Publication 517 – Introductory Material

Future Developments

For the latest information about developments related to Pub. 517, such as legislation enacted after this publication was published, go to IRS.gov/Pub517.

What’s New

Standard mileage rate. The business standard mileage rate for 2017 is 53.5 cents a mile.

Earnings subject to social security tax. For 2017, the maximum wages and self-employment income subject to social security tax has increased to $127,200.

Modified adjusted gross income (AGI) limit for traditional IRA contributions. For 2017, you may be able to take an IRA deduction for your contributions if you were covered by a retirement plan at work and your modified AGI is:

Less than $119,000 if married filing jointly or qualifying widow(er);
Less than $72,000 if single or head of household; or
Less than $10,000 if married filing separately.

If you file a joint return and either you or your spouse wasn’t covered by a retirement plan at work, you may be able to take an IRA deduction if your modified AGI is less than $196,000.

Modified AGI limit for Roth IRA contributions increased. For 2017, you may be able to contribute to your Roth IRA if your modified AGI is:

Less than $196,000 if married filing jointly or qualifying widow(er);
Less than $133,000 if single, head of household, or married filing separately and you didn’t live with your spouse at any time during the year; or
Less than $10,000 if married filing separately and you lived with your spouse at any time during the year.

Earned income credit (EIC). For 2017, the maximum amount of income you can earn and still claim the EIC has increased. See Earned Income Credit , later.

Reminders

Social security information. Social Security beneficiaries may quickly and easily obtain various information from SSA’s website with a my Social Security account, including getting a replacement Form SSA-1099 or SSA-1042S. For more information, go to SSA.gov/myaccount.

Photographs of missing children. The IRS is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

Three federal taxes are paid on wages and self-employment income—income tax, social security tax, and Medicare tax. Social security and Medicare taxes are collected under one of two systems. Under the Self-Employment Contributions Act (SECA), the self-employed person pays all the taxes. Under the Federal Insurance Contributions Act (FICA), the employee and the employer each pay half of the social security and Medicare taxes. No earnings are subject to both systems.

Table 1. Are Your Ministerial Earnings* Covered Under FICA or SECA?

Find the class to which you belong in the left column and read across the table to find if you are covered under FICA or SECA. Don’t rely on this table alone. Also read the discussion for the class in the following pages.

Class	Covered under FICA?	Covered under SECA?
Minister	NO. Your ministerial earnings are exempt.	YES, if you don’t have an approved exemption from the IRS. NO, if you have an approved exemption.
Member of a religious order who hasn’t taken a vow of poverty	NO. Your ministerial earnings are exempt.	YES, if you don’t have an approved exemption from the IRS. NO, if you have an approved exemption.
Member of a religious order who has taken a vow of poverty	YES, if: · Your order elected FICA coverage for its members; or · You worked outside the order and the work wasn’t required by, or done on behalf of, the order. NO, if neither of the above applies.	NO. Your ministerial earnings are exempt.
Christian Science practitioner or reader	NO. Your ministerial earnings are exempt.	YES, if you don’t have an approved exemption from the IRS. NO, if you have an approved exemption.
Religious worker (church employee)	YES, if your employer didn’t elect to exclude you. NO, if your employer elected to exclude you.	YES, if your employer elected to exclude you from FICA. NO, if you are covered under FICA.
Member of a recognized religious sect	YES, if you are an employee and don’t have an approved exemption from the IRS. NO, if you have an approved exemption.	YES, if you are self-employed and don’t have an approved exemption from the IRS. NO, if you have an approved exemption.
* Ministerial earnings are the self-employment earnings that result from ministerial services, defined and discussed later.

In addition, all wages and self-employment income that are subject to Medicare tax are subject to a 0.9% Additional Medicare Tax to the extent they exceed the applicable threshold for an individual’s filing status. Medicare wages and self-employment income are combined to determine if income exceeds the threshold. A self-employment loss isn’t considered for purposes of this tax. Railroad retirement (RRTA) compensation is separately compared to the threshold. Additional Medicare Tax applies to Medicare wages, RRTA compensation, and self-employment income that are more than:

$125,000 if married filing separately,
$250,000 if married filing jointly, or
$200,000 for any other filing status.

There is no employer match for Additional Medicare Tax. For more information, see Form 8959, Additional Medicare Tax, and its separate instructions.

This publication contains information for the following classes of taxpayers.

Members of a religious order.
Christian Science practitioners and readers.
Religious workers (church employees).
Members of a recognized religious sect.

Note.

Unless otherwise noted, in this publication references to members of the clergy include ministers, members of a religious order (but not members of a recognized religious sect), and Christian Science practitioners and readers.

This publication covers the following topics about the collection of social security and Medicare taxes from members of the clergy, religious workers, and members of a recognized religious sect.

Which earnings are taxed under FICA and which under SECA. See Table 1.
How a member of the clergy can apply for an exemption from self-employment tax.
How a member of a recognized religious sect can apply for an exemption from both self-employment tax and FICA taxes.
How a member of the clergy or religious worker figures net earnings from self-employment.

This publication also covers certain income tax rules of interest to ministers and members of a religious order.

A Comprehensive Example shows filled-in forms for a minister who has income taxed under SECA, other income taxed under FICA, and income tax reporting of items specific to a minister.

In the back of Pub. 517 is a set of that you can use to figure the amount of your taxable ministerial income and allowable deductions. You will find these worksheets right after the Comprehensive Example .

Note.

In this publication, the term “church” is generally used in its generic sense and not in reference to any particular religion.

Comments and suggestions.

We welcome your comments about this publication and your suggestions for future editions.

You can send us comments through IRS.gov/FormComments. Or you can write to:

Internal Revenue Service
Tax Forms and Publications
1111 Constitution Ave. NW, IR-6526
Washington, DC 20224

Although we can’t respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax forms, instructions, and publications.

Ordering forms and publications.

Visit IRS.gov/FormsPubs to download forms and publications. Otherwise, you can go to IRS.gov/OrderForms to order current and prior-year forms and instructions. Your order should arrive within 10 business days.

Tax questions.

If you have a tax question not answered by this publication, check IRS.gov and How To Get Tax Help at the end of this publication.

Useful Items – You may want to see:

Publication

54Tax Guide for U.S. Citizens and Resident Aliens Abroad
525Taxable and Nontaxable Income
529Miscellaneous Deductions
535Business Expenses
590-AContributions to Individual Retirement Arrangements (IRAs)
590-BDistributions from Individual Retirement Arrangements (IRAs)
596Earned Income Credit (EIC)

Form (and Instructions)

SS-8Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
SS-16Certificate of Election of Coverage Under the Federal Insurance Contributions Act
Schedule C (Form 1040)Profit or Loss From Business (Sole Proprietorship)
Schedule C-EZ (Form 1040)Net Profit From Business (Sole Proprietorship)
Schedule SE (Form 1040)Self-Employment Tax
1040-ESEstimated Tax for Individuals
1040XAmended U.S. Individual Income Tax Return
4029Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits
4361Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners
8274Certification by Churches and Qualified Church-Controlled Organizations Electing Exemption From Employer Social Security and Medicare Taxes
8959Additional Medicare Tax
8962Premium Tax Credit (PTC)
8965Health Coverage Exemptions

Ordering publications and forms.

See How To Get Tax Help , at the end of this publication, for information about getting these publications and forms.

Publication 517 – Main Content

Social Security Coverage

This section gives information about which system (SECA or FICA) is used to collect social security and Medicare taxes from members of the clergy (ministers, members of a religious order, and Christian Science practitioners and readers) and religious workers (church employees).

Coverage of Members of the Clergy

The services you perform in the exercise of your ministry, of the duties required by your religious order, or of your profession as a Christian Science practitioner or reader are covered by social security and Medicare under SECA. Your earnings for these ministerial services (defined later) are subject to self-employment (SE) tax unless one of the following applies.

You are a member of a religious order who has taken a vow of poverty.
You ask the IRS for an exemption from SE tax for your services and the IRS approves your request. SeeExemption From Self-Employment (SE) Tax, later.
You are subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. For more information, see Bilateral Social Security (Totalization) Agreementsin Pub. 54.

Your earnings that aren’t from ministerial services may be subject to social security tax under FICA or SECA according to the rules that apply to taxpayers in general. See Ministerial Services , later.

Ministers

If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax, even if you perform these services as an employee of that church. However, you can request that the IRS grant you an exemption, as discussed under Exemption From Self-Employment (SE) Tax , later. For the specific services covered, see Ministerial Services , later.

