines 3a and 3b) | 3c | 10,800 | |
| 4 |
Add lines 1, 2, and 3c | 4 | 45,544 | |
| 5 |
Schedule C or C-EZ expenses allocable to tax-free income (from Worksheet 2, line 6) | 5 | 76 | |
| 6 |
Total unreimbursed employee business expenses after the 50% reduction for meals and entertainment (from Worksheet 3, line 9) | 6 | 1,618 | |
| 7 |
Total business expenses not deducted in lines 1 and 2 above (add lines 5 and 6) | 7 | 1,694 | |
| 8 |
Net self-employment income. Subtract line 7 from line 4. Enter here and on Schedule SE, Section A, line 2, or Section B, line 2. |
8 | 43,850 |
These worksheets are provided to help you figure your taxable ministerial income, your allowable deductions, and your net self-employment income.
Worksheet 1.Figuring the Percentage of Tax-Free Income
Note. For each line, enter the appropriate amount in all boxes that are not shaded. |
| Source of Income |
(a) Taxable |
(b) Tax-free |
(c) Total | |||
| 1 | W-2 salary as a minister (from box 1 of Form W-2) | 1 | ||||
| 2 | Gross income from weddings, baptisms, writing, lecturing, etc. (from line 1 of Schedule C or C-EZ) | 2 | ||||
| Note. Complete either lines 3a–3e or lines 4a–4i. | ||||||
| •If your church provides you with a parsonage, complete lines 3a–3e. | ||||||
| •If, instead of providing a parsonage, your church provides you with a rental or parsonage allowance, complete lines 4a–4i. |
||||||
| 3a |
FRV* of parsonage provided by church | 3a | ||||
| b |
Utility allowance, if any | 3b | ||||
| c |
Actual expenses for utilities | 3c | ||||
| d | Enter the smaller of line 3b or 3c | 3d | ||||
| e |
Excess utility allowance (subtract line 3d from line 3b) | 3e | ||||
| 4a |
Parsonage or rental allowance | 4a | ||||
| b | Utility allowance, if separate | 4b | ||||
| c | Total allowance (add lines 4a and 4b) | 4c | ||||
| d |
Actual expenses for parsonage | 4d | ||||
| e | Actual expenses for utilities | 4e | ||||
| f | Total actual expenses for parsonage and utilities (add lines 4d and 4e) |
4f | ||||
| g | FRV* of home, plus the cost of utilities | 4g | ||||
| h |
Enter the smaller of line 4c, 4f, or 4g | 4h | ||||
| i |
Excess allowance (Subtract line 4h from line 4c) | 4i | ||||
| 5 |
Ministerial income (for columns (a), (b), and (c), add lines 1 through 4i) |
5 | ||||
| 6 |
Percentage of tax-free income:Total tax-free income$ Total income$ |
= | %** | |||
| *FRV (Fair Rental Value): As determined objectively and between unrelated parties, what it would cost to rent a comparable home (including furnishings) in a similar location. |
| ** This percentage of your ministerial expenses will not be deductible. Use Worksheets 2 and 3 to figure your allowable deductions. |
Worksheet 2.Figuring the Allowable Deduction for Schedule C or C-EZ Expenses
| 1 |
Percentage of expenses that are nondeductible (from Worksheet 1, line 6): % | |||
| 2 |
Business use of car: miles × 50¢ (.50) | 2 | ||
| 3 |
Meals and entertainment: $ × 50% (.50) | 3 | ||
| 4 |
Other expenses (list item and amount) | |||
| a |
4a | |||
| b |
4b | |||
| c |
4c | |||
| d |
4d | |||
| e |
4e | |||
| f |
Total other expenses (add lines 4a through 4e) | 4f | ||
| 5 |
Total Schedule C or C-EZ expenses (add lines 2, 3, and 4f) | 5 | ||
| 6 |
Nondeductible part of Schedule C or C-EZ expenses (multiply line 5 by the percent in line 1) | 6 | ||
| 7 |
Deduction allowed.* Subtract line 6 from line 5. Enter the result here and on Schedule C, line 27, or Schedule C-EZ, line 2. | 7 | ||
Worksheet 3.Figuring the Allowable Deduction for Form 2106 or 2106-EZ Expenses
| Column A | Column B | |||
| 1 | Percentage of expenses that are nondeductible (from Worksheet 1, line 6): % | |||
| 2 | Use of car for church business: miles × 50¢ (.50) | 2 | ||
| 3 | Meals and entertainment | 3 | ||
| 4 | Other expenses (list item and amount) | |||
| a | 4a | |||
| b | 4b | |||
| c | 4c | |||
| d | 4d | |||
| e | 4e | |||
| 5 | Total expenses. In column A, add lines 2 and 4a through 4e and enter the result. In column B, enter the amount from line 3. | 5 | ||
| 6 | Enter reimbursements received for other expenses (Column A) and meals and entertainment (Column B) that were not included in box 1 of Form W-2 | 6 | ||
| 7 | Total Form 2106 or 2106-EZ unreimbursed expenses (subtract line 6 from line 5) | 7 | ||
| 8 | In Column A, enter the amount from line 7. In Column B, multiply line 7 by 50% (.50) | 8 | ||
| 9 | Add the amounts on line 8 of both columns and enter the total here | 9 | ||
| 10 | Nondeductible part of Form 2106 or 2106-EZ expenses (multiply line 9 by the percent in line 1) | 10 | ||
| 11 | Ministerial employee business expense deduction allowed.* Subtract line 10 from line 9. Enter the result here and on Form 2106, line 10, or Form 2106-EZ, line 6. | 11 | ||
Worksheet 4.Figuring Net Self-Employment Income for Schedule SE (Form 1040)
| 1 |
W-2 salary as a minister (from box 1 of Form W-2) | 1 | ||
| 2 |
Net profit from Schedule C, line 31, or Schedule C-EZ, line 3 | 2 | ||
| 3a |
Parsonage or rental allowance (from Worksheet 1, line 3a or 4a) | 3a | ||
| b |
Utility allowance (from Worksheet 1, line 3b or 4b) | 3b | ||
| c |
Total allowance (add lines 3a and 3b) | 3c | ||
| 4 |
Add lines 1, 2, and 3c | 4 | ||
| 5 |
Schedule C or C-EZ expenses allocable to tax-free income (from Worksheet 2, line 6) | 5 | ||
| 6 |
Total unreimbursed employee business expenses after the 50% reduction for meals and entertainment (from Worksheet 3, line 9) | 6 | ||
| 7 |
Total business expenses not deducted in lines 1 and 2 above (add lines 5 and 6) | 7 | ||
| 8 |
Net self-employment income. Subtract line 7 from line 4. Enter here and on Schedule SE, Section A, line 2, or Section B, line 2. |
8 |
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