Self Employment allowance

by Pamela
(Los Angeles)

How can we break the circle. We figure out the Self Employment Tax for the priest. We give him an allowance for the entire amount. We add the entire amount to his Salary so he pays personal income tax on it.

BUT since it is part of his income it is included on his SE Schedule and therefore we are paying Self Employment tax on the Self Employment tax. Which means now we have more self employment tax to pay. Can someone break this circle. Thanks.

Comments for Self Employment allowance

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Use Algebra
by: Anonymous

You want to pay them a total salary, x, which is their base salary, b, plus a social security offset, which is equal to a certain percentage of x. In our case it's 7.65% of the total salary (0.0765x), but in your case it would be 15.3% of x (0.153x), since you want to pay the whole amount. This gives the equation: x=b+.153x
Then b=(1-.153)x
And finally, x=b/(0.847)
Which means you take the base salary you wanted to pay your minister and multiply it by 1.1806 and you'll be paying them the correct offset.

Self Employment allowance
by: Anonymous

How did D. Martin calculate the $18.05? Thank you!

Calculating SE Tax Allowance
by: Vickey

Thank you, D Martin! Your helpful calculations could not have come at a better time for me as my church is in the process of setting up a self employment allowance for our pastor.

It Eventually Tapers Off
by: D Martin

Given a SE Tax rate of 15.3%, an allowance of 18.06% will cover the entire cycle. Consider the following example:

Your minister has a salary of $100.
His SE Tax is $15.30

However, the church provides an $18.06 allowance.
Now his total income is $118.06.
His SE Tax is 15.3% of 118, which is $18.06

Subtract the $18.05 from $118.00 and you are only a nickel short of the original $100.

If the SE Tax rate ever changes, find someone who is good at math and calculate:

(rate)+(rate^2)+(rate^3)+(rate^4)+(rate^5)

technically it goes on forever in that sequence but five iterations will get you so close that rounding pennies takes care of the rest.

Social Security Tax Allowance
by: VIckey

It is a vicious circle, isn’t it :(

Most churches figure the social security tax allowance on their pastor’s basic salary.

Yes, the pastor will be responsible for income taxes and self-employment taxes on that extra amount; however, most pastors are very appreciative of that extra help on their taxes and do not mind paying the taxes on it.

If he has your church hold out income taxes for him, he could just have extra held out to cover the allowance’s taxes.

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