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IRS.gov Website
Publication 517
taxmap/pubs/p517-008.htm#en_us_publink100033652

Comprehensive
Example(p12)

rule
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.
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Form W-2 From Church(p12)

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The church completed its Form W-2 for Rev. White as follows.
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Box 1.(p12)

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The church entered Rev. White's $31,000 salary.
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Box 2.(p12)

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The church left this box blank because Rev. White did not request federal income tax withholding.
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Boxes 3 through 6.(p12)

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Rev. White is considered a self-employed person for purposes of social security and Medicare tax withholding, so the church left these boxes blank.
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Box 14.(p12)

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The church entered Rev. White's total parsonage and utilities allowance for the year and identified them.
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Form W-2 From College(p12)

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The community college gave Rev. White a Form W-2 that showed the following.
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Box 1.(p12)

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The college entered Rev. White's $3,400 salary.
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Box 2.(p12)

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The college withheld $272 in federal income tax on Rev. White's behalf.
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Boxes 3 and 5.(p12)

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As an employee of the college, Rev. White is subject to social security and Medicare withholding on his full salary from the college.
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Box 4.(p12)

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The college withheld $142.80 in social security taxes.
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Box 6.(p12)

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The college withheld $49.30 in Medicare taxes.
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Schedule C-EZ (Form 1040)(p12)

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Some of Rev. White's entries on Schedule C-EZ are explained here.
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Line 1b.(p12)

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Rev. White reports the $4,000 from weddings, baptisms, and honoraria.
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Line 2.(p12)

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Rev. White reports his expenses related to the line 1b amount. He paid $87 for marriage and family booklets and drove his car 490 miles for business (245 miles from January 1 through June 30, and 245 miles from July 1 through December 31), mainly in connection with honoraria. Rev. White used the standard mileage rate to figure his car expense, as follows.
 245 miles × 51 cents ($0.51)1 = $125
 245 miles × 55.5 cents ($0.555)2 = 136
 Total =$261

1 This is the standard mileage rate for January 1 to June 30 of 2011.
2 This is the standard mileage rate for July 1 to December 31 of 2011.
These expenses total $348 ($261 + $87). However, he cannot deduct the part of his expenses allocable to his tax-free parsonage allowance.
First, Rev. White uses Worksheet 1 (see Attachment 1 later) to figure what percentage of his business expenses are not deductible. Then he completes Worksheet 2 (see Attachment 1 later) to show that 23% (or $80 = $348 × 23% (.23)) of his business expenses are not deductible because they are allocable to his tax-free allowance. He subtracts the $80 from the $348, enters the $268 difference on line 2, and adds a note at the bottom of the page to see the attached statement.
Rev. White attaches Worksheets 1 and 2 to his return. This is part of his required statement. See Attachment 1 later.
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Line 3.(p12)

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He enters his net profit of $3,732 ($4,000 − $268) on line 3 and on Form 1040, line 12.
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Lines 4 through 8b.(p12)

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Rev. White fills out these lines to report information about his car.
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Form 2106-EZ(p12)

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Rev. White fills out Form 2106-EZ to report the unreimbursed business expenses he had as a common-law employee of First United Church.
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Line 1.(p12)

rule
Before completing line 1, Rev. White fills out Part II because he used his car for church business. His records show that he drove 2,774 business miles (1,387 miles from January 1 through June 30, and 1,387 miles from July 1 through December 31), which he reports in Part II. Then, he figures his car expense for his line 1 entry.
1,387 miles × 51 cents ($0.51)1 = $ 707
1,387 miles × 55.5 cents ($0.555)2 = 770
Total =$1,477

1 This is the standard mileage rate for January 1 to June 30 of 2011.
2 This is the standard mileage rate for July 1 to December 31 of 2011.
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Line 4.(p12)

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He enters $231 for his professional publications and booklets.
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Line 6.(p12)

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Before entering the total expenses on line 6, Rev. White must reduce them by the amount allocable to his tax-free parsonage allowance. After completing Worksheet 3 (see Attachment 1, later), he finds that 23% [or $393 = ($1,477 + $231) × 23% (.23)] of his employee business expenses are not deductible. He subtracts $393 from $1,708 ($1,477 + $231) and enters the result, $1,315, on line 6, adding a note at the bottom of the page about the attached statement. He also enters $1,315 on Schedule A (Form 1040), line 21.
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Schedule A (Form 1040)(p12)

rule
Rev. White fills out Schedule A as explained here.
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Line 6.(p12)

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He deducts $1,800 in real estate taxes paid in 2011.
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Line 10.(p13)

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He deducts $5,572 of home mortgage interest paid in 2011 (reported on Form 1098, Mortgage Interest Statement (not shown)).
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Line 16.(p13)

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Rev. and Mrs. White contributed $4,800 in cash during the year to various qualifying charities. Each individual contribution was less than $250 and they have the required records for all donations.
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Line 21.(p13)

