5 Myths About Ministers’ Taxes

Myth 1: “Ministers do not have to pay income taxes.”

Ministers are exempt from income tax withholding . . . not from having to pay income taxes. There’s a huge difference.

Many ministers misunderstand the fact that their wages as a minister are not subject to income tax withholding.

This leads to the false assumption that they do not have to pay income taxes. Not until it is too late and costly do they realize the gravity of their mistake.

Since ministers have a dual tax status, ministers are responsible for withholding and paying their own taxes. As a minister, you can pay your taxes in quarterly installments using Form 1040-ES, Estimated Tax for Individuals.

Myth 2: “Love offerings are not taxable income.”

The confusion surrounding love offerings comes primarily because the term love offering implies a gift that is given because of love and respect for the recipient. 

In the giver’s mind, it may be a gift, while it is compensation in the IRS’s mind! 

Herein lies the conflict.

IRS Code Section 102(a) says, “Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.”

While the members of the church are truly giving a love offering as a gift, the IRS says it is taxable income because section 102(c)(1) says that “any amount transferred by or for an employer to, or for the benefit of, an employee” shall be treated as gross income.

While the law clearly says that a gift is tax-free, the fact that the gift is given to the church and then given to the Pastor or leader makes it 100% taxable because of section 102(c)(1).

The law makes an exception for a gift given by the church to the Pastor if it is under $25.00.

Myth 3: “If I do not have the exact figures for my deductions, then I can just round up or make a best faith estimate.”

Deductions should not be in round numbers. Inserting round numbers on a return tells the IRS that you are likely making them up and can increase your chances of being audited. Do your best to keep receipts organized and easily accessible. 

Myth 4: “If I owe taxes and file an extension, then I will not have to pay the taxes I owe until the extension is due.”

The truth is that all money owed to the IRS is due by the annual tax deadline.

The filing deadline for the 2021 tax year is April 18th, 2022.

If you happen to owe taxes and fail to meet the April 18th deadline, then you will be penalized for each month that you are late (even if you have filed an extension using Form 4868). 

In general, if you file a tax extension using Form 4868 and think that you may end up owing money for your taxes, it is better to pay the IRS an estimated amount by April 18th than to delay and owe more due to penalties.

If you happen to overpay, the IRS will reimburse you the amount you overpaid.

Myth 5: “Any CPA is a good CPA for ministers.”

While there are many knowledgeable and well-intentioned CPAs, not all of them are familiar with the various caveats of taxes for ministers.

A CPA working on taxes for ministers should be well versed on the subject and be familiar with nonprofit tax law because many of the tax benefits afforded to a minister are directly tied to a minister’s ordination.

For example, IRS Publication 517 explains various rules regarding the tax status of ministers, and within this publication, it defines a minister as: 

“[I]ndividuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination.” 

With this definition in mind, your chosen CPA should have a working knowledge of nonprofit tax law and how it relates specifically to you as a minister.

First published on StartChurch.com. Used by permission.

Valerie West
Valerie West

Valerie West is the billing team lead in the StartCHURCH accounts receivable department.