There are two methods for figuring your net earnings from self-employment as a minister, member of a religious order, Christian Science practitioner, or church employee.
- Regular method.
- Nonfarm optional method.
You may find Worksheets 1 through 4 helpful in figuring your net earnings from self-employment. Blank worksheets are in the back of this publication, after the Comprehensive Example.
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. 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.
If you have an approved exemption, or you are automatically exempt, do not include the income or deductions from qualified services in figuring your net earnings from self-employment.
To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income:
- Salaries and fees for your qualified services (discussed earlier),
- Offerings you receive for marriages, baptisms, funerals, masses, etc.,
- The value of meals and lodging provided to you, your spouse, and your dependents for your employer's convenience,
- 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
- 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.
For the income tax treatment of items (2) and (4), see Income Tax: Income and Expenses, later.taxmap/pubs/p517-003.htm#en_us_publink100033586
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 net earnings from self-employment.
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. taxmap/pubs/p517-003.htm#en_us_publink100033587
Your net earnings from self-employment are determined without any foreign earned income exclusion or the foreign housing exclusion or deduction if you are a U.S. citizen or resident alien serving abroad and living in a foreign country.
For information on excluding foreign earned income or the foreign housing amount, see Publication 54.taxmap/pubs/p517-003.htm#en_us_publink100033588
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. However, Mr. Jones must include $35,000 when figuring net earnings from self-employment.taxmap/pubs/p517-003.htm#en_us_publink100033589
The exclusion from gross income for amounts derived from American Samoa or Puerto Rico does not apply in computing net earnings from self-employment. Also see Residents of Puerto Rico, the U.S. Virgin Islands, Guam, the CNMI, and American Samoa, earlier, under U.S. Citizens and Resident and Nonresident Aliens. taxmap/pubs/p517-003.htm#en_us_publink100033590
Do not include the following amounts in gross income when figuring your net earnings from self-employment.
- Offerings that others made to the church.
- 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.
- Pension payments or retirement allowances you receive for your past qualified services.
- The rental value of a parsonage or a parsonage allowance provided to you after you retire.
When figuring your net earnings from self-employment, deduct all your nonemployee ministerial expenses. Also, deduct all your allowable unreimbursed trade or business expenses that you incur in performing ministerial services as a common-law employee of the church. Include this net amount on Schedule SE (Form 1040), Section A, line 2, or Section B, line 2. Attach an explanation.taxmap/pubs/p517-003.htm#en_us_publink100033592
These are qualified expenses you incurred while not working as a common-law employee of the church. They include expenses incurred in performing marriages and baptisms, and in delivering speeches.taxmap/pubs/p517-003.htm#en_us_publink100033593
If you received an advance, allowance, or reimbursement for your expenses, how you report this amount and your expenses depends on whether the reimbursement was paid to you under an accountable plan or a nonaccountable plan. If you are not sure if you are reimbursed from an accountable plan or a nonaccountable plan, ask your employer.taxmap/pubs/p517-003.htm#en_us_publink100033594
To be an accountable plan, your employer's reimbursement arrangement must include all three of the following rules.
- 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.
- You must adequately account to your employer for these expenses within a reasonable period of time.
- You must return any excess reimbursement or allowance within a reasonable period of time.
Generally, if your expenses equal your reimbursement, you have no deduction and the reimbursement is not reported on your Form W-2. If your expenses are more than your reimbursement, you can deduct your excess expenses for SE tax and income tax purposes.taxmap/pubs/p517-003.htm#en_us_publink100033595
A nonaccountable plan is a reimbursement arrangement that does not meet all three of the rules listed under Accountable plans.
In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan.
- Excess reimbursements you fail to return to your employer.
- Reimbursement of nondeductible expenses related to your employer's business.
Your employer will combine any reimbursement paid to you under a nonaccountable plan with your wages, salary, or other compensation and report the combined total in box 1 of your Form W-2. You can deduct your related expenses (for SE tax and income tax purposes) regardless of whether they are more than, less than, or equal to your reimbursement.
For more information on accountable and nonaccountable plans, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. taxmap/pubs/p517-003.htm#en_us_publink100033596
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 in only the self-employment income of the spouse having the agreement. taxmap/pubs/p517-003.htm#en_us_publink100033597
For 2008, the maximum net earnings from self-employment subject to social security (old age, survivors, and disability insurance) tax is $102,000 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%. taxmap/pubs/p517-003.htm#en_us_publink100033598
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.
- 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.
- You have used this method less than 5 years. (There is a 5-year lifetime limit.) The years do not have to be one after another.
- Your net nonfarm profits were:
- Less than $4,548, and
- Less than 72.189% of your gross nonfarm income.
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 ...|
|$6,300 or less||Two-thirds of your gross nonfarm income.|
|More than $6,300||$4,200.|
Multiply your total earnings subject to SE tax by 92.35% (.9235) to get actual net earnings. Actual net earnings are equivalent to net earnings under the "Regular Method."taxmap/pubs/p517-003.htm#en_us_publink100033600
For more information on the nonfarm optional method, see Publication 334 and the Schedule SE (Form 1040) instructions.