Ministers defined.

Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination.

If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes.

Employment status for other tax purposes.

Even though all of your income from performing ministerial services is subject to self-employment tax for social security tax purposes, you may be an employee for income tax or retirement plan purposes in performing those same services. For income tax or retirement plan purposes, your income earned as an employee will be considered wages.

Common-law employee.

Under common-law rules, you are considered either an employee or a self-employed person. Generally, you are an employee if you perform services for someone who has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. For more information about the common-law rules, see Pub. 15-A, Employer’s Supplemental Tax Guide.

If a congregation employs you and pays you a salary, you are generally a common-law employee and income from the exercise of your ministry is wages for income tax purposes. However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, aren’t wages; such amounts are self-employment income for both income tax purposes and social security tax purposes.

Example.

A church hires and pays you a salary to perform ministerial services subject to its control. Under the common-law rules, you are an employee of the church while performing those services.

Form SS-8.

If you aren’t certain whether you are an employee or a self-employed person, you can get a determination from the IRS by filing Form SS-8.

Members of Religious Orders

If you are a member of a religious order who hasn’t taken a vow of poverty, your earnings for ministerial services you perform as a member of the order are subject to SE tax. See Ministerial Services , later. However, you can request that the IRS grant you an exemption as discussed under Exemption From Self-Employment (SE) Tax , later.

Vow of poverty.

If you are a member of a religious order and have taken a vow of poverty, you are already exempt from paying SE tax on your earnings for ministerial services you perform as an agent of your church or its agencies. You don’t need to request a separate exemption. For income tax purposes, the earnings are tax free to you. Your earnings are considered the income of the religious order.

Services covered under FICA at the election of the order.

However, even if you have taken a vow of poverty, the services you perform for your church or its agencies may be covered under social security. Your services are covered if your order, or an autonomous subdivision of the order, elects social security coverage for its current and future vow-of-poverty members.

The order or subdivision elects coverage by filing Form SS-16. The election may cover certain vow-of-poverty members for a retroactive period of up to 20 calendar quarters before the quarter in which it files the certificate. If the election is made, the order or subdivision pays both the employer’s and employee’s share of the tax. You don’t pay any of the FICA tax.

Services performed outside the order.

Even if you are a member of a religious order who has taken a vow of poverty and the order requires you to turn over amounts you earn, your earnings are subject to federal income tax and either SE tax or FICA tax (including estimated tax payments and/or withholding) if you:

Are self-employed or an employee of an organization outside your religious community; and
Perform work not required by, or done on behalf of, the order.

In these cases, your income from self-employment or as an employee of that outside organization is taxable to you directly. You may, however, be able to take a charitable deduction for the amount you turn over to the order. See Pub. 526, Charitable Contributions.

Rulings.

Organizations and individuals may request rulings from the IRS on whether they are religious orders, or members of a religious order, respectively, for FICA tax, SE tax, and federal income tax withholding purposes. To request a ruling, follow the procedures in Revenue Procedure 2018-1. To find the revenue procedure, go to IRS.gov and type “Revenue Procedure 2018-1” in the search box.

Christian Science Practitioners and Readers

Generally, your earnings from services you perform in your profession as a Christian Science practitioner or reader are subject to SE tax. However, you can request an exemption as discussed under Exemption From Self-Employment (SE) Tax , later.

Practitioners.

Christian Science practitioners are members in good standing of the Mother Church, The First Church of Christ, Scientist, in Boston, Massachusetts, who practice healing according to the teachings of Christian Science. State law specifically exempts Christian Science practitioners from licensing requirements.

Some Christian Science practitioners also are Christian Science teachers or lecturers. Income from teaching or lecturing is considered the same as income from their work as practitioners.

Readers.

For tax purposes, Christian Science readers are considered the same as ordained, commissioned, or licensed ministers.

Coverage of Religious Workers (Church Employees)

If you are a religious worker (a church employee) and aren’t in one of the classes already discussed, your wages are generally subject to social security and Medicare tax under FICA, not SECA. Some exceptions are discussed next.

Election by Church To Exclude Its Employees From FICA Coverage

Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes may elect to exclude their employees from FICA coverage. If your employer makes this election, it doesn’t pay the employer’s portion of the FICA taxes or withhold from your pay your portion of the FICA taxes. Instead, your wages are subject to SECA and you must pay SE tax on your wages if they exceed $108.28 during the tax year. However, you can request an exemption from SE tax if you are a member of a recognized religious sect, as discussed below.

Churches and church organizations make this election by filing two copies of Form 8274. For more information about making this election, see Form 8274.

Election by Certain Church Employees Who Are Opposed to Social Security and Medicare

You may be able to choose to be exempt from social security and Medicare taxes, including the SE tax, if you are a member of a recognized religious sect or division and work for a church (or church-controlled nonprofit division) that doesn’t pay the employer’s part of the social security tax on wages. This exemption doesn’t apply to your service, if any, as a minister of a church or as a member of a religious order.

Make this choice by filing Form 4029. See Requesting Exemption—Form 4029 , later, under Members of Recognized Religious Sects.

U.S. Citizens and Resident and Nonresident Aliens

To be covered under the SE tax provisions (SECA), individuals generally must be citizens or resident aliens of the United States. Nonresident aliens aren’t covered under SECA unless a social security agreement in effect between the United States and the foreign country determines that they are covered under the U.S. social security system.

To determine your alien status, see Pub. 519, U.S. Tax Guide for Aliens.

Residents of Puerto Rico, the U.S. Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), and American Samoa.

If you are a resident of one of these U.S. possessions but not a U.S. citizen, for SE tax purposes you are treated the same as a citizen or resident alien of the United States. For information on figuring the tax, see Self-Employment Tax: Figuring Net Earnings , later.

Ministerial Services

Ministerial services, in general, are the services you perform in the exercise of your ministry, in the exercise of your duties as required by your religious order, or in the exercise of your profession as a Christian Science practitioner or reader. Income you receive for performing ministerial services is subject to SE tax unless you have an exemption as explained later. Even if you have an exemption, only the income you receive for performing ministerial services is exempt. The exemption doesn’t apply to any other income.

The following discussions provide more detailed information on ministerial services of ministers, members of a religious order, and Christian Science practitioners and readers.

Ministers

Most services you perform as a minister, priest, rabbi, etc., are ministerial services. These services include:

Performing sacerdotal functions;
Conducting religious worship; and
Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination.

You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization’s activities.

A religious organization is under the authority of a religious body that is a church or denomination if it is organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith.

Services for nonreligious organizations.

Your services for a nonreligious organization are ministerial services if the services are assigned or designated by your church. Assigned or designated services qualify even if they don’t involve performing sacerdotal functions or conducting religious worship.

If your services aren’t assigned or designated by your church, they are ministerial services only if they involve performing sacerdotal functions or conducting religious worship.

Services that aren’t part of your ministry.

Income from services you perform as an employee that aren’t ministerial services is subject to social security and Medicare tax withholding under FICA (not SECA) under the rules that apply to employees in general. The following aren’t ministerial services.

Services you perform for nonreligious organizations other than the services stated above.
Services you perform as a duly ordained, commissioned, or licensed minister of a church as an employee of the United States, the District of Columbia, a foreign government, or any of their political subdivisions. These services aren’t ministerial services even if you are performing sacerdotal functions or conducting religious worship. (For example, if you perform services as a chaplain in the Armed Forces of the United States, those services aren’t ministerial services.)
Services you perform in a government-owned and operated hospital. (These services are considered performed by a government employee, not by a minister as part of the ministry.) However, services that you perform at a church-related hospital or health and welfare institution, or a private nonprofit hospital, are considered to be part of the ministry and are considered ministerial services.

Books or articles.

Writing religious books or articles is considered to be in the exercise of your ministry and is considered a ministerial service.

This rule also applies to members of religious orders and to Christian Science practitioners and readers.

Members of Religious Orders

Services you perform as a member of a religious order in the exercise of duties required by the order are ministerial services. The services are considered ministerial because you perform them as an agent of the order.

For example, if the order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to perform the services as an agent of the order.

However, if the order directs you to work outside the order, this employment won’t be considered a duty required by the order unless:

Your services are the kind that are ordinarily performed by members of the order; and
Your services are part of the duties that must be exercised for, or on behalf of, the religious order as its agent.

Effect of employee status.

Ordinarily, if your services aren’t considered directed or required of you by the order, you and the outside party for whom you work are considered employee and employer. In this case, your earnings from the services are taxed under the rules that apply to employees in general, not under the rules for services performed as an agent of the order. This result is true even if you have taken a vow of poverty.

