Like I said, I'm clergy, and I'm required to self-employment tax on all my religious income, both salary and housing allowance. However, TurboTax won't allow me to do so if any amount was withheld for Social Security tax. This seems to be a clear mistake in the program, and will result in me underpaying my taxes by thousands of dollars or seeking another route to file my taxes.
If using Turbotax online, you can't make manual entries. The workaround would be to divide your W-2 into 2 W-2s, one that covers your SS wages and one that includes non-SS wages. Box 4 should be 6.2% of box 3, and box 6 should be 1.45% of box 5. Box 4 and 6 should generally be the same unless your income is more than $136,000. That's how you would split the W-2s.
For example, suppose your W-2 shows
1_$50,000. 2_$3500
3_$20,000. 4_$1,240
5_$20,000. 6_$290
You would enter this as if it was a W-2 for
1_$30,000. 2_$0
3_$0. 4_$0
5_$0. 6_$0
and another one for
1_$20,000. 2_$3500
3_$20,000. 4_$1,240
5_$20,000. 6_$290
Split the state wages and withholding in the same way.
The W-2 with zero SS tax would be marked as clergy, and you would select to pay SE tax on your wages plus housing allowance. The W-2 that shows your income that was taxed would not be coded as clergy, just as a regular W-2.
If using Turbotax installed on your own computer, you can use this workaround or you can make a manual entry as follows. Enter the W-2, check "clergy wages" and check the box for "pay SE tax on wages plus housing allowance." Then, click the Forms icon at the top to switch for Forms mode, and locate the Schedule SE Adjustment Worksheet (Sch SE Adj Wks). Locate line 5a, which is your income subject to SE tax. Highlight line 5a and select Override from the menu. Edit the line 5a amount to be only the part of your wages that were not already subject to social security tax (in my example above, that would be changing "$50,000" to "$30,000.") Be aware, however, that making overrides voids the Turbotax accuracy guarantee and prevents e-filing, you will have to print your return and file by mail.
Or you certainly could see a professional this year. Turbotax can't automatically handle a clergy W-2 that was prepared incorrectly by the church.
Firstly, it is incorrect for the church to withhold social security and medicare tax if you are performing religious duties, so you need to make sure they correct this for 2021.
Then, were you performing religious duties all year as a qualified minister, or were you working part of the year in a non-qualified position that was subject to social security and medicare? (For example, if you were employed as a lay pastor until June, and then got your pastoral license from your denomination and began in an official religious role in July, then it would be correct to withhold social security and medicare wages on your non-clergy wages. However, Turbotax can't handle this situation by itself.)
It would help if you give me more details on your exact situation. It may be that you need to make some manual entries in Turbotax, or you may need to see a professional this year if you are not comfortable doing that.
Yes, I've done that a number of times trying to get a different result regarding the issue I posted in my question.
Thanks for the reply. All my income for this year is clergy income. Regardless of whether my employer incorrectly withheld taxes, I still need to pay taxes on it. I'd love to know how to manually edit forms, though I'm on the verge of just have a professional do my taxes. Is there any other info you'd need to be able to answer my question?
How much social security and Medicare was withheld? The full amount for the year, or a partial amount? If possible, what are the values in your W-2 box 1, 3, 4, 5, and 6?
A partial amount. I'm not sure how it was calculated, tbh.
And I hope you understand, but I'm not gonna publish exact amounts on a public online forum.
Is there a way to manually edit this in TurboTax or should I find a professional?
If using Turbotax online, you can't make manual entries. The workaround would be to divide your W-2 into 2 W-2s, one that covers your SS wages and one that includes non-SS wages. Box 4 should be 6.2% of box 3, and box 6 should be 1.45% of box 5. Box 4 and 6 should generally be the same unless your income is more than $136,000. That's how you would split the W-2s.
For example, suppose your W-2 shows
1_$50,000. 2_$3500
3_$20,000. 4_$1,240
5_$20,000. 6_$290
You would enter this as if it was a W-2 for
1_$30,000. 2_$0
3_$0. 4_$0
5_$0. 6_$0
and another one for
1_$20,000. 2_$3500
3_$20,000. 4_$1,240
5_$20,000. 6_$290
Split the state wages and withholding in the same way.
The W-2 with zero SS tax would be marked as clergy, and you would select to pay SE tax on your wages plus housing allowance. The W-2 that shows your income that was taxed would not be coded as clergy, just as a regular W-2.
If using Turbotax installed on your own computer, you can use this workaround or you can make a manual entry as follows. Enter the W-2, check "clergy wages" and check the box for "pay SE tax on wages plus housing allowance." Then, click the Forms icon at the top to switch for Forms mode, and locate the Schedule SE Adjustment Worksheet (Sch SE Adj Wks). Locate line 5a, which is your income subject to SE tax. Highlight line 5a and select Override from the menu. Edit the line 5a amount to be only the part of your wages that were not already subject to social security tax (in my example above, that would be changing "$50,000" to "$30,000.") Be aware, however, that making overrides voids the Turbotax accuracy guarantee and prevents e-filing, you will have to print your return and file by mail.
