When individuals secure employment as youth ministers, they are commonly considered either employees of the church or freelance independent contractors. Independent contractor status is typically reserved for youth ministers who travel regularly as part of their outreach. Regardless of the tax status commonly reserved for churches and other nonprofit organizations, youth ministers are required to pay federal and state income taxes on any compensation they receive as part of their employment.
Although specific deductions may be available to these ministers depending on their credentialed status, they will typically be required to pay the same clergy taxes that all other employed staff within the church are obligated to pay. With this in mind, it is imperative that youth ministers review their tax obligations in order to determine what specifically they will owe on their next tax return and what deduction opportunities may be open to them as part of their employment.
Youth ministers will be required to pay both federal and state income taxes on income they earn as part of their work. That being said, specific deductions may be available to them to help offset their tax duties.
Exploring the Basics of Clergy Taxes
If you are seeking an answer to the question, "Do pastors pay taxes?" the simple answer is "yes." Much like any other employed individual, income taxes are required on the federal level for anyone earning above the minimum income threshold. Regarding state income taxes, pastors and youth ministers will only be required to make these payments if the state they currently work in requires income tax.
As mentioned previously, youth ministers may be eligible for specific tax deductions based on their ordination status. If, for example, a youth minister has received official ministerial credentials, then they may be able to deduct the cost of specific items that are required for their work, including various religious texts or items associated with travel, such as mileage, transportation fees, etc.
One important distinction must be made here, however, between ordained youth ministers working on a freelance basis or as part of a church. As a part of new tax legislation introduced in 2018, the miscellaneous expenses such as those mentioned previously may not be deductible for youth ministers who are employed by a church on a full-time basis. The IRS has repealed the miscellaneous expense deduction for employed ministry officials, as well as any expenses associated with hospitality or entertainment. That being said, meal expenses which were paid as part of required ministry travel can still qualify for tax deductions.
These aforementioned regulations differ when a youth minister is operating as their own independent contractor. According to tax legislation, freelancers and independent contractors still have the opportunity to deduct expenses associated with the successful operation of their businesses. Because of this, youth ministers may still be able to deduct the cost of supplies purchased as part of their business operations.
Evaluating the Clergy Housing Allowance Worksheet
Even though many deductions have been removed for employed ministers and youth pastors, the popular housing allowance remains in effect. That being said, the constitutionality of this tax benefit for ministers has been challenged and may result in the allowance being dissolved in the near future. Until this time, however, ministers can still take advantage of a powerful tax credit for their housing.
Although claiming this credit requires an extensive array of documentation, using a clergy housing allowance worksheet can help ministers quickly parse through valuable information and determine the scope of their potential tax credit. These worksheets are offered by a number of organizations and can be found quickly and easily on the internet.
Generally speaking, youth ministers will likely not be able to qualify for this credit due to their specialized status with the church. Given the fact that youth ministers are not trained to manage an entire congregation, it is quite likely that housing credits will be reserved for general ministry employees. However, various travel-related expenses that independently contracted minsters are forced to pay as part of their work will remain tax deductible. While this may not be as cost-saving as a housing allowance, it nevertheless remains a valuable benefit for those who choose to take advantage of it. In fact, these deductions could significantly reduce a self-employed youth ministers tax duties during filing.
Assessing IRS Form 4361
According to Internal Revenue Service guidelines, members of the clergy have the opportunity to claim an exemption from self-employment tax in the event that they are fully ordained. As per IRS guidelines, individuals are eligible to apply for this credit if they are "an ordained, commissioned, or licensed minister of a church." As can be imagined, this particular exemption can be immensely valuable for youth ministers who identify as independent contractors on their tax return. Youth ministers can use IRS Form 4361 in order to apply for tax exempt status on their next tax return.
That being said, the IRS also dictates that ordained ministers must pay income tax on any income that is derived from religious services performed outside of their church, such as weddings, speaking appearances, etc. Although the self-employment tax exemption may still apply to income earned directly as part of church duties, funds earned outside of the church itself will still qualify for both income tax and self-employment tax. These services are often available to ministers and should be carefully analyzed so as to ensure that this type of compensation is not improperly reported on an upcoming tax return filing.
Moving Forward With Clergy Taxes
As with any tax policy., the rules regarding clergy taxes and various deductions allocated exclusively for religious personnel may change over time. With that in mind, it is in the best interest of youth ministers to remain current on all relevant tax-related news in order to ensure that they know the appropriate methods for completing their next tax return. Failure to fully understand these tax laws could result in sizable penalties and fines during filing season.
Youth ministers who are seeking more information about their tax responsibilities and the various reporting requirements associated with their profession are strongly encouraged to consult with a financial advisor or tax professional. Given the dynamic nature of tax law today, these experts may represent your best chance for gaining a comprehensive overview of current tax law and how it applies to ministry today.
The Internal Revenue Service maintains a large collection of information on taxes for clergy earnings as part of Tax Topic 417. Both full-time and self-employed youth ministers may be able to find information here that complements their pre-existing knowledge surrounding current tax law.