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Rev. White enters his unreimbursed employee business expenses from Form 2106-EZ, line 6.
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Lines 25, 26, and 27.(p13)

rule
He can deduct only the part of his employee business expenses that exceeds 2% of his adjusted gross income. After he completes page 1 of Form 1040, he fills out these lines to figure the amount he can deduct.
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Line 29.(p13)

rule
The total of all the Whites' itemized deductions is $12,781, which he enters here and on Form 1040, line 40.
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Schedule SE (Form 1040)(p13)

rule
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.
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Line 2.(p13)

rule
Rev. White attaches a statement (see Attachment 2, Worksheet 4, later) that explains how he figures the amount ($43,744) to enter.
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Line 4.(p13)

rule
He multiplies $43,744 by 92.35% (.9235) to get his net earnings from self-employment ($40,398).
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Line 5.(p13)

rule
The amount on line 4 is less than $106,800, so Rev. White multiplies the amount on line 4 ($40,398) by 13.3% (.133) to get his self-employment tax of $5,373. He enters that amount here and on Form 1040, line 56.
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Line 6.(p13)

rule
Rev. White multiplies the amount on line 5 by 57.51% (.5751) to get his deduction for the employer-equivalent portion of self-employment tax of $3,090. He enters that amount here and on Form 1040, line 27.
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Form 1040(p13)

rule
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.
taxmap/pubs/p517-008.htm#en_us_publink100033686

Line 7.(p13)

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Rev. White reports $34,640. This amount is the total of his $31,000 church salary, $3,400 college salary, and $240 ($1,200 - $960), his excess utility allowance. The two salaries were reported to him in box 1 of the Forms W-2 he received.
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Line 12.(p13)

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He reports his net profit of $3,732 from Schedule C-EZ, line 3.
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Line 27.(p13)

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He enters $3,090, the deductible part of his SE tax from Schedule SE, line 6.
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Line 40.(p13)

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He enters the total itemized deductions from Schedule A, line 29.
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Line 51.(p13)

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The Whites can take the child tax credit for their daughter, Jennifer. Rev. White figures the credit by completing the Child Tax Credit Worksheet (not shown) in the Instructions for Form 1040. He enters $1,000 credit on line 51.
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Line 56.(p13)

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He enters the self-employment tax from Schedule SE, line 5.
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Line 62.(p13)

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He enters the federal income tax withheld, as shown in box 2 of his Form W-2 from the college.
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Line 63.(p13)

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He enters the $7,000 estimated tax payments he made for the year.
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Line 75.(p13)

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He wants to have any overpayment of tax applied to his 2012 estimated tax.
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Attachment 1(p13)

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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.
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Attachment 2(p13)

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Attachment 2 (Worksheet 4) shows the computation of net self-employment income.
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Attachment 1—John E. White 011-00-2222
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 1d 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 church3a    
b
Utility allowance, if any3b    
c
Actual expenses for utilities3c    
dEnter the smaller of line 3b or 3c3d    
e
Excess utility allowance (subtract line 3d from line 3b)3e    
4a
Parsonage or rental allowance4a9,600    
bUtility allowance, if separate4b1,200    
cTotal allowance (add lines 4a and 4b)4c10,800    
d
Actual expenses for parsonage4d9,600    
eActual expenses for utilities4e960    
fTotal actual expenses for parsonage and utilities (add lines 4d
and 4e)
4f 10,560    
gFRV* of home, plus the cost of utilities4g10,800    
h
Enter the smaller of line 4c, 4f, or 4g4h  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 (line 5(b)) $ 10,560  
Total income (line 5(c))  $ 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.
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Attachment 1—John E. White 011-00-2222  (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 for entire year:    490   miles. Multiply the miles entered by 51 cents ($0.51) for miles driven before July 1, 2011, and by 55.5 cents ($0.555) for miles driven after June 30, 2011. Add the dollar amounts, then enter the result here. 2  261
3 
Meals and entertainment: $      × 50% (.50) 3   
4 
Other expenses (list item and amount)
a
  Marriage and family booklets4a87 
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  348
6 
Nondeductible part of Schedule C or C-EZ expenses (multiply line 5 by the percent in line 1)6  80
7 
Deduction allowed.* Subtract line 6 from line 5. Enter the result here and on Schedule C, line 27a, or Schedule C-EZ, line 2. 7  268
* None of the other deductions claimed in this return are allocable to tax-free income.
 
 
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Worksheet 3. Figuring the Allowable Deduction for Form 2106 or 2106-EZ Expenses

 Column AColumn B
1 Percentage of expenses that are nondeductible (from Worksheet 1, line 6):   23  %
2 Use of car for church business for entire year:    2,774   miles. Multiply the miles entered by 51 cents ($0.51) for miles driven before July 1, 2011, and by 55.5 cents ($0.555) for miles driven after June 30, 2011. Add the dollar amounts, then enter the result here. 2 1,477  
3 Meals and entertainment3   
4 Other expenses (list item and amount)
a  Professional publications and booklets4a 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  1,708  
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  1,708  
8 In Column A, enter the amount from line 7. In Column B, multiply line 7 by 50% (.50)8  1,708  
9 Add the amounts on line 8 of both columns and enter the total here9  1,708  
10 Nondeductible part of Form 2106 or 2106-EZ expenses (multiply line 9 by the percent in line 1)10 393  
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  1,315 
* None of the other deductions claimed in this return are allocable to tax-free income.
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Attachment 2—John E. White 011-00-2222
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 32  3,732 
3a
Parsonage or rental allowance (from Worksheet 1, line 3a or 4a)3a9,600  
b
Utility allowance (from Worksheet 1, line 3b or 4b)3b1,200  
c
Total allowance (add lines 3a and 3b)3c 10,800 
4 
Add lines 1, 2, and 3c4  45,532 
5 
Schedule C or C-EZ expenses allocable to tax-free income (from Worksheet 2, line 6)5  80  
6 
Total unreimbursed employee business expenses after the 50% reduction for meals and entertainment (from Worksheet 3, line 9) 6  1,708  
7 
Total business expenses not deducted in lines 1 and 2 above (add lines 5 and 6)7   1,788
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  43,744