Ministerial & Church Taxation—The Top Ten Mistakes

In the past few years so many churches have started or been revitalized! Church growth is on the move! Yet, I’ve come to the conclusion that the taxation issues facing these churches and their ministerial staff are not being adequately addressed. Here’s my list of the Top Ten Taxation Mistakes that are being made by Churches and the Clergy. There is no order intended by the list, just, 10 errors that I routinely come across in my volunteer consulting with churches and ministers. (This list is updated regularly and may differ from the lists found in the PowerPoint presentations)

1.         Improperly classifying employees as self-employed independent contractors. Thus, the church is not withholding and not paying their share of the required Social Security and Medicare Taxes.

2.         Failing to furnish a Form W-2 to each employee (including ministers) and/or a Form 1099-Misc to certain non-employees, including, maintenance staff, nursery workers, evangelists and certain vendors. Watch for new rules and regulations in this area!

3.         Failing to classify taxable fringe benefits, such as non-accountable expense reimbursements, social security supplements, and “special occasion" gifts, as wages on the W-2Form. Yes, Christmas and Anniversary cash gifts by the congregation’s members are taxable!

4.         Including the minister’s housing allowance in wages on Form W-2. Housing allowance is NOT subject to income taxes but is subject to Social Security and Medicare. It is rare for a minister to be an employee, for Taxation purposes, of a Church.

5.         Failing to offer church employees available nontaxable fringe benefits. If the church offers the benefit to its leaders, it must be offered to all employees!

6.         Failing to have a properly documented and approved accountable expense reimbursement plan.

7.         Failing to have a properly approved housing allowance reimbursement plan. If not properly documented, the minister ends up paying income tax on the amounts paid to him/her as housing allowance.

8.         Providing contribution receipts to members who donate their services to the church.

9.         Not providing the IRS mandated contribution receipts for donations.  

10.       Minister’s using a Schedule C for their regular church earnings. This form should only be used for income received from other sources, for example: payments for performing weddings, funerals, revivals and counseling. 

Recent years have seen a greatly increased awareness by the IRS and the general public of church

Taxation and business issues and it is imperative that church leaders become knowledgeable in this area.

Many church associations, denominations or conventions have professional and/or volunteer staff to

help the individual church.

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