1. Director of Finance and Administration

2. UNITED METHODIST CLERGY
Special

3. ANSWERS TO 3 KEY QUESTIONS

4. CLERGY PAY WHAT?

5. INCOME TAX Governed by: Internal Revenue Code
Internal Revenue Regulations
Revenue Rulings
U.S. Court Decision
All Subject to Change!

6. SOCIAL SECURITY AND MEDICARE TAXES

7. PAYROLL TAX Governed by either:
Self Employment Contributions Act (SECA)
Federal Insurance Contributions Act ( FICA)
These taxes fund Social Security and Medicare.

8. PAYROLL TAX Key Point: The Employer Pays FICA.
The tax rate for Social Security and Medicare is 15.3% of Wages/Income.
In FICA
½ is paid by the employer (7.65%)
½ is withheld from employee paychecks (7.65%)
Key Point: The Employer Pays FICA.

9. They employ themselves.
BUT
A self-employed individual pays under SECA and is responsible for paying the entire share.
WHY?
They employ themselves.

10. AS CLERGY WE PAY WHICH ONE?
Most people with an employer pay FICA … But clergy are special so …
CLERGY PAY SECA!

11. CLERGY WORK FOR WHO?

12. Conference, bishop, local church or conference board of pensions?

13. At least as far as income tax is concerned
THE LOCAL CHURCH
At least as far as income tax is concerned

14. Seriously? What does that mean?
EMPLOYMENT STATUS?
Seriously? What does that mean?

15. Clergy are treated as employees of the salary paying unit.
REMEMBER
Clergy are treated as employees of the salary paying unit.

16. That was for
purposes of income tax.

17. BUT, REMEMBER, CLERGY ARE SPECIAL …
CLERGY ARE ALSO RESPONSIBLE FOR SECA.

18. Congress made clergy self-employed for purposes of SECA.
Simple, right?

19. SECA Most people who pay SECA have a particular employment status
They aren’t “employees” at all
They are “independent contractors”
That means they aren’t “employees” of who/whatever is paying them

20. SO WHAT?
When someone is an “independent contractor,” the “employer” will issue a tax form called a 1099 which will list the amounts paid during the course of the preceding year. They do NOT get a W-2.

21. Despite paying SECA, clergy are “employees” for income tax purposes
CLERGY GET A W-2

22. CLERGY THUS …
Receive benefits through the administration of the conference and are supervised by their bishop but are employed by the local church for purposes of income tax.
But clergy are self-employed for purposes of Social Security and Medicare, meaning they pay SECA, which is paid by them individually by April 15 and filed as a schedule SE with the rest of their tax returns.
BUT, as employees of local churches they are issued a W-2 by January 31 of each year, reflecting the wages paid by the local church with notes for tax-deferred pension and housing (we’ll get there later).

23. CHURCHES SHOULD NOT …
Give clergy a 1099 reflecting their salary support; or
Withhold and pay FICA from and on behalf of clergy
Elder
Deacon
Licensed Local Pastor

24. CHURCHES SHOULD …
Give clergy a W-2 reflecting the cash support paid during the year
Show in the boxes for Social Security and Medicare Wages

26. INCOME TAX BASICS
In case you’ve never had it explained This is all subject to change by act of Congress.

27. INCOME TAX

28. TAXABLE INCOME

29. Getting there is a 4 step process that includes a ton of smaller steps on form 1040.

30. GROSS INCOME +
Box 1 of W-2 Any other income
(excluding housing)

31. From Gross Income you subtract certain “above the line deductions.”
STEP 1
From Gross Income you subtract certain “above the line deductions.”

32. STEP 1 Health Savings Account Deductions (if you have one)
Unreimbursed Moving Expenses (Changing in 2018)
Self Employment tax
Contributions to IRAs
not PIP — before tax contributions never even get reported as gross income
Student loan interest
Tuition

33. ADJUSTED GROSS INCOME (AGI)

34. Standard Deduction OR “Itemized Deductions”
STEP 2
Standard Deduction OR “Itemized Deductions”

35. STANDARD DEDUCTIONS 2017 SINGLE INDIVIDUALS $6,350 Up $50 from 2016
HEAD OF HOUSEHOLD
$9,350
MARRIED FILING JOINTLY
$12,700
Up $100 from 2016

