Priests who have been reading this column over the past several years realize that the Federal income tax system is (unnecessarily) complex for priests. For the next few months this column will focus on the 12 most elusive tax rules that experience has shown to be the most common challenges for priests in preparing their income taxes.
The first three elusive tax rules apply to the calculation and reporting of Social Security Self-employment tax.
Elusive Rule 1. Complete Schedule SE when filing Form 1040 each year. Priests must pay Social Security tax through the self-employment tax method. For most priests Social Security tax is the largest portion of their tax liability, typically costing a priest $5,000 to $7,000 annually.
In the case of a newly ordained priest who receives his first Form W-2 reporting his salary for the first seven months he serves in his initial assignment as an ordained priest, he may ask a tax preparer to help him file his first Federal tax return.
The Form W-2 appears similar, but not identical, to that of a lay employee, and if the tax preparer is not aware of the special tax rules for priests, the tax preparer may not think to ask why there are no FICA wages on the Form W-2 and then prepare the tax return without including Schedule SE.
What that means is that the priest pays no Social Security Self-employment tax. When the error is eventually discovered, the priest will owe significant amounts of back taxes, interest and penalties to the IRS.
Elusive Rule 2. Include the value of room and board as additional earnings on Schedule SE when filing Form 1040. If a priest (or his tax preparer) ''looks hard enough,'' he will discover that, in addition to reporting his cash salary and other earnings for Social Security Self-employment tax purposes, he must also add the value of room and board provided by the parish to his earnings and pay Self-employment tax on that value.
The reason that it is not obvious to include the value of room and board on Schedule SE, is that there is no line on the form prompting a priest to enter the value.
To the credit of the IRS, however, Line 2 of Schedule SE includes the statement, ''Ministers and members of religious orders, see page SE-1 for types of income to report on this line.'' Page SE-1 refers to the instructions for Schedule SE in which the priest will read that he must include the value of both the fair value of the housing provided (room) and the value of meals provided at the rectory (board).
Most dioceses provide a standard value for room and board for the priests residing in parish-owned rectories. If not, the priest must estimate the value of room and board provided to him and add that value to his other earnings on Schedule SE.
Elusive Rule 3. Deduct unreimbursed business expenses on Schedule SE. Many priests have out-of-pocket ministry-related expenses for which they are not reimbursed. Often priests do not report their unreimbursed business expenses as tax deductions because they do not have enough aggregated expenses to qualify because of various limitations built into the tax reporting system. Though the expenses may not qualify as deductions for Federal income tax purposes, a priest may deduct all unreimbursed ministry-related expenses for Social Security Self-employment tax purposes reported on Schedule SE. Like ''Elusive Rule 2,'' the IRS does not provide a line for this deduction on Schedule SE, nor does the Schedule SE make mention of the opportunity for the reduction in taxable earnings. A priest must refer to the instructions for Schedule SE to learn of this tax break. TP