Example.

Pat Brown and Chris Green are members of a religious order and have taken vows of poverty. They renounce all claims to their earnings. The earnings belong to the order.

Pat is a licensed attorney. The superiors of the order instructed her to get a job with a law firm. Pat joined a law firm as an employee and, as she requested, the firm made the salary payments directly to the order.

Chris is a secretary. The superiors of the order instructed him to accept a job with the business office of the church that supervises the order. Chris took the job and gave all his earnings to the order.

Pat’s services aren’t duties required by the order. Her earnings are subject to social security and Medicare tax under FICA and to federal income tax.

Chris’ services are duties required by the order. He is acting as an agent of the order and not as an employee of a third party. He doesn’t include the earnings in gross income, and they aren’t subject to income tax withholding or to social security and Medicare tax under FICA or SECA.

Christian Science Practitioners and Readers

Services you perform as a Christian Science practitioner or reader in the exercise of your profession are ministerial services. Amounts you receive for performing these services are generally subject to SE tax. You may request an exemption from SE tax, discussed next, which applies only to those services.

Exemption From Self-Employment (SE) Tax

You can request an exemption from SE tax if you are a member of the clergy (minister, member of a religious order, or Christian Science practitioner or reader) or a member of a recognized religious sect.

Generally, members of religious orders who have taken a vow of poverty are already exempt from paying SE tax, as discussed earlier under Members of Religious Orders under Social Security Coverage. They don’t have to request the exemption.

Who can’t be exempt.

You can’t be exempt from SE tax if you made one of the following elections to be covered under social security. These elections are irrevocable.

You elected to be covered under social security by filing Form 2031, Revocation of Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners, for your 1986, 1987, 2000, or 2001 tax year.
You elected before 1968 to be covered under social security for your ministerial services.

Requesting exemption.

Table 2 briefly summarizes the procedure for requesting exemption from the SE tax. More detailed explanations follow.

If you are a minister, member of a religious order, or Christian Science practitioner, an approved exemption only applies to earnings you receive for ministerial services, discussed earlier. It doesn’t apply to any other self-employment income.

Table 2. The Self-Employment Tax Exemption Application and Approval Process

	Who Can Apply
	Members of the Clergy	Members of Recognized Religious Sects
How	File Form 4361	File Form 4029
When	File by the due date (including extensions) of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment, any of which came from ministerial services	File anytime
Approval	If approved, you will receive an approved copy of Form 4361	If approved, you will receive an approved copy of Form 4029
Effective Date	For all tax years after 1967 in which you have at least $400 of net earnings from self-employment, any of which came from ministerial services	For all tax years beginning with the first year you meet the eligibility requirementsdiscussed later

Members of the Clergy

To claim the exemption from SE tax, you must meet all of the following conditions.

You file Form 4361, described below under Requesting Exemption—Form 4361.
You are conscientiously opposed to public insurance because of your individual religious considerations (not because of your general conscience), or you are opposed because of the principles of your religious denomination.
You file for other than economic reasons.
You inform the ordaining, commissioning, or licensing body of your church or order that you are opposed to public insurance if you are a minister or a member of a religious order (other than a vow-of-poverty member). This requirement doesn’t apply to Christian Science practitioners or readers.
You establish that the organization that ordained, commissioned, or licensed you, or your religious order, is a tax-exempt religious organization.
You establish that the organization is a church or a convention or association of churches.
You didn’t make an election discussed earlier under Who can’t be exempt.
You sign and return the statement the IRS mails to you to certify that you are requesting an exemption based on the grounds listed on the statement.

Requesting Exemption—Form 4361

To request exemption from SE tax, file Form 4361 in triplicate (original and two copies) with the IRS

The IRS will return to you a copy of the Form 4361 that you filed indicating whether it has approved your exemption. If it is approved, keep the approved copy of Form 4361 in your permanent records.

When to file.

File Form 4361 by the date your income tax return is due, including extensions, for the second tax year in which both of the following are true.

You have net earnings from self-employment of at least $400.
Any part of those net earnings was from ministerial services you performed as a:
1. Minister,
2. Member of a religious order, or
3. Christian Science practitioner or reader.

The 2 years don’t have to be consecutive tax years.

The approval process can take some time, so you should file Form 4361 as soon as possible.

Example 1.

Rev. Lawrence Jaeger, a clergyman ordained in 2017, has net self-employment earnings as a minister of $450 in 2017 and $500 in 2018. He must file his application for exemption by the due date, including extensions, for his 2018 income tax return. However, if Rev. Jaeger doesn’t receive IRS approval for an exemption by April 15, 2019, his SE tax for 2018 is due by that date.

Example 2.

Rev. Louise Wolfe has only $300 in net self-employment earnings as a minister in 2017, but earned more than $400 in 2016 and expects to earn more than $400 in 2018. She must file her application for exemption by the due date, including extensions, for her 2018 income tax return. However, if she doesn’t receive IRS approval for an exemption by April 15, 2019, her SE tax for 2018 is due by that date.

Example 3.

In 2015, Rev. David Moss was ordained a minister and had $700 in net self-employment earnings as a minister. In 2016, he received $1,000 as a minister, but his related expenses were over $1,000. Therefore, he had no net self-employment earnings as a minister in 2016. Also in 2016, he opened a book store and had $8,000 in net self-employment earnings from the store. In 2017, he had net self-employment earnings of $1,500 as a minister and $10,000 net self-employment earnings from the store.

Rev. Moss had net earnings from self-employment in 2015 and 2017 that were $400 or more each year, and part of the self-employment earnings in each of those years was for his services as a minister. Thus, he must file his application for exemption by the due date, including extensions, for his 2017 income tax return. However, if Rev. Moss doesn’t receive IRS approval for an exemption by April 17, 2018, his SE tax for 2017 is due by that date.

Death of individual.

The right to file an application for exemption ends with an individual’s death. A surviving spouse, executor, or administrator can’t file an exemption application for a deceased clergy member.

Effective date of exemption.

An approved exemption is effective for all tax years after 1967 in which you have $400 or more of net earnings from self-employment and any part of those earnings is for services as a member of the clergy. Once the exemption is approved, it is irrevocable.

Example.

Rev. Trudy Austin, ordained in 2014, had $400 or more in net self-employment earnings, in both 2014 and 2017, part of which was from her services as a minister. She files an application for exemption on February 19, 2018. If an exemption is granted, it is effective for 2014 and the following years.

Refunds of SE tax.

If, after receiving an approved Form 4361, you find that you overpaid SE tax, you can file a claim for refund on Form 1040X. Generally, for a refund, you must file Form 1040X within 3 years from the date you filed the return or within 2 years from the date you paid the tax, whichever is later. A return you filed, or tax you paid, before the due date is considered to have been filed or paid on the due date.

If you file a claim after the 3-year period but within 2 years from the time you paid the tax, the credit or refund won’t be more than the tax you paid within the 2 years immediately before you file the claim.

Members of Recognized Religious Sects

If you are a member of a recognized religious sect, or a division of a recognized religious sect, you can apply for an exemption from payment of social security and Medicare taxes on both your self-employment income and the wages you earn from an employer who also has an exemption.

Exception

If you received social security benefits or payments, or anyone else received these benefits or payments based on your wages or self-employment income, you can’t apply. However, if you pay your benefits back, you may be considered for exemption. Contact your local Social Security Administration office to find out the amount you must pay back.

Eligibility requirements.

To claim this exemption from SE tax, all the following requirements must be met.

You must file Form 4029, discussed later under Requesting Exemption—Form 4029.
As a follower of the established teachings of the sect or division, you must be conscientiously opposed to accepting benefits of any private or public insurance that makes payments for death, disability, old age, retirement, or medical care, or provides services for medical care.
You must waive all rights to receive any social security payment or benefit and agree that no benefits or payments will be made to anyone else based on your wages and self-employment income.
The Commissioner of Social Security must determine that:
1. Your sect or division has the established teachings as described in (2) above;
2. It is the practice, and has been for a substantial period of time, for members of the sect or division to provide for their dependent members in a manner that is reasonable in view of the members’ general level of living; and
3. The sect or division has existed at all times since December 31, 1950.

Requesting Exemption—Form 4029

To request the exemption, file Form 4029 in triplicate (original and two copies) with the Social Security Administration at the address shown on the form. The sect or division must complete part of the form.

The IRS will return to you a copy of the Form 4029 that you filed indicating whether it has approved your exemption. If it is approved, keep the approved copy of Form 4029 in your permanent records.

When to file.

You can file Form 4029 at any time.

If you have an approved exemption from SE tax and for some reason that approved exemption ended, you must file a new Form 4029 if you subsequently meet the eligibility requirements, discussed earlier. See Effective date of exemption next for information on when the newly approved exemption would become effective.

If you have a previously approved exemption from SE tax, you are considered to have met the requirements for exemption from social security and Medicare taxes on wages and don’t need to file a new Form 4029.

Effective date of exemption.

An approved exemption from SE tax generally is effective for all tax years beginning with the first year you meet the eligibility requirements discussed earlier. (For example, if you meet the eligibility requirements in 2015, file Form 4029 in 2016, and the IRS approves your exemption in 2017, your exemption is effective for tax year 2015 and all later years.)

The exemption will end if you fail to meet the eligibility requirements or if the Commissioner of Social Security determines that the sect or division fails to meet them. You must notify the IRS within 60 days if you are no longer a member of the religious group, or if you no longer follow the established teachings of this group. The exemption will end for the tax year in which you or your sect/division first fails to meet the eligibility requirements.

Refunds of SE tax paid.

To get a refund of any SE tax you paid while the exemption was in effect, file Form 1040X. For information on filing this form, see Refunds of SE tax under Requesting Exemption—Form 4361, earlier.

Exemption From FICA Taxes

Generally, under FICA, the employer and the employee each pay half of the social security and Medicare tax. Both the employee and the employer, if they meet the eligibility requirements discussed earlier, can apply to be exempt from their share of FICA taxes on wages paid by the employer to the employee.

A partnership in which each partner holds a religious exemption from social security and Medicare tax is an employer for this purpose.

If the employer’s application is approved, the exemption will apply only to FICA taxes on wages paid to employees who also received an approval of identical applications.

Information for employers.

If you have an approved Form 4029 and you have an employee who has an approved Form 4029, don’t report wages you paid to the employee as social security and Medicare wages.

If you have an employee who doesn’t have an approved Form 4029, you must withhold the employee’s share of social security and Medicare taxes and pay the employer’s share.

Form W-2.

When preparing a Form W-2 for an employee with an approved Form 4029, enter “Form 4029” in box 14, “Other.” Don’t make any entries in box 3, 4, 5, or 6.

Forms 941, 943, and 944.

If both you and your employee have received approved Forms 4029, don’t include these exempt wages on the following forms. Instead, follow the instructions given below.

Form 941, Employer’s QUARTERLY Federal Tax Return: check the box on line 4 and enter “Form 4029” in the empty space below the check box.
Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees: enter “Form 4029” on the dotted line next to the lines 2 and 4 entry spaces.
Form 944, Employer’s ANNUAL Federal Tax Return: check the box on line 3 and enter “Form 4029” in the empty space below the check box.

Effective date.

An approved exemption from FICA becomes effective on the first day of the first calendar quarter after the quarter in which you file Form 4029. The exemption will end on the last day of the calendar quarter before the quarter in which the employer, employee, sect, or division fails to meet the requirements.

Self-Employment Tax: Figuring Net Earnings

There are two methods for figuring your net earnings from self-employment as a member of the clergy or a religious worker.

Regular method.
Nonfarm optional method.

You may find Worksheets 1 through 4 helpful in figuring your net earnings from self-employment. Blank worksheets are in the back of this publication, after the Comprehensive Example.

Regular Method

Most people use the regular method. Under this method, figure your net earnings from self-employment by totaling your gross income for services you performed as a minister, a member of a religious order who hasn’t taken a vow of poverty, or a Christian Science practitioner or reader. Then, subtract your allowable business deductions and multiply the difference by 92.35% (0.9235). Use Schedule SE (Form 1040) to figure your net earnings and SE tax.

If you are an employee of a church that elected to exclude you from FICA coverage, figure net earnings by multiplying your church wages shown on Form W-2 by 92.35% (0.9235). Don’t reduce your wages by any business deductions when making this computation. Use Schedule SE (Form 1040), Section B, to figure your net earnings and SE tax.

If you have an approved exemption, or you are automatically exempt, don’t include the income or deductions from ministerial services in figuring your net earnings from self-employment.

Amounts included in gross income.

To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income:

Salaries and fees for your ministerial services (discussed earlier);
Offerings you receive for marriages, baptisms, funerals, masses, etc.;
The value of meals and lodging provided to you, your spouse, and your dependents for your employer’s convenience;
The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you; and
Any amount a church pays toward your income tax or SE tax, other than withholding the amount from your salary. This amount is also subject to income tax.

For the income tax treatment of items (2) and (4), see Income Tax: Income and Expenses , later.

Example.

Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. His church owns a parsonage that has a fair rental value of $12,000 per year. The church gives Pastor Adams the use of the parsonage. He isn’t exempt from SE tax. He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes.

The results would be the same if, instead of the use of the parsonage and receipt of the rental allowance for utilities, Pastor Adams had received an annual salary of $51,000 of which $17,000 ($5,000 plus $12,000) per year was designated as a rental allowance.

Overseas duty.

Your net earnings from self-employment are determined without any foreign earned income exclusion or the foreign housing exclusion or deduction if you are a U.S. citizen or resident alien serving abroad and living in a foreign country.

For information on excluding foreign earned income or the foreign housing amount, see Pub. 54.

Example.

Diane Jones was the minister of a U.S. church in Mexico. She earned $35,000 in that position and was able to exclude it all for income tax purposes under the foreign earned income exclusion. The United States doesn’t have a social security agreement with Mexico, so Mrs. Jones is subject to U.S. SE tax and must include $35,000 when figuring net earnings from self-employment.

Specified U.S. possessions.

The exclusion from gross income for amounts derived from American Samoa or Puerto Rico doesn’t apply in figuring net earnings from self-employment. Also see Residents of Puerto Rico, the U.S. Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), and American Samoa , earlier, under U.S. Citizens and Resident and Nonresident Aliens.

Amounts not included in gross income.

Don’t include the following amounts in gross income when figuring your net earnings from self-employment.

Offerings that others made to the church.
Contributions by your church to a tax-sheltered annuity plan set up for you, including any salary reduction contributions (elective deferrals) that aren’t included in your gross income.
Pension payments or retirement allowances you receive for your past ministerial services.
The rental value of a parsonage or a parsonage allowance provided to you after you retire.

Allowable deductions.

When figuring your net earnings from self-employment, deduct all your expenses related to your ministerial services performed as a self-employed person. These are ministerial expenses you incurred while working other than as a common-law employee of the church. They include expenses incurred in performing marriages and baptisms, and in delivering speeches. Deduct these expenses on Schedule C or C-EZ (Form 1040), and carry the net amount to line 2 of Schedule SE (Form 1040), Section A or B.

Wages earned as a common-law employee (explained earlier) of a church are generally subject to self-employment tax unless an exemption is requested, as discussed earlier under Exemption From Self-Employment (SE) Tax . Subtract any allowable expenses (including unreimbursed employee business expenses) from those wages, include the net amount on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Don’t complete Schedule C or C-EZ (Form 1040). However, for income tax purposes, the expenses are allowed only as an itemized deduction on Schedule A (Form 1040) to the extent they exceed 2% of adjusted gross income.

Employee reimbursement arrangements.

If you received an advance, allowance, or reimbursement for your employee expenses, how you report this amount and your employee expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. Ask your employer if you aren’t sure if it reimburses you using an accountable or a nonaccountable plan.

Accountable plans.

To be an accountable plan, your employer’s reimbursement arrangement must include all three of the following rules.

Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.
You must adequately account to your employer for these expenses within a reasonable period of time.
You must return any excess reimbursement or allowance within a reasonable period of time.

The reimbursement isn’t reported on your Form W-2. Generally, if your expenses equal your reimbursement, you have no deduction. If your expenses are more than your reimbursement, you can deduct your excess expenses for SE tax and income tax purposes.

Nonaccountable plan.

A nonaccountable plan is a reimbursement arrangement that doesn’t meet all three of the rules listed under Accountable plans above. In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan.

Excess reimbursements you fail to return to your employer.
Reimbursement of nondeductible expenses related to your employer’s business.

Your employer will combine any reimbursement paid to you under a nonaccountable plan with your wages, salary, or other compensation and report the combined total in box 1 of your Form W-2. Because reimbursements under a nonaccountable plan are included in your gross income, you can deduct your related expenses (for SE tax and income tax purposes) regardless of whether they are more than, less than, or equal to your reimbursement.

