Minister Income Mistakes That Blow Me Away

I never ceased to be blown away at the number of things that ministers do incorrectly when it comes to properly reporting income on their tax returns.  As a fellow minister, I understand why that happens.  The tax laws that regulate churches and ministers are very complex and filled with pitfalls.  In today’s ever-changing, legal climate, we must be careful to stay up to date.  Just because our hearts are in the right place, it does not mean our financial records are OK.  I use the phrase "right heart, wrong books." 

Many ministers perform weddings, sell their sermons, books and other teachings in the church book store or as they travel and speak in other places.  Other ministers receive compensation for counseling or chaplain services.  This income is defined in section 61(a)(2) of the Internal Revenue Code and is therefore taxable.  However, under section 1402(a)(8), ministers that have opted out of social security do not have to pay self employment tax when they conduct a wedding or sell their sermons, books and other teachings.  Most ministers do not know this--that blows me away!  Let me give you an example:

Minister Tom writes a book titled "Loving Jesus."  He receives royalties in the amount of $17,800.00.  He also performs 3 weddings and receives $750.00. Finally, he also sells teachings on CD and receives $3,500.00.  His total income from these sales equals $22,050.00.  Since Pastor Tom has opted out of social security, he does not owe any self employment taxes on these earnings.  He saves at least $3,373.65 in taxes.  Why?  Because the above described services, including his book sales, are considered qualified services. IRS publication 517 includes the following activities:
 
    * Books or articles

    * Counseling

    * Weddings, funerals

    * Serving on the board of a church, church controlled school or religious ministry

    * Any work for the church

    * Sermon tape and CD sales

    * Traveling preaching and teaching

    * Online sales of religious items

Pastoral Love Offerings

Many churches give pastoral love offerings to their pastors as gifts.  When churches do this, it is because of love, admiration and respect for their pastor, and truly intended as a gift and not as compensation.  Some common occasions for giving pastoral love offerings are the pastor's birthday, Christmas or anniversaries.  The church wants to bless the pastor because of his/her tireless dedication.  Many churches and pastors believe that because the offering was a gift, it is not taxable income.  This is an old line of thought that has been around for a while and continues to permeate churches all across America.  While section 102(a) allows the pastor to receive a gift tax free, subsection (c)(1) specifically states that if the gift is from the church, it cannot be recorded as a gift and is therefore taxable.  The repercussions of treating pastoral love offerings as non-taxable gifts can be grave.  That blows me away!

Another Note on Pastoral Love Offerings

When I pastored a church in Florida, on many occasions after a Sunday morning service, members would shake my hand and tell me how they were blessed by the message and hand me a 20, 50 or 100 dollar bill as a gift.  At that time, I was living on a shoestring budget and it was a welcomed gift that would often times arrive just in time to pay the mortgage of my very small home.

While we can all agree that the gift by the member is a wonderful blessing to me, the question that follows receiving the gift is whether the gift is taxable?  What does the IRS Code say about it?  How about a love offering given after a counseling session?  Though the minister does not set a fee, the individual out of his/her own free will gives a gift out of gratitude for his wise counsel?  According to sections 3401(a)(9), 61(a)(2) and 102(c)(1), these offerings are taxable within the context described above, meaning that if the reason why the giver gave the gift was because of what your message or counsel meant to him/her, then the gift was motivated by a service provided, whether intending to be compensated or not.  "Whaaaaaat?  Are you serious?"  Those are the two most common questions I get when I teach this.  That blows me away!

What about reimbursements?

I often had to drive my car to attend a conference, visit someone sick in the hospital or visit someone in jail (I never liked going to the correctional facilities).  The gas for those trips were reimbursed by the church.  When the church reimburses a pastor's miles, are they taxable?   That depends!  Let's assume that pastor Tom takes a trip to a national conference of ministers.  The trip is 260 miles round trip.  Before leaving the board of directors approves for him to use the church debit card to cover his gas.  He fills up the tank before leaving and it costs $74.00.  He goes to the conference spends a four days there and returns home with only 1/8 of a tank left.  The rest of the tank he uses for visitation and other ministry related travel.  Under the law, This type of reimbursement is considered taxable income.  The amount paid to the pastor to reimburse his trip is taxable and would have constitutes an excess benefit transaction, even though the church paid it to him thinking it was tax free.  The fine for this type of violation is 25% for those that happened this year and 200% for those that happened last year.  That blows me away! 

We are going to be discussing this topic in detail at our next set of conferences.  Please consider attending one.  whether you are considering starting a church or ministry or have already started and have been established for a long time, our Church Compliance and Ministry Empowerment is for you.  I bet what you learn, will blow you away!