36. STANDARD DEDUCTIONS 2018 SINGLE INDIVIDUALS $12,000
Up almost double from 2017
HEAD OF HOUSEHOLD
$18,000
Up almost double
MARRIED FILING JOINTLY
$24,000

37. Itemized Deductions (must exceed Standard)
Mortgage Interest (Primary Residence Only)
Charitable Contributions
State Taxes (in some states) (and capped in 2018)
Property Taxes (in some states) (and capped in 2018)

38. Other Possible Itemized Deductions
Medical/Dental Expenses
Must exceed 10% of your AGI or 7.5% if you’re 65 or older
Broad range of expenses qualify (see IRS Tax Topic 502 at
Unreimbursed Business/Employee Expenses
Must exceed 2% of AGI
CAUTION! There is a better way: Accountable Reimbursement Policy.
See IRS Publication 529 at
In 2018 the Unreimbursed Business/Employee Expenses is Changing and Medical Expenses will change in 2019

39. Itemized or Standard?
Taxpayers choose standard or itemized deductions based on which one is larger.
For example, if Pastor Jane, a single taxpayer, gave $10,000 to the church she serves last year, she will definitely be itemizing deductions. Why?
$10,000 is more than $6,300.

40. Tax is calculated based on taxable income.
STEP 3
Tax is calculated based on taxable income.

41. INDIVIDUAL INCOME BRACKET MARRIED FILING JOINTLY INCOME BRACKET
TAX BRACKETS
INDIVIDUAL INCOME BRACKET
$0 - $9,325
10%
$9,326 - $37,950
15%
$37,951 - $91,900
25%
$91,901 - $191,650
28%
$191,651 - $416,700
33%
$416,701-$418,400
35%
Top Bracket
39.6%
MARRIED FILING JOINTLY INCOME BRACKET
$0 - $18,650
10%
$18,651 - $75,900
15%
$75,901 - $153,100
25%
$153,101 - $233,350
28%
$233,351 - $416,700
33%
$416,701-$470,400
35%
Top Bracket
39.6%

42. Applying the Brackets
Married taxpayers filing jointly have taxable income of $150,000. What is their tax owed?
10% of the first $18,650 = $1,865.00
15% of the next $57,249 = $8,587.35
Why $57,249? $75,900-$18651
25% of the last $74,099 = $18,524.75
$150,000 - $75,901
Total = $28,977.10

43. INDIVIDUAL INCOME BRACKET MARRIED FILING JOINTLY INCOME BRACKET
TAX BRACKETS 2018
INDIVIDUAL INCOME BRACKET
$0 - $9,525
10%
$9,526 - $38,700
12%
$38,701 - $82,500
22%
$82,501 - $157,500
24%
$157,501 - $200,000
32%
$200,001-$500,000
35%
Top Bracket
37%
MARRIED FILING JOINTLY INCOME BRACKET
$0 - $19,050
10%
$19,051 - $77,400
12%
$77,401 - $165,000
22%
$165,001 - $315,000
24%
$315,001 - $400,000
32%
$400,001-$600,000
35%
Top Bracket
37%

44. That amount is then reduced by any “credits.”
STEP 4
That amount is then reduced by any “credits.”

45. Previously paid or withheld tax. (Not really a credit at all)
BIGGEST CREDIT:
Previously paid or withheld tax. (Not really a credit at all)

46. CHILD TAX CREDIT – IF YOU HAVE KIDS:
Up to $1,000 per child (under 17) capped at $3,000
Phases out for taxpayers with AGI over $75,000 for individuals or $110,000 for married filing jointly
In 2018, the amount doubles to $2,000 (at least until 2025), but isn’t entirely refundable.

