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What is Taxable Income for a Minister? Part 2
Yesterday you received part 1 of a series of emails titled "What is Taxable Income for a Minister?" Today we will discuss the benefits of income from book or sermon sales or the performance of weddings.
Many ministers perform weddings, sell their sermons, books and other teachings in the church book store or as they travel and speak in other places. Other ministers receive compensation for counseling or chaplain services. This income is defined in section 61(a)(2) of the Internal Revenue Code and is therefore taxable. However, under section 1402(a)(8), ministers that have opted out of social security do not have to pay self employment tax when they conduct a wedding or sell their sermons, books and other teachings. Let me give you an example:
Minister Tom writes a book titled "Loving Jesus." He receives royalties in the amount of $17,800.00. He also performs 3 weddings and receives $750.00. Finally, he also sells teachings on CD and receives $3,500.00. His total income from these sales equals $22,050.00. Since Pastor Tom has opted out of social security, he does not owe any self employment taxes on these earnings. He saves at least $3,373.65 in taxes. Why? Because the above described services, including his book sales, are considered qualified services. IRS publication 517 includes the following activities:
* Books or articles
* Counseling
* Weddings, funerals
* Serving on the board of a church, church controlled school or religious ministry
* Any work for the church
* Sermon tape and CD sales
* Traveling preaching and teaching
* Online sales of religious items
Pastoral Love Offerings
Many churches give pastoral love offerings to their pastors as gifts. When churches do this, it is because of love, admiration and respect for their pastor, and truly intended as a gift and not as compensation. Some common occasions for giving pastoral love offerings are the pastor's birthday, Christmas or anniversaries. The church wants to bless the pastor because of his/her tireless dedication. Many churches and pastors believe that because the offering was a gift, it is not taxable income. This is an old line of thought that has been around for a while and continues to permeate churches all across America. While section 102(a) allows the pastor to receive a gift tax free, subsection (c)(1) specifically states that if the gift is from the church, it cannot be recorded as a gift and is therefore taxable. The repercussions of treating pastoral love offerings as non-taxable gifts can be grave.
Another Note on Pastoral Love Offerings
When I pastored a church in Florida, on many occasions after a Sunday morning service, members would shake my hand and tell me how they were blessed by the message and hand me a 20, 50 or 100 dollar bill as a gift. At that time, I was living on a shoestring budget and it was a welcomed gift that would often times arrive just in time to pay the mortgage of my very small home.
While we can all agree that the gift by the member is a wonderful blessing to me, the question that follows receiving the gift is whether the gift is taxable? What does the IRS Code say about it? How about a love offering given after a counseling session? Though the minister does not set a fee, the individual out of his/her own free will gives a gift out of gratitude for his wise counsel? According to sections 3401(a)(9), 61(a)(2) and 102(c)(1), these offerings are taxable within the context described above, meaning that if the reason why the giver gave the gift was because of what your message or counsel meant to him/her, then the gift was motivated by a service provided, whether intending to be compensated or not. "Whaaaaaat? Are you serious?" Those are the two most common questions I get when I teach this.
Under the law, this is considered an accountable reimbursement plan that makes the $366.61 paid to the pastor tax free. Had the church board of directors not approved the accountable reimbursement plan, the amount paid to the pastor as a car allowance would have been taxable and would have constituted an excess benefit transaction, even though the church paid it to him thinking it was tax free.
We are going to be discussing this topic in detail at our next set of conferences. Please consider attending one. whether you are considering starting a church or ministry or have already started and have been established for a long time, our Church Compliance and Ministry Empowerment is for you.
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