Publication 517
Social Security and Other Information for Members of the Clergy and Religious Workