How and where you report minister tax deductions usually depends on the minister's tax classification.
Review 7 of the top tax deductions for ministers below...
Ministers have "dual status". Most are considered employees of their churches for income tax reporting purposes and all are considered self-employed for Social Security purposes.
See more on minister's dual status and clergy taxes.
Whether a minister is classified as an employee of the church or completely self-employed will usually depend on control.
See more on determining if a minister is an employee or not.
If a minister is classified as an employee, they USED TO BE limited to claiming their unreimbursed business expenses as an itemized deduction on Form 1040 Schedule A. Now with the latest tax reform...those employee deductions were done away with.
SO...setting up an Accountable Reimbursement policy, is the best and only method for claiming and reimbursing professional or business expenses for ministers that are classified as employees.
Ministers can still deduct their professional or business expenses on IRS Schedule C if they are classified as an independent contractor (self-employed).
The Church Accounting: How To Guide devotes a whole section of the book to payroll for churches. It covers payroll terminology and forms and then takes you through the steps necessary to set up a payroll, calculate and file the necessary taxes and forms, and even details how to handle the minister's payroll. It also includes sections on filling out IRS forms: 1099, 1099-NEC, and 1096.
If you have QuickBooks or are considering using it in the future, go ahead and purchase the QuickBooks for Churches and the How To Guide combo for a complete package on setting up and administering a payroll using QuickBooks.
1. Travel: Work related transportation such as hospital and nursing home visits is a major business expense for both the minister employee and self-employed.The most important thing to remember with this expense is to faithfully document every trip! To claim this deduction or reimbursement, you must include the following information in your mileage log:
Another tip is to keep a copy of mapquest showing route and mileage and keep any supporting documents to prove you went where you said...such as toll receipts with log.
Note: Commuting miles (distance from the minister’s residence to the church or nonprofit organization) is not an allowable tax-free business expense. If you reimburse for commuting miles, you will need to include and report the total amount on the minister's W-2.
Important: Meals are not usually deductible on those day trips...unless it was for a church related meeting!
2. Entertainment: Entertainment expense is often an area where there is not enough information recorded to “substantiate” the business expense and it is often reimbursed or claimed as a deduction erroneously.
The IRS has some strict rules regarding this tax deduction.
See Pub 463
A meal can be deducted or reimbursed if a business relationship and purpose can be proven such as the ministers in the example above.
See more tips on what documentation needs to be included for an entertainment minister tax deduction in this article about Unsubstantiated Business Expenses. NOTE: the rules for this deduction keep changing ...so look up the most recent rulings on this deductions before attempting to claim on your Schedule C or requesting reimbursement from the church.
3. Clothing: Vestments, robes, and "uniforms" that is not usually worn outside of your ministry duties can be minister tax deductions. Note: Ordinary street clothes or suits are not deductible as they can be worn for other events outside of the ministry.
4. Fees/Dues/Subscriptions: seminar fees, dues to professional organizations and/or societies, subscriptions to professional journals,subscriptions to religious publications etc. Note: Charitable contributions to a minister's church does not qualify as a tax deductible business expense. However, they may still be deducted as contributions on Schedule A if a minister is able to itemize his deductions.
5. Resource Books: Concordance, theological dictionaries, religious books and publications, etc.
6. Education: Educational expenses such as tuition, books, supplies, correspondence courses can be minister tax deductions if the education:
Last of all but certainly not least...one of the greatest minister tax deductions:
7. Housing Allowance: A housing allowance is the greatest tax benefit available to ministers. It is also one of the least understood.
It is simply a portion of a minister’s compensation that is so designated in advance by the minister’s employing church.
It is very beneficial for ministers because an allowance for housing is excluded from federal income tax, but not exempt from the minister’s self-employment tax.
See how to set up a housing allowance for ministers.
If you want to DIY your payroll, I highly recommend you look at using Gusto! It is very user friendly and their support is awesome! Plus they know how to set up and maintain payrolls for churches and nonprofit organizations.
Note: I am a "partner" of Gusto, but as I have told you before ... I never recommend anything that we or our clients have not tried and love =)