Or you certainly could see a professional this year. Turbotax can't automatically handle a clergy W-2 that was prepared incorrectly by the church.
Ooh, this is an interesting workaround, and I might try it.
I'm using the online version, so I'd need to split W2s. Why would I need to report Box 2 with the SS withholdings and not the rest of the income?
@anonymousbadger wrote:
Ooh, this is an interesting workaround, and I might try it.
I'm using the online version, so I'd need to split W2s. Why would I need to report Box 2 with the SS withholdings and not the rest of the income?
It won't actually matter how you split the box 2 federal withholding. Most churches don't withhold any taxes, so box 2 will be blank for most clergy. (It is not improper for a church to withhold in box 2, if the pastor submits a W-4, but it is less common.)
For what it's worth, I'm having a similar issue, but it's because the church paid a Social Security offset as part of my compensation package, so they didn't do anything improper.
@Greg Briggs wrote:
For what it's worth, I'm having a similar issue, but it's because the church paid a Social Security offset as part of my compensation package, so they didn't do anything improper.
You aren't specific about your situation, but if you have any value in box 3, 4, 5 or 6 of your W-2, then the church messed up. If they are giving you a salary bump to account for your self-employment taxes, that should be included in your box 1 wages, not in box 3, 4, 5 or 6. (Further, if they included money in your W-2 boxes 3-6 but did not file a form W-3 and form 941 or 944 that matches, they will be getting letters from the IRS too.)
After you input your W2 continue to the screen "lets check for uncommon situations" where you will check "Religious employment" continue and check "clergy" continue to input/confirm your housing allowance, continue to "Now tell us about your clergy self-employment taxes" screen. Here is where you tell TurboTax how to tax your wages and housing allowance. Employers will tax the wages and retirement portion only, or not at all. If your W2 shows SS tax is approximately 6.2% of the SS wages (wages plus retirement), then choose option "Pay self-employment tax on my housing allowance." If there are no SS wages or tax, then choose "Pay self-employment tax on my wages and housing allowance". Hope this helps.
I have a question on this topic too. My W2 did not have any tax withholding for clergy work. W2 only have Box 1 wages and Box 14 which is housing allowance. Which one should I choose below:
We can help. You should select 'Pay self-employment tax on my wages and housing allowance' if you never applied for an exemption of self employment tax through the IRS. The links below will provide some additional information you may find interesting.
The housing allowance is not taxed for personal income tax but is taxed for self employment tax (social security and medicare tax). Any housing allowance that is more than what you actually spent on housing would be included for personal income tax.
Thanks for your reply as I am so last minute trying to finish the tax return. One more question on ministers for self employment tax. I was asked/prompted to make adjustments to enter ministerial business expense that will deduct under the Job-related Expenses topic, the amount I entered will reduce the income that is subject to self employment tax. Am I allow to enter these expenses?
Can I include health insurance premium I paid for medical and dental insurance for myself, my spouse and my dependents in the above Job related expenses deduction?
Thanks,
@KL47 wrote:
Thanks for your reply as I am so last minute trying to finish the tax return. One more question on ministers for self employment tax. I was asked/prompted to make adjustments to enter ministerial business expense that will deduct under the Job-related Expenses topic, the amount I entered will reduce the income that is subject to self employment tax. Am I allow to enter these expenses?
Can I include health insurance premium I paid for medical and dental insurance for myself, my spouse and my dependents in the above Job related expenses deduction?
Thanks,
I strongly recommend reading this guide. You may want to subscribe to the web site, they are very good. It sounds like you are new, and there a lot you will need to know about clergy taxes and finances.
https://data.efca.org/files/view/2088
Especially, because taxes were not withheld (this is normal) you should have been making estimated tax payments to the IRS each quarter. If you did not, you will not only owe a large lump sum of taxes now, you may be assessed a penalty for underpayment. (You can ask for a waiver for cause or if this is your first time, based on not knowing the rules, but you need to be making estimated payments ahead of your 2024 taxes too.)
Note that Turbotax DOES NOT automatically tax the housing allowance from box 14. After entering your W-2, you must check the box for "religious wages" in the list of special circumstances. Enter your housing allowance there, and also enter your qualified housing expenses. You can't enter a larger number than your housing allowance. If you enter a smaller number, because your allowance was more than your qualified expenses, the difference is added to your taxable income.
Unreimbursed employee business expenses are not deductible on your federal tax return. You may enter such expenses, because they might be deductible in your state. However, you must reduce your expense deduction according to the Deason rule. This means you can't fully deduct your expenses if some part of your compensation is a non-taxable housing allowance. For example, suppose your W-2 box 1 wages are $20,000 and your housing allowance is $30,000. Because only 40% of your total compensation is taxable, you can only list 40% of your expenses as deductible expenses. You must make this calculation yourself, the program does not do it for you.
