[Nevergiveup2012]

This question is not related to CPA exam at all.

I recently started working for a tax firm, which is a new area to me since my past experiences were mostly in Audit and private industry.

I am in the process of preparing a tax return for a client who works for a company . He receives W-2 from his employer but they didn’t withhold any federal, Social Security, and medicare taxes from his paychecks. Is my client considered a “self-employed” then?. Should his income be reported in Schedule C ? and he would be subject to self-employment taxes. or should his income be reported under “wages” in 1040?

Your advise is appreciated. Thank you

BEC - 86 (8/31/12)
AUD - 97 (11/18/12)
REG - 83 (5/12/13)
FAR - 91 (12/2/13)
Done!!!

[Nevergiveup2012]

The client is a pastor and his employer treats him as if he's an independent contractor. He doesn't receive any insurance benefits and have been told by his employer “the church” that they wouldn't withhold any of his taxes. Since this is a new job, prior year tax return doesn't help me. The part that confuses me is the W-2. In my opinion , he should have received 1099 as supposed to W-2.

His W-2 shows wages in box 1, but the rest of boxes left as blank. I believe that his employer probably didn't pay the employer portion of Social Security and Medicare either. If this is the case, my client would be responsible for both the Employee and Employer portions of SS and Medicare. Schedule C is more appropriate in this case and the ER portion of SS and Medicare would be deductible for him.

Since I don't want to trigger any red flags with the IRS, would it be too late for his employer to do a form correction? how difficult is it for them to issue a 1099 and change the W2? I am so not familiar with issuance of 1099

BEC - 86 (8/31/12)
AUD - 97 (11/18/12)
REG - 83 (5/12/13)
FAR - 91 (12/2/13)
Done!!!

[Anonymous]

Ministers and clergy can request exemption from social security and medicare tax by filing form 4361. This is the most likely explanation for having no withholding.

[Anonymous]

Ministers and clergy can request exemption from social security and medicare tax by filing form 4361. This is the most likely explanation for having no withholding.

[Anonymous]

I would look at pub 517. Has a lot of info that should help you out.

[Anonymous]

I would look at pub 517. Has a lot of info that should help you out.

[Anonymous]

I was going to suggest that his profession could explain the lack of SS & Medicare, but that's already come up in the discussion, so that has that part covered!

I have seen the taxes for pastors of small churches that don't withhold any taxes. You should advise him for next year to pay quarterly estimates – first one is due soon. Beyond that, you will want to see if your tax program has somewhere that it will compute the appropriate taxes for clergymen. Also see if he has a housing allowance or if he can get the church to give him a housing allowance in the future, since that will help reduce his taxes.

[Anonymous]

I was going to suggest that his profession could explain the lack of SS & Medicare, but that's already come up in the discussion, so that has that part covered!

I have seen the taxes for pastors of small churches that don't withhold any taxes. You should advise him for next year to pay quarterly estimates – first one is due soon. Beyond that, you will want to see if your tax program has somewhere that it will compute the appropriate taxes for clergymen. Also see if he has a housing allowance or if he can get the church to give him a housing allowance in the future, since that will help reduce his taxes.

[Tarheelgirl]

Pastors are exempt from paying taxes. To learn more and I use this website all the time at work, http://www.IRS.gov. It will tell you exactly what to do.

FAR - 46, 79 (7/8/14)
AUD - 56, 59, 2/23/15 3rd times a charm!
BEC - 69, 74 Really??
REG - April, I hope. Fingers crossed!

[Tarheelgirl]

Pastors are exempt from paying taxes. To learn more and I use this website all the time at work, http://www.IRS.gov. It will tell you exactly what to do.

FAR - 46, 79 (7/8/14)
AUD - 56, 59, 2/23/15 3rd times a charm!
BEC - 69, 74 Really??
REG - April, I hope. Fingers crossed!

[Anonymous]

“Pastors are exempt from paying taxes” – not exactly! They can opt to have none withheld, but are not really exempt from paying them. They just have some modified requirements.

[Anonymous]

“Pastors are exempt from paying taxes” – not exactly! They can opt to have none withheld, but are not really exempt from paying them. They just have some modified requirements.

[TAXMAN710]

The way that they are treating the W2 is common. Pastors are exempt from regular wage withholding at the employer level. You do have to make sure that you trigger schedule SE to recognize the income from the W2 as self employment income. Pastors' wages are reported on either the W2 like you have or a 1099 depending on the church, but all are subject to self-employment tax unless the pastor files the religious exemption form 4361. Make sure that you question him on any expenses that he might have to offset the income and also go over his housing allowance situation with him. All are typical items to keep in mind for a pastor.

REG-July 12
BEC-May 12
FAR-July 12
AUD-October 12

[TAXMAN710]

The way that they are treating the W2 is common. Pastors are exempt from regular wage withholding at the employer level. You do have to make sure that you trigger schedule SE to recognize the income from the W2 as self employment income. Pastors' wages are reported on either the W2 like you have or a 1099 depending on the church, but all are subject to self-employment tax unless the pastor files the religious exemption form 4361. Make sure that you question him on any expenses that he might have to offset the income and also go over his housing allowance situation with him. All are typical items to keep in mind for a pastor.

REG-July 12
BEC-May 12
FAR-July 12
AUD-October 12

[Anonymous]

Yup, that W-2 is subject to both income AND SE tax. The SE income may be offset by use of Form 2106, which should be set up to reduce SE Income, NOT on Sch. A.

Also, be aware of any housing allowance he may have received. The full housing allowance is subject to SE tax, but he may use household expenditures (rent/mortgage pmts, property tax, utilities, repairs, etc.) to reduce it for Income tax purposes. Housing allowance is only taxed as ordinary income if the housing allowance payments exceed expenses, but may not be reduced below zero (create a loss) for Income Tax purposes.

I hope this helps clear up some, but ministers are confusing.

[Anonymous]

Yup, that W-2 is subject to both income AND SE tax. The SE income may be offset by use of Form 2106, which should be set up to reduce SE Income, NOT on Sch. A.

Also, be aware of any housing allowance he may have received. The full housing allowance is subject to SE tax, but he may use household expenditures (rent/mortgage pmts, property tax, utilities, repairs, etc.) to reduce it for Income tax purposes. Housing allowance is only taxed as ordinary income if the housing allowance payments exceed expenses, but may not be reduced below zero (create a loss) for Income Tax purposes.

I hope this helps clear up some, but ministers are confusing.

[Author]

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