Qualified Services
Qualified services, in general, are the services you perform in the exercise of your
ministry or in the exercise of your duties as required by your religious order. Income you
receive for performing qualified services is subject to SE tax unless you have an
exemption as explained earlier. If you have an exemption, only the income you receive for
performing qualified services is exempt. The exemption does not apply to any other SE
income.
The following discussions provide more detailed information on qualified services of
ministers, and members of religious orders, and Christian Science practitioners and
readers.
Ministers
Most services you perform as a minister, priest, rabbi, etc., are
qualified services. These services include:
- Performing sacerdotal functions,
- Conducting religious worship, and
- Controlling, conducting, and maintaining religious organizations, boards, societies, and
other integral agencies 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 qualified services if the services are assigned or
designated by your church. Assigned or designated services qualify even if they do not
involve performing sacerdotal functions or conducting religious worship.
If your services are not assigned or designated by your church, they are qualified
services only if they involve performing sacerdotal functions or conducting religious
worship.
Services that are not part of your ministry. Income from services
that are not qualified services is generally subject to social security tax withholding
(not self-employment tax) under the rules that apply to workers in general. The following
are not qualified services.
- Services you perform for nonreligious organizations other than the services stated
earlier.
- 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. This is true 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, the services are not qualified
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 qualified services.
Books or articles. Writing
religious books or articles is considered to be in the exercise of your ministry and is
considered qualified services.
This rule also applies to members of religious orders and to Christian Science
practitioners.
Members of
Religious Orders
Services you perform as a member of a religious order in the exercise
of duties required by the order are qualified services. The services are qualified
because you perform them as an agent of the order.
For example, if you are directed 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 you are directed to work outside the order, the employment will not 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 are not
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 workers in general, not under the rules
for services provided as agent for the order. This is true even if you have taken a vow of
poverty.
Example. Mark Brown and Elizabeth 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.
Mark is a licensed attorney. The superiors of the order instructed him to get a job
with a law firm. Mark joined a law firm as an employee and, as he requested, the firm made
the salary payments directly to the order.
Elizabeth is a secretary. The superiors of the order instructed her to accept a job
with the business office of the church that supervises the order. Elizabeth took the job
and gave all her earnings to the order.
Mark's services are not duties required by the order. His earnings are
subject to social security and Medicare tax under FICA and Federal income tax.
Elizabeth's services are considered duties required by the order.
She is acting as an agent of the order and not as an employee of a third party. She does
not include the earnings in gross income, and they are not subject to income tax
withholding, social security and Medicare tax, or SE tax.
Christian Science Practitioners and Readers
The exemption from SE tax, discussed earlier, applies only to the
services a Christian Science practitioner or reader performs in the exercise of his
or her profession. If you do not have an exemption, amounts you receive for performing
these qualified services are subject to SE tax.
Figuring Net Earnings
From Self-Employment
for SE Tax
There are two methods for figuring your net earnings from
self-employment as a minister, member of a religious order, Christian Science
practitioner, or church employee.
- Regular method, or
- Nonfarm optional method.
Regular Method
Most people use the regular method. Under this method, you
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 has not taken a vow of
poverty, or a Christian Science practitioner. Then, you subtract your allowable business
deductions and multiply the difference by .9235 (92.35%). 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 .9235. Do not
reduce your wages by any business deductions when making this computation. Use Section B
of Schedule SE (Form 1040) to figure your net earnings and SE tax.
 If you have an
approved exemption, or you are automatically exempt, do not include the income or
deductions from qualified services in figuring your net earnings from self-employment.
For more information on net earnings from self-employment, get Publication 533.
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 qualified 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 $16,500
as a full-time minister. The $16,500 includes $1,500 that is designated as a rental
allowance to pay utilities. His church owns a parsonage that has a fair rental value of
$5,200 per year. Pastor Adams is given the use of the parsonage. He is not exempt from SE
tax. He must include $21,700 ($16,500 plus $5,200) when figuring net earnings from
self-employment.
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 $21,700
of which $6,700 ($1,500 plus $5,200) 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 who is serving abroad and living in a foreign country.
For information on excluding foreign earned income or the foreign housing amount, get
Publication 54.
Example. Paul Jones was the minister of a U.S. church in Mexico.
He earned $22,000 and was able to exclude it all for income tax purposes under the foreign
earned income exclusion. However, Mr. Jones must include $22,000 when figuring net
earnings from self-employment.
Specified U.S. possessions. The exclusion from gross income for
amounts derived in Guam, American Samoa, or the Commonwealth of the Northern Mariana
Islands does not apply in computing net earnings from self-employment. Also see Residents
of Puerto Rico, the Virgin Islands, Guam, the CNMI, and American Samoa, earlier,
under U.S. Citizens and Resident and Nonresident Aliens.
Amounts not included in gross income. Do not 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 are not included in your
gross income.
- Pension payments or retirement allowances you receive for your past qualified 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 nonemployee ministerial expenses. Also, deduct all your
allowable unreimbursed trade or business expenses that you incur in performing ministerial
services as a common-law employee of the church. Include this net amount on line 2 of
Schedule SE (Form 1040).
Nonemployee ministerial expenses. These are qualified
expenses you incurred while not working as a common-law employee of the church. They
include expenses incurred in performing marriages and baptisms, and in delivering
speeches.
Reimbursement arrangements. If
you received an advance, allowance, or reimbursement for your expenses, how you report
this amount and your expenses depends on whether the reimbursement was paid to you
under an accountable plan or a nonaccountable plan. If you are not sure if you are
reimbursed from an accountable plan or a nonaccountable plan, ask your employer.
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.
Generally, if your expenses equal your reimbursement, you have no deduction and the
reimbursement is not reported on your Form W-2. 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 does not meet at least one of the three rules
listed under Accountable plans. 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. Your employer will report the combined
total in box 1 of your Form W-2. You can deduct your related expenses (for SE 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, get Publication 463, Travel,
Entertainment, Gift, and Car Expenses.
Husband and Wife
Missionary Team
If a husband and wife are both 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 SE income
according to the agreement.
If the agreement is with one spouse only and the other spouse is not paid for any
specific duties, amounts received for their services are included in only the SE income of
the spouse having the agreement.
Maximum Earnings Subject to SE Tax
For 2002, the maximum net earnings from self-employment subject to
social security (old age, survivors, and disability insurance) tax is $84,900 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%.
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 for nonfarm SE income if you meet all
of the following tests.
- Your net nonfarm profits are less than $1,733.
- Your net nonfarm profits are less than 72.189% of your gross income from nonfarm
self-employment.
- You are self-employed or a partner on a regular basis. This means that your actual net
earnings from self-employment are $400 or more in at least 2 of the 3 tax years before the
one for which you use this method.
- You have not previously used this method more than 4 years (there is a 5-year lifetime
limit). The years do not have to be consecutive.
If you meet the four tests, you may report the smaller of two thirds of the gross
income from your nonfarm business, or $1,600 as your net earnings from self-employment.
However, you may not report less than your actual net earnings from nonfarm
self-employment.
For more information on the nonfarm optional method, get Publication 533 and Schedule
SE (Form 1040).
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