For more information on accountable and nonaccountable plans, see Pub. 463, Travel, Entertainment, Gift, and Car Expenses.

Married Couple Missionary Team

If both spouses are duly ordained, commissioned, or licensed ministers of a church and have an agreement that each will perform specific services for which they are paid jointly or separately, they must divide the self-employment income according to the agreement.

If the agreement is with one spouse only and the other spouse isn’t paid for any specific duties, amounts received for their services are included only in the self-employment income of the spouse having the agreement.

Earnings Subject to SE Tax

For 2017, the maximum net earnings from self-employment subject to social security (old age, survivors, and disability insurance) tax is $127,200 minus any wages and tips you earned that were subject to social security tax. The tax rate for the social security part is 12.4%. In addition, all of your net earnings are subject to the Medicare (hospital insurance) part of the SE tax. This tax rate is 2.9%. The combined self-employment tax rate is 15.3%.

Additional Medicare Tax.

A 0.9% Additional Medicare Tax applies to Medicare wages, RRTA compensation, and self-employment income that are more than:

$125,000 if married filing separately,
$250,000 if married filing jointly, or
$200,000 for any other filing status.

Medicare wages and self-employment income are combined to determine if income exceeds the threshold. A self-employment loss isn’t considered for purposes of this tax. RRTA compensation is separately compared to the threshold. For more information, see Form 8959, Additional Medicare Tax, and its separate instructions.

Nonfarm Optional Method

You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. In general, the nonfarm optional method is intended to permit continued coverage for social security and Medicare purposes when your income for the tax year is low.

You may use the nonfarm optional method if you meet all the following tests.

You are self-employed on a regular basis. You meet this test if your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. The net earnings can be from either farm or nonfarm earnings or both.
You have used this method less than 5 prior years. (There is a 5-year lifetime limit.) The years don’t have to be consecutive.
Your net nonfarm profits were:
1. Less than $5,631; and
2. Less than 72.189% of your gross nonfarm income.

If you meet all three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method.

Table 3. Figuring Nonfarm Net Earnings

IF your gross nonfarm income is …	THEN your net earnings are equal to …
$7,800 or less	Two-thirds of your gross nonfarm income.
More than $7,800	$5,200

Actual net earnings.

Multiply your total earnings subject to SE tax by 92.35% (0.9235) to get actual net earnings. Actual net earnings are equivalent to net earnings under the “Regular Method.”

More information.

For more information on the nonfarm optional method, see Pub. 334, Tax Guide for Small Business, and the Schedule SE (Form 1040) instructions.

Income Tax: Income and Expenses

Some income and expense items are treated the same for both income tax and SE tax purposes and some are treated differently.

Note.

For purposes of this section, references to members of the clergy are only to ministers or members of a religious order.

Income Items

The tax treatment of offerings and fees, outside earnings, rental allowances, rental value of a parsonage, earnings of members of religious orders, and foreign earned income is discussed here.

Offerings and Fees

If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc., in addition to your salary. If the offering is made to the religious institution, it isn’t taxable to you.

Outside Earnings

If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. For more information, see Pub. 526.

Exclusion of Rental Allowance and Fair Rental Value of a Parsonage

Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services. Services include:

Ministerial services, discussed earlier;
Administrative duties and teaching at theological seminaries; and
The ordinary duties of a minister performed as an employee of the United States (other than as a chaplain in the Armed Forces), a state, possession, political subdivision, or the District of Columbia.

This exclusion applies only for income tax purposes. It doesn’t apply for SE tax purposes, as discussed earlier under Amounts included in gross income under Self-Employment Tax: Figuring Net Earnings.

Designation requirement.

The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. It must designate a definite amount. It can’t determine the amount of the housing allowance at a later date. If the church or organization doesn’t officially designate a definite amount as a housing allowance, you must include your total salary in your income.

If you are employed and paid by a local congregation, a resolution by a national church agency of your denomination doesn’t effectively designate a housing allowance for you. The local congregation must officially designate the part of your salary that is a housing allowance. However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the national agency.

An official designation of an amount as a housing or rental allowance may be shown in an employment contract, in the minutes of a church or qualified organization, in a budget, or any official action taken in advance of payment of the allowance. A designation is sufficient if it permits a payment to be identified as a payment of a rental or housing allowance as distinguished from salary or other remuneration.

Informal discussions don’t amount to an official designation. However, the facts and circumstances of a designation may demonstrate that the designation was official.

A church or employing organization may report the rental allowance or fair rental value of the parsonage (and utilities) in box 14 of Form W-2.

Rental allowances.

If you receive in your salary an amount officially designated as a rental allowance (including an amount to pay utility costs), you can exclude the allowance from your gross income if:

You use the amount to provide or rent a home, and
The amount isn’t more than reasonable pay for your services.

The amount you exclude can’t be more than the fair rental value of the home, including furnishings, plus the cost of utilities.

Fair rental value of parsonage.

You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. However, the exclusion can’t be more than the reasonable pay for your services. If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost.

Example.

Rev. Joanna Baker is a full-time minister. The church allows her to use a parsonage that has an annual fair rental value of $24,000. The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. Her actual utility costs during the year were $7,000.

For income tax purposes, Rev. Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage).

Home ownership.

If you own your home and you receive as part of your salary a housing or rental allowance, you may exclude from gross income the smallest of:

The amount actually used to provide a home;
The amount officially designated as a rental allowance; or
The fair rental value of the home, including furnishings, utilities, garage, etc.

Excess rental allowance.

You must include in gross income the amount of any rental allowance that is more than the smallest of:

Your reasonable salary,
The fair rental value of the home plus utilities, or
The amount actually used to provide a home.

Include this amount in the total on Form 1040, line 7. On the dotted line next to line 7, enter “Excess allowance” and the amount.

You may deduct the home mortgage interest and real estate taxes paid on your home even though you pay all or part of those expenses with funds you get through a tax-free rental or parsonage allowance. However, you can only deduct these expenses as itemized deductions on Schedule A (Form 1040).

Retired ministers.

If you are a retired minister, you can exclude from your gross income the rental value of a home (plus utilities) furnished to you by your church as a part of your pay for past services, or the part of your pension that was designated as a rental allowance. However, a minister’s surviving spouse can’t exclude the rental value unless the rental value is for ministerial services he or she performs or performed.

Teachers or administrators.

If you are a minister employed as a teacher or administrator by a church school, college, or university, you are performing ministerial services for purposes of the housing exclusion. However, if you perform services as a teacher or administrator on the faculty of a nonchurch college, you can’t exclude from your income a housing allowance or the value of a home that the college provides to you.

If you live in faculty lodging as an employee of an educational institution or academic health center, all or part of the value of that lodging may be nontaxable under a different rule. In Pub. 525, see Faculty lodging in the discussion on meals and lodging under Fringe Benefits.

If you serve as a minister of music or minister of education, or serve in an administrative or other function of your religious organization, but aren’t authorized to perform substantially all of the religious duties of an ordained minister in your church (even if you are commissioned as a minister of the gospel), the housing exclusion doesn’t apply to you.

Theological students.

If you are a theological student serving a required internship as a part-time or assistant pastor, you can’t exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister.

Traveling evangelists.

You can exclude a designated rental allowance from out-of-town churches if you meet all of the following requirements.

You are an ordained minister.
You perform ministerial services at churches located away from your community.
You actually use the rental allowance to maintain your permanent home.

Cantors.

If you have a bona fide commission and your congregation employs you on a full-time basis to perform substantially all the religious functions of the Jewish faith, you can exclude a rental allowance from your gross income.

Earnings—Members of Religious Orders

Your earnings may be exempt from both income tax and SE tax if you are a member of a religious order who:

Has taken a vow of poverty,
Receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and
Renounces the earnings and gives them to the order.

See Members of Religious Orders , earlier, under Social Security Coverage.

Foreign Earned Income

Certain income may be exempt from income tax if you work in a foreign country or in a specified U.S. possession. Pub. 54 discusses the foreign earned income exclusion. Pub. 570, Tax Guide for Individuals With Income From U.S. Possessions, covers the rules for taxpayers with income from U.S. possessions. You can get these free publications from the IRS at IRS.gov/Forms or from most U.S. embassies or consulates.

Expense Items

The tax treatment of ministerial trade or business expenses, expenses allocable to tax-free income, and health insurance costs is discussed here.

Ministerial Trade or Business Expenses as an Employee

When you figure your income tax, you must itemize your deductions on Schedule A (Form 1040) to claim allowable deductions for ministerial trade or business expenses incurred while working as an employee. You also may have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses).