47. ADOPTION CREDIT – IF YOU HAVE KIDS:
Up to $13,570 based on expenses incurred
Phases outs apply, but are quite high (starting at $203,450 of Modified AGI

48. Lifetime Learning Credit
$2,000 of eligible education expenses per student (broader than American Opportunity/Hope Scholarship but still no room and board).
It is NOT refundable (only reduces your tax owed)
You MUST have paid the expenses, BUT you can claim it for amounts paid with a loan (NOT tax free scholarship money).
Phases out at certain AGI

49. EARNED INCOME TAX CREDIT
Must have children and sufficiently low AGI earned income from work.

50. HOUSING

51. HOUSING
At least as of today, compensation (cash or in-kind) paid to clergy in the form of “housing” is exempt from INCOME TAX. (That same compensation MUST be reported and IS subject to SECA.)
This is due to an old section of the Internal Revenue Code (26 U.S.C. sec. 107), and it HAS been and will probably continue to be challenged on grounds of the Establishment Clause of the 1st Amendment of the U.S. Constitution
In fact, in October, the U.S. Circuit Court for the Western District of Wisconsin found 26 U.S.C. section 107(2) violated the Establishment Clause.
For now, but only for now, housing treatment remains as it has always been.

52. WHAT IS HOUSING? Parsonages Housing allowances
Amounts paid for utilities
Amounts paid for “furnishings”

53. THIS IS ACTUALLY A BENEFIT
Something to remember:
THIS IS ACTUALLY A BENEFIT
(Even if SECA hurts)

54. WHAT’S THE RULE?
Clergy can exempt from INCOME TAX (not SECA) any compensation (in-kind or cash) paid for housing including
Rent
Mortgage payments
Utilities
Furnishings or other expenses related to housing

55. BUT, THE AMOUNT THAT MAY BE EXEMPTED IS LIMITED TO:
The amount set by the congregation in a charge conference
Will need some form of housing resolution that states what housing is provided and how much the church intends to pay as ‘housing’
The fair rental value of the pastor’s home fully furnished with utilities paid; and
The amount the pastor can actually substantiate with receipts

56. CASE #1 Factory Worker Jack was paid $45,000 in wages in 2017.
He rents an apartment for $500 a month in the small town of Missouri in which he works.
His utilities (electric, gas, internet, home phone and basic cable) totaled $4,000 exactly.
After housing and taxes, what $ did he have available for the rest of living?

57. *Will be even less with above the line deductions
CASE #1
WHAT’S LEFT?
$45,000 -$5,402
-$3,442
-$10,000
$26,156
STANDARD DEDUCTION
$6,350
$38,650 of Taxable Income
TAX BRACKET
25%
FICA
7.65% of wages
INCOME TAX OWED
$5,401*
FICA WITHELD
$3,442.50
HOUSING PAID
$6,000+$4,000=$10,000
*Will be even less with above the line deductions

58. After housing and taxes, what $ did he have left?
CASE #2
Pastor Jack get’s the Conference minimum for an Elder: $35,000.
He also is provided a parsonage with utilities paid by the local church he serves.
The fair rental value of the parsonage is approximately $6,000 annually, and his utilities were also $4,000.
After housing and taxes, what $ did he have left?

59. CASE #2 WHAT’S LEFT? $35,000 -$3,831 -$6,885 $24,284
STANDARD DEDUCTION
$6,350
$28,650 of Taxable Income
TAX BRACKET
15%
SECA
15.3% of gross
INCOME TAX OWED
$3,831*
SECA OWED
$6,885
HOUSING PAID
$0.00
*Will be less because Self-Employment tax is an above the line deduction.

60. PROFESSIONAL EXPENSES Remember I said there was a better way?
26 U.S.C. sec. 162 allows employees to deduct unreimbursed expenses incurred in business
The deduction is “itemized,” and the amount must exceed 2% of Adjusted Gross Income
Much better for 2018!!!

61. ACCOUNTABLE REIMBURSEMENT More Critical for 2018
Church must adopt an accountable reimbursement policy (charge conference form in Missouri)
Clergy will then account for expenses to the local church, NOT the IRS and reimbursements are NOT considered income (not taxed) AND it avoids SECA!!!
BUSINESS RELATED (No personal use)
Key rule: ADEQUATE ACCOUNTING
Itemized receipts
Mileage logs (beginning reading/end reading)

62. MILEAGE
Rate of reimbursement for business-travel: $.535/mile ($.545/mile for 2018)
No commuting miles (home office exception)
Alternative: Actual costs (reimbursing clergy for gas)

63. A Word about Tax Reform

64. Detrimental Changes for UMC Clergy
Moving expenses no longer deductible
Reimbursed moving expenses now taxable
Charitable contributions will largely have no impact on taxes
Mortgage Interest also less relevant AND risk of loss for housing allowance

66. QUESTIONS