Clergy and EIC taxes

by Art Shady
(Crossville, TN)

Most tax software companies do not know how to handle minister’s taxes. When you click on the minister's SE exemption due to filing form 4361, the Earned Income Credit (EIC) goes away and it should not.

I have been doing some study and I understand that non-employee income, such as housing allowances have been exempt from EIC earned income since 2001. (i.e., 2001 Act, supra note 1, section 303(i)(1) and IRC section32(c)(2)(A)(i)(Lexis 2002)(codifying 2001 Act section 303(b). Also see committee reports, Supra note 19, It is the same section that exempts military housing allowances from being included in income and thereby preventing their inclusion from exceeding the limits of the EIC.

In most software, if you don't check the box and override the SE tax entry on your 1040 then you can't e-file because you overrode something. According to my studies being exempt from SE tax should not stop one from claiming the EIC, it doesn't for military and they are governed by the same code as ministers. In fact, military have the election to choose whether they want their housing allowance included in the EIC calculation depending on what is most advantageous for them. I have to file schedule SE for non-ministry activities this year, but am exempt from social security taxes (4361). I do not have a housing allowance, but as a missionary am self-employed.

Should I not be able to pay SE taxes ONLY on my non-ministry income and still get the full EIC, and only pay SE taxes on my non-ministry activities?

Answer far as I know...there is no reason why you should not get EIC on your self-employed income including your ministry income. You may need to contact your software support and see if they can tell you how to get around this issue. If worse comes to worse, you might have to just print out your return and mail it in.

Hope this helps,

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Further Information
by: Art

IRS Publication 517 states:
Earned income for a minister with an approved Form 4361. If you have earnings from qualified services that are exempt from SECA (because you have an approved Form 4361), amounts you received for performing ministerial duties as an employee are earned income. This includes wages, salaries, tips, and other taxable employee compensation.
Amounts you received for nonemployee ministerial duties are not earned income. This includes fees for performing marriages and baptisms, and honoraria for delivering speeches.

If you had nonministerial duties, any net earnings from self-employment, minus one-half of your SE tax, and any compensation received as an employee is earned income.

In other words, if your income is reported on a W-2 and you are exempted from SECA taxes, your W-2 earnings will be considered earned income for purposes of calculating the earned income credit. If you receive a 1099-MISC or otherwise report your income on Schedule C, the earnings are not considered earned income (which I think is erroneous) for purposes of calculating the earned income credit.

All of my income is self-employment because I am a missionary. So I only have to file schedule SE for my secular self-employment. I don't have a housing allowance or income from weddings, honorariums, etc. so all I have is income from speaking. My thinking is that the IRS has generalized their interpretation of the code too much.

In other words would it not be ok (in my case) to write on the SE tax line of form 1040 something like "Ministerial Income Exempt from SE Tax- Form 4361" and include the tax from my wife's secular self-employment only (my other self-employment was under $400)?

If I do this will the IRS bounce it back and say I cannot claim the credit? In my view they should not. Their processors probably would not understand the law either, but that could work against me.


Well, Art, you just exceeded my field of expertise :-)

When I used to prepare my now-retired pastor's income tax return many years ago, I would write on the SE tax line "Exempt-Form 4361", but he did not have any other income that would require an amount on that line. So I am not sure what to do in that case.

As I are now way over my head :-)

To be on the safe side, I would either make a call to the IRS or seek some professional tax advice before I sent my taxes in.


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