You claim these expenses as miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) limit. See Pub. 529 for more information on this limit.

However, you can’t deduct any of your employee business expenses that are allocable to tax-free income (discussed next).

Expenses Allocable to Tax-Free Income

If you receive a rental or parsonage allowance that is exempt from income tax (tax free), you must allocate a portion of the expenses of operating your ministry to that tax-free income. You can’t deduct the portion of your expenses that you allocate to your tax-free rental or parsonage allowance.

Exception.

This rule doesn’t apply to your deductions for home mortgage interest or real estate taxes on your home.

Figuring the allocation.

Figure the portion of your otherwise deductible expenses that you can’t deduct (because you must allocate that portion to tax-free income) by multiplying the expenses by the following fraction:

	Tax-free rental or parsonage allowance
	All income (taxable and tax free) earned from your ministry

When figuring the allocation, include the income and expenses related to the ministerial duties you perform both as an employee and as a self-employed person.

Reduce your otherwise deductible expenses only in figuring your income tax, not your SE tax.

Example.

Rev. Charles Ashford received $40,000 in earnings for ministerial services consisting of a $28,000 salary for ministerial services performed as an employee, $2,000 for weddings and baptisms performed as a self-employed person, and a $10,000 tax-free parsonage allowance. He incurred $4,000 of unreimbursed expenses connected with his earnings for ministerial services. $3,500 of the $4,000 is for employee expenses related to his ministerial salary, and $500 is related to the weddings and baptisms he performed as a self-employed person.

Rev. Ashford figures the nondeductible (tax-free) portion of expenses related to his ministerial salary as follows:

($10,000 ÷ $40,000) x $3,500 = $875

Rev. Ashford figures the nondeductible (tax-free) portion of expenses related to his wedding and baptism income as follows:

($10,000 ÷ $40,000) x $500 = $125

Required statement.

If you receive a tax-free rental or parsonage allowance and have ministerial expenses, attach a statement to your tax return. The statement must contain all of the following information.

A list of each item of taxable ministerial income by source (such as wages, salary, weddings, baptisms, etc.) plus the amount.
A list of each item of tax-free ministerial income by source (parsonage allowance) plus the amount.
A list of each item of otherwise deductible ministerial expenses plus the amount.
How you figured the nondeductible part of your otherwise deductible expenses.
A statement that the other deductions claimed on your tax return aren’t allocable to your tax-free income.

See the attachments prepared for the Comprehensive Example , later. Following the example, you will find blank worksheets for your own use.

Health Insurance Costs of Self-Employed Ministers

If you are self-employed, you may be able to deduct the amount you paid in 2017 for medical and dental insurance and qualified long-term care insurance for you, your spouse, your dependents, and any child you may have who, as of the end of the tax year, had not attained age 27.

For purposes of this deduction, your child must be an individual who is your son, daughter, stepson, stepdaughter, or eligible foster child. An individual who has been legally adopted by you (or placed with you for adoption) will be treated as your child.

If you qualify, you can take this deduction as an adjustment to income on Form 1040, line 29. See the Instructions for Form 1040 to figure your deduction.

The following special rules apply to the self-employed health insurance deduction.

You can’t take a medical expense deduction on Schedule A (Form 1040) for any expenses you claim for purposes of the self-employed health insurance deduction.
You can’t take the deduction for any month you are eligible to participate in a subsidized plan of your (or your spouse’s) employer.
The deduction can’t exceed your net earnings from the business under which the insurance plan is established. Your net earnings under this rule don’t include the income you earned as a common-law employee (discussed earlier) of a church.

More information.

For more information about the self-employed health insurance deduction, see chapter 6 in Pub. 535.

Deduction for SE Tax

You can deduct one-half of your SE tax in figuring AGI. This is an income tax deduction only, on Form 1040, line 27.

Don’t claim this deduction in figuring net earnings from self-employment subject to SE tax.

Income Tax Withholding and Estimated Tax

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her wages or salary. However, your salary isn’t subject to federal income tax withholding if both of the following conditions apply.

You are a duly ordained, commissioned, or licensed minister, a member of a religious order (who hasn’t taken a vow of poverty), or a Christian Science practitioner or reader.
Your salary is for ministerial services (see Ministerial Services, earlier).

If your salary isn’t subject to withholding, or if you don’t pay enough tax through withholding, you may need to make estimated tax payments to avoid penalties for not paying enough tax as you earn your income.

You generally must make estimated tax payments if you expect to owe taxes, including SE tax, of $1,000 or more, when you file your return.

Determine your estimated tax by using the worksheets in Pub. 505, Tax Withholding and Estimated Tax. You can also use the IRS Withholding calculator at IRS.gov/W4App . Pay the entire estimated tax for 2018 or the first installment by April 17, 2018. See Form 1040-ES for the different payment methods. The April 17 date applies whether or not your tax home and your abode are outside the United States and Puerto Rico. For more information, see chapter 2 of Pub. 505.

If you perform your services as a common-law employee of the church and your salary isn’t subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and SE tax that may be due.

Filing Your Return

You must file an income tax return for 2017 if your gross income was at least the amount shown in the third column of Table 4.

Table 4. 2017 Filing Requirements for Most Taxpayers

IF your filing status is …	AND at the end of 2017 you were* …	THEN file a return if your gross income was at least …**
single	under age 65 65 or older		$10,400 $11,950
married filing jointly***	under 65 (both spouses) 65 or older (one spouse) 65 or older (both spouses)		$20,800 $22,050 $23,300
married filing separately	any age		$ 4,050
head of household	under 65 65 or older		$13,400 $14,950
qualifying widow(er)	under 65 65 or older		$16,750 $18,000
* If you were born on January 1, 1953, you are considered to be age 65 at the end of 2017. (If your spouse died in 2017 or you are preparing a return for someone who died in 2017, see Pub. 501, Exemptions, Standard Deduction, and Filing Information.)
Gross income means all income you received in the form of money, goods, property, and services that isn’t exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Do not** include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2017, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). If (a) or (b) applies, see the instructions for Form 1040, lines 20a and 20b, to figure the taxable part of social security benefits you must include in gross income. Gross income includes gains, but not losses, reported on Form 8949 or Schedule D (Form 1040). Gross income from a business means, for example, the amount on Schedule C (Form 1040), line 7; or Schedule F (Form 1040), line 9. But, in figuring gross income, don’t reduce your income by any losses, including any loss on Schedule C (Form 1040), line 7; or Schedule F (Form 1040), line 9.
*** If you didn’t live with your spouse at the end of 2017 (or on the date your spouse died) and your gross income was at least $4,050, you must file a return regardless of your age.

Additional requirements.

Even if your income was less than the amount shown in Table 4, you must file an income tax return on Form 1040, and attach a completed Schedule SE (Form 1040), if:

You aren’t exempt from SE tax, and you have net earnings from self-employment (discussed earlier underSelf-Employment Tax: Figuring Net Earnings) of $400 or more in the tax year;
You are exempt from SE tax on earnings from ministerial services and you have $400 or more of other net earnings subject to SE tax; or
You had wages of $108.28 or more from an electing church or church-controlled organization (see Coverage of Religious Workers (Church Employees), earlier, under Social Security Coverage).

Self-employment tax.

For services in the exercise of the ministry, members of the clergy receive a Form W-2, but do not have social security or Medicare taxes withheld. You must pay social security and Medicare taxes by filing Schedule SE (Form 1040) with your return.

If you filed Form 4361 and didn’t receive approval from the IRS, you must pay SE tax on your ministerial earnings, as explained earlier. You should report ministerial earnings and expenses from nonemployee ministerial services on Schedule C or C-EZ (Form 1040). You should then carry the net amount over to line 2 of Schedule SE (Form 1040), Section A or B. However, if you were a duly ordained minister who was an employee of a church and you must pay SE tax on the wages you earned for those services, don’t report those wages on Schedule C or C-EZ (Form 1040). Instead, report those wages less any allowable expenses (including any unreimbursed employee business expenses), on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation.

Note.

For income tax purposes, the unreimbursed employee business expenses that you incurred as an employee of the church and subtracted from your wages on line 2 of Schedule SE (Form 1040) are allowed only as an itemized deduction on Schedule A (Form 1040) if they exceed 2% of your adjusted gross income. You can’t deduct these expenses on Schedule C or C-EZ (Form 1040) as a trade or business expense.

Exemption from SE tax.

If you filed Form 4361 and received IRS approval not to be taxed on your ministerial earnings, and you don’t have any other income subject to SE tax, don’t file Schedule SE (Form 1040). Instead, enter “Exempt—Form 4361” on the dotted line next to Form 1040, line 57. However, if you had net earnings from another trade or business of $400 or more subject to SE tax, see line A at the top of Schedule SE (Form 1040), Section B.

If you filed Form 4029 and received IRS approval not to be taxed on those earnings, and you don’t have any other income subject to SE tax, don’t file Schedule SE (Form 1040). Instead, enter “Form 4029” on the dotted line next to Form 1040, line 57.

More information.

For more information on filing your return, including when and where to file it, see the Instructions for Form 1040.

Retirement Savings Arrangements

Retirement savings arrangements are plans that offer you a tax-favored way to save for your retirement. You generally can deduct your contributions to the plan. Your contributions and the earnings on them aren’t taxed until they are distributed.

Retirement plans for the self-employed.

To set up one of the following plans you must be self-employed.

SEP (simplified employee pension) plan.
SIMPLE (savings incentive match plan for employees) plan.
Qualified retirement plan (also called a Keogh or H.R. 10 plan), including a 401(k) plan.

The common-law rules determine whether you are an employee or a self-employed person for purposes of setting up a retirement plan. See Employment status for other tax purposes under Coverage of Members of the Clergy, earlier. This result is true even if your compensation for ministerial services (defined earlier) is subject to SE tax.

For example, if a congregation pays you a salary for performing ministerial services and you are subject to the congregation’s control, you generally are a common-law employee. You aren’t a self-employed person for purposes of setting up a retirement plan. This result is true even if your salary is subject to SE tax.

On the other hand, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services that you report on Schedule C or C-EZ (Form 1040), are earnings from self-employment for all tax purposes.

For more information on establishing a SEP, SIMPLE, or qualified retirement plan, see Pub. 560, Retirement Plans for Small Business.

Individual retirement arrangements (IRAs).

The traditional IRA and the Roth IRA are two individual retirement arrangements you can use to save money for your retirement. Generally, your maximum contribution for 2017 to either of these plans (or to a combination of the two) is the smaller of your taxable compensation or $5,500 ($6,500 if you are age 50 or older by the end of 2017).

However, your maximum contribution to a Roth IRA will be further reduced or eliminated if your adjusted gross income (AGI) is above a certain amount. You can’t deduct Roth IRA contributions, but if you satisfy certain requirements, all earnings in the Roth IRA are tax free and neither your nondeductible contributions nor any earnings on them are taxable when distributed.

If you contribute to a traditional IRA, your contribution may be deductible. However, your deduction may be reduced or eliminated if you or your spouse is covered by an employer retirement plan (including, but not limited to, a SEP, SIMPLE, or qualified retirement plan).

For more information on IRAs, see Pub. 590-A, Contributions to Individual Retirement Arrangements.

Tax-sheltered annuity plans.

Church employees, members of religious orders, and duly ordained, commissioned, or licensed ministers working as ministers or chaplains can participate in tax-sheltered annuity (403(b)) plans. For more information, see Pub. 571, Tax-Sheltered Annuity Plans.

Deducting contributions to tax-sheltered annuity plans.

If you are an employee, your employer may exclude allowable contributions to a 403(b) plan from your income. These contributions won’t be included in your total wages on your Form W-2, but you will pay tax on distributions from your plan. However, if you choose to have contributions made to a Roth contribution program, they won’t be excluded from your income, but will be distributed tax free.

You may also participate in a 403(b) plan if you are a minister or chaplain and, in the exercise of your ministry, you are either self-employed or employed by an organization that isn’t exempt from tax under section 501(c)(3) of the Internal Revenue Code. If either situation applies to you, you can deduct your contributions to a 403(b) plan as explained next.

If you are self-employed, deduct your contributions on Form 1040, line 28.
If you aren’t self-employed and your employer doesn’t exclude your contributions from your earned income, deduct your contributions on Form 1040, line 36. Enter the amount of your deduction and “403(b)” on the dotted line next to line 36.

Retirement savings contributions credit.

You may be able to take a tax credit of up to $1,000 (up to $2,000 if filing jointly) for certain contributions you make to any of the retirement plans or IRAs discussed earlier. The credit is based on the contributions you make and your credit rate. Your credit rate can be as low as 10% or as high as 50%, depending on your filing status and AGI. Figure the credit on Form 8880, Credit for Qualified Retirement Savings Contributions.

You can’t take the credit if any of the following apply.

You were born after January 1, 2000.
You were a student who during any part of 5 calendar months (not necessarily consecutive) of 2017:
1. Was enrolled as a full-time student at a school; or
2. Took a full-time, on-farm training course given by a school or a state, county, or local government agency.
Someone, such as your parent(s), claims an exemption for you on his or her 2017 tax return.
Your AGI for 2017 is more than:
1. $62,000, if your filing status is married filing jointly;
2. $46,500, if your filing status is head of household; or
3. $31,000, if your filing status is single, married filing separately, or qualifying widow(er).

Full-time student.

You are a full-time student if you are enrolled for the number of hours or courses the school considers to be full time.

AGI.

When figuring AGI, you must add back any exclusion or deduction claimed for the year for:

Foreign earned income,
Foreign housing costs,
Income of bona fide residents of American Samoa, and
Income of bona fide residents of Puerto Rico.

More information.

For more information about the credit, see Pub. 590-A.

Health Care: Individual Responsibility

Shared responsibility payment.

If for any month in 2017, you, your spouse (if filing jointly), or your dependents didn’t have qualifying health care coverage (called minimum essential coverage) and didn’t qualify for a coverage exemption, then you must make a shared responsibility payment. For more information, go toIRS.gov/SRP. Also see the instructions for line 61 in the Form 1040 instructions and Form 8965.

Minimum essential coverage.

Most health care coverage that people have is minimum essential coverage. Minimum essential coverage includes:

Most types of health care coverage provided by your employer;
Many types of government-sponsored health care coverage including Medicare, most Medicaid coverage, and most health care coverage provided to veterans and active duty service members;
Health care coverage you buy through the Marketplace; and
Certain types of health care coverage you buy directly from an insurance company.

See the instructions for Form 8965 for more information on what qualifies as minimum essential coverage.

Premium tax credit.

If you, your spouse, or a dependent enrolled in health insurance through the Marketplace, you may be able to claim the premium tax credit. See the instructions for Form 1040, line 69, and Form 8962.

Earned Income Credit (EIC)

The EIC is a tax credit for certain people who work. If you qualify for it, the EIC reduces the tax you owe. Even if you don’t owe tax, you can get a refund of the credit.

You can’t take the credit for 2017 if your earned income (or adjusted gross income) is:

$15,010 or more ($20,600 or more if married filing jointly) and you don’t have a qualifying child,
$39,617 or more ($45,207 or more if married filing jointly) and you have one qualifying child,
$45,007 or more ($50,597 or more if married filing jointly) and you have two qualifying children, or
$48,340 or more ($53,930 if married filing jointly) and you have three or more qualifying children.

Earned income.

Earned income includes your:

Wages, salaries, tips, and other taxable employee compensation (even if these amounts are exempt from FICA or SECA under an approved Form 4029 or 4361); and
Net earnings from self-employment that are notexempt from SECA (you don’t have an approved Form 4029 or 4361) that you report on Schedule SE, line 3, with the following adjustments.
1. Subtract the amount you claimed (or should have claimed) on Form 1040, line 27, for the deductible part of your SE tax.
2. Add any amount from Schedule SE, Section B, line 4b and line 5a.

To figure your EIC, see the Form 1040 instructions for lines 66a and 66b.

If you are a minister and have an approved Form 4361, your earned income will still include wages and salaries earned as an employee, but it will not include amounts you received for nonemployee ministerial duties, such as fees for performing marriages and baptisms, and honoraria for delivering speeches.

More information.

For detailed rules on this credit, see Pub. 596. To figure the amount of your credit, you can either fill out a worksheet or have the IRS figure the credit for you. You may need to complete Schedule EIC and attach it to your tax return.

Comprehensive Example

Rev. John White is the minister of the First United Church. He is married and has one child, Jennifer. Jennifer is considered a qualifying child for the child tax credit. Mrs. Susan White isn’t employed outside the home. Rev. White is a common-law employee of the church, and he hasn’t applied for an exemption from SE tax.

The church paid Rev. White a salary of $31,000. In addition, as a self-employed person, he earned $4,000 during the year for weddings, baptisms, and honoraria. He made estimated tax payments during the year totaling $7,000. The local community college paid him $3,400 for teaching a course. The Whites paid $925 in general state and local sales taxes during 2017.