You can also enter your unreimbursed business expenses as an adjustment to income on schedule SE, this will reduce your self-employment tax, and this is still allowed even though the regular itemized deduction for business expenses is not allowed. In the past, the only way to enter this expenses on schedule SE was to make a manual entry in Forms mode, which is only available when using Turbotax installed on your own computer from a CD or download (the desktop version), and not in Turbotax online. I heard a rumor that you can now enter these expenses in the online interview, but I have not checked this personally. Here also, your expenses must be reduced by the percentage of non-taxable compensation.
Your health insurance is not allowed as a business expense, because you are not considered self-employed for this purpose and you don't have a schedule C. Instead, you may be eligible for a premium credit under the affordable care act. You will enter this in the section for deductions and credits in the personal income section.
Thanks for your reply. I have paid the quarterly estimated tax for 2023 so I should be able to get a refund.
I am able to enter my unreimbursed business expenses (ministry) as an adjustment to income on schedule SE, this reduce the self-employment tax and result with a refund. The higher expense I enter, the larger the refund amount, therefore I need to confirm what are the appropriate unreimbursed business expenses for clergy income.
It depends. As indicated by @Opus 17 you are not allowed to use expenses that are associated with the housing allowance portion. This means you must make a manual adjustment before you make the entry for the expenses and his instruction is posted here again for your review:
Review your entries and calculations to make sure you have made the appropriate entries.
" I need to confirm what are the appropriate unreimbursed business expenses for clergy income"
Unreimbursed employee expenses are discussed in the 2018 version of IRS publication 529. Although such expenses are not allowed on your federal return, these are the rules used by states that still allow the deduction.
https://www.irs.gov/pub/irs-prior/p529--2017.pdf
Deductible expenses are expenses that are "Ordinary and necessary" expenses related to your job. "An expense is ordinary if it is common and accepted in your trade, business, or profession. An expense is necessary if it is appropriate and helpful to your business. An expense doesn't have to be required to be considered necessary."
This could include books and study materials, vehicle expenses if you use your personal vehicle for work-related travel (making parish calls, going to diocese meetings), sheet music, or other expenses related to the job of being a clergy person that you paid for, and were not reimbursed. There are special rules for vehicle milage— you can deduct mileage to drive away from your normal workplace, but you can't deduct mileage back and forth to your regular workplace, since commuting is non-deductible. You can't deduct expenses for clothing unless it is a unique item that is not suitable for everyday wear. For example, a priest could deduct the cost of a clerical collar but not black trousers and shirt. There are also special rules for meals, and for equipment costing more than $2500 (such as computers). Costs that serve both business and personal purposes (such as a computer that is used for both personal activities and business activities) must be allocated to the business based on the percentage of time or involvement of business use, and if you are audited, you need to have some kind of reliable written record determining the business use percentage, not just a guess.
Turbotax has a guided interview for work-related expenses that will ask separately about vehicle mileage, equipment, and other expenses. Remember that you can't enter your full expense, you can only enter the reduced amount that you calculate using the Deason rule as described above. Keep records of your expenses and your calculations for at least 3 years in case of audit.
If I use this method of splitting my w2, what do I do with business expense? I'm guessing I would put them on the form SE for the W2 income without Social Security/medicare withholding? What percentage can I deduct?
@cdrway wrote:
If I use this method of splitting my w2, what do I do with business expense? I'm guessing I would put them on the form SE for the W2 income without Social Security/medicare withholding? What percentage can I deduct?
This is like the 20th response to an old discussion, and I don't know your facts. Since you are talking about splitting a W-2, I will assume for this argument that you were employed by a church as a lay person with social security and medicare withholding, then at some point became a clergy member (licensed, ordained) and the social security and medicare withholding stopped. And you are going to follow the advice to create 2 W-2s, one with your lay wages and withholding, and one with your clergy wages and withholding.
For unreimbursed business expenses, they are not deductible on your federal tax return. You can still list them, and they will flow to your state if your state allows this deduction. The amount you should list is the amount of unreimbursed expenses adjusted according to the Deason rule. This looks at your non-taxable parsonage or housing allowance. For example, suppose your total box 1 wages for the entire year are $40,000 and you have a $10,000 housing allowance that started when you were ordained. Your total compensation is $50,000 with 80% being subject to income tax, so you would enter 80% of your work expenses. Turbotax doesn't do this calculation, you have to do it; keep records for 3 years in case of audit. You can combine your expenses from the lay position and clergy position.
Then additionally, you can include the expenses as an adjustment to your clergy income subject to self-employment tax on schedule SE. Here, you can only include expenses from when you were in a clergy position, and you must do a separate Deason calculation. For example, suppose your wages for your clergy position only were $20,000 and your housing allowance is $10,000. You can take 66% of your expenses as an adjustment on schedule SE. To take this adjustment, you must be using Turbotax installed on your own computer from a CD or download (the desktop version). Switch to Forms mode, find the Schedule SE Adjustment Worksheet, and enter the amount on line 5c.