Rev. and Mrs. White own a home next to the church. They make a $650 per month mortgage payment of principal and interest only. They paid $1,800 in real estate taxes for the year on the home. The church paid Rev. White $800 per month as his parsonage allowance (excluding utilities). The home’s fair rental value for the year (excluding utilities) is $9,840. The utility bills for the year totaled $960. The church paid him $100 per month ($1,200 for the year) designated as an allowance for utility costs.

First, the parts of Rev. and Mrs. White’s income tax return are explained in the order the Whites complete them. Next, the parts are illustrated in the order that Rev. White will assemble the return to send it to the IRS.

Form W-2 From Church

The church completed its Form W-2 for Rev. White as follows.

Box 1.

The church entered Rev. White’s $31,000 salary.

Box 2.

The church left this box blank because Rev. White didn’t request federal income tax withholding.

Boxes 3 through 6.

Rev. White is considered a self-employed person for purposes of social security and Medicare tax withholding, so the church left these boxes blank.

Box 14.

The church entered Rev. White’s total parsonage and utilities allowance for the year and identified them.

Form W-2 From College

The community college gave Rev. White a Form W-2 that showed the following.

Box 1.

The college entered Rev. White’s $3,400 salary.

Box 2.

The college withheld $272 in federal income tax on Rev. White’s behalf.

Boxes 3 and 5.

As an employee of the college, Rev. White is subject to social security and Medicare withholding on his full $3,400 salary from the college.

Box 4.

The college withheld $210.80 in social security taxes.

Box 6.

The college withheld $49.30 in Medicare taxes.

Schedule C-EZ (Form 1040)

Some of Rev. White’s entries on Schedule C-EZ are explained here.

Line 1.

Rev. White reports the $4,000 from weddings, baptisms, and honoraria.

Line 2.

Rev. White reports his expenses related to the line 1 amount. He paid $87 for marriage and family booklets and drove his car 490 miles for business, mainly in connection with honoraria. Rev. White used the standard mileage rate to figure his car expense, as follows.

490 miles × 53.5 cents ($0.535) =

$262

These expenses total $349 ($262 + $87). However, he can’t deduct the part of his expenses allocable to his tax-free parsonage allowance.

First, Rev. White uses Worksheet 1 to figure his percentage of tax-free income. Then he completes Worksheet 2 (see Attachment 1, Worksheet 2, later) to show that 23% or $80 ($349 × 23% (0.23)) of his business expenses aren’t deductible because they are allocable to his tax-free allowance. He subtracts the $80 from the $349, enters the $269 difference on line 2, and adds a note at the bottom of the schedule to see the attached statement.

Rev. White attaches Worksheets 1 and 2 to his return. This is part of his required statement. See Attachment 1, later.

Line 3.

Rev. White enters his net profit of $3,731 ($4,000 − $269) on line 3 and on Form 1040, line 12.

Lines 4 through 8b.

Rev. White fills out these lines to report information about his car.

Form 2106-EZ

Rev. White fills out Form 2106-EZ to report the unreimbursed business expenses he had as a common-law employee of First United Church.

Line 1.

Before completing line 1, Rev. White fills out Part II because he used his car for church business. His records show that he drove 2,774 business miles, which he reports in Part II. Then, he figures his car expense for his line 1 entry.

2,774 miles × 53.5 cents ($0.535) =

$1,484

Line 4.

He enters $231 for his professional publications and booklets.

Line 6.

Before entering the total expenses on line 6, Rev. White must reduce them by the amount allocable to his tax-free parsonage allowance. After completing Worksheet 3 (see Attachment 1, later), he finds that $394 (($1,484 + $231) × 23% (0.23)) of his employee business expenses aren’t deductible. He subtracts $394 from $1,715 ($1,484 + $231) and enters the result, $1,321, on line 6, adding a note at the bottom of the page about the attached statement. He also enters $1,321 on Schedule A (Form 1040), line 21.

Schedule A (Form 1040)

Rev. White fills out Schedule A as explained here.

Line 5.

He deducts $925 for state and local general sales taxes paid during 2017. Because he has accurate records, he uses his actual expenses and doesn’t need to complete the State and Local General Sales Tax Deduction Worksheet and consult the Optional State and Local Sales Tax Tables in the Schedule A (Form 1040) instructions.

Line 6.

He deducts $1,800 in real estate taxes paid in 2017.

Line 10.

He deducts $5,572 of home mortgage interest paid in 2017 (reported on Form 1098, Mortgage Interest Statement (not shown)).

Line 16.

Rev. and Mrs. White contributed $4,800 in cash during the year to various qualifying charities. Each individual contribution was less than $250 and they have the required records for all donations.

Line 21.

Rev. White enters his $1,321 of unreimbursed employee business expenses from Form 2106-EZ, line 6.

Lines 25, 26, and 27.

He can deduct only the part of his employee business expenses that exceeds 2% of his adjusted gross income. After he completes page 1 of Form 1040, he fills out these lines to figure the amount he can deduct.

Line 29.

The total of all the Whites’ itemized deductions is $13,712, which he enters here and on Form 1040, line 40.

Schedule SE (Form 1040)

After Rev. White prepares Schedule C-EZ and Form 2106-EZ, he fills out Schedule SE (Form 1040). He reads the chart on page 1 of the schedule and determines that he can use Section A—Short Schedule SE to figure his self-employment tax. Rev. White is a minister, so his salary from the church isn’t considered church employee income. Thus, he doesn’t have to use Section B—Long Schedule SE. He fills out the following lines in Section A.

Line 2.

Rev. White attaches a statement (see Attachment 2, Worksheet 4, later) that explains how he figures the amount ($43,736) to enter on line 2, and adds a note at the bottom of the page to see the attached statement.

Line 4.

He multiplies $43,736 by 92.35% (0.9235) to get his net earnings from self-employment ($40,390).

Line 5.

The amount on line 4 is less than $127,200, so Rev. White multiplies the amount on line 4 ($40,390) by 15.3% (0.153) to get his self-employment tax of $6,180. He enters that amount here and on Form 1040, line 57.

Line 6.

Rev. White multiplies the amount on line 5 by 50% (0.50) to get his deduction for the employer-equivalent portion of self-employment tax of $3,090. He enters that amount here and on Form 1040, line 27.

Form 1040

After Rev. White prepares Form 2106-EZ and the other schedules, he fills out Form 1040. He files a joint return with his wife. First, he fills out the address area and completes the appropriate lines for his filing status and exemptions. Then, he fills out the rest of the form as follows.

Line 7.

Rev. White reports $34,640. This amount is the total of his $31,000 church salary, $3,400 college salary, and $240 ($1,200 – $960), his excess utility allowance. He enters “Excess allowance $240” on the dotted line next to line 7 as directed under Excess rental allowance , earlier. His employers reported the two salaries to him in box 1 of the Forms W-2 he received.

Line 12.

He reports his net profit of $3,731 from Schedule C-EZ, line 3.

Line 27.

He enters $3,090, the deductible part of his SE tax from Schedule SE, line 6.

Line 40.

He enters $13,712, the total itemized deductions from Schedule A, line 29.

Line 52.

The Whites can take the child tax credit for their daughter, Jennifer. Rev. White figures the credit by completing the Child Tax Credit Worksheet (not shown) in the Instructions for Form 1040. He enters the $943 credit on line 52.

Line 57.

He enters $6,180, the self-employment tax from Schedule SE, line 5.

Line 61.

Rev. White checks the box and leaves the entry space blank because he, his wife, and daughter had qualifying health coverage for all of 2017.

Line 64.

He enters $272, the federal income tax withheld, as shown in box 2 of his Form W-2 from the college.

Line 65.

He enters the $7,000 estimated tax payments he made for the year.

Line 66a.

Rev. White completes Steps 1 through 5 of the instructions for lines 66a and 66b to see if he can claim the EIC. As instructed under Clergy following Step 6, he writes “Clergy” on the dotted line next to line 66a. He then completes Worksheet B (not illustrated) in the instructions and finds that he qualifies for an EIC of $189. He enters $189 on line 66a and attaches Schedule EIC as directed by line 11 of Worksheet B.

Line 67.

Rev. White enters $57 from Schedule 8812 (not illustrated).

Line 77.

He wants to have any overpayment of tax applied to his 2018 estimated tax.

Attachment 1

Attachment 1 (Worksheets 1, 2, and 3) shows the computation of expenses that are nondeductible because they are allocable to tax-free ministerial income and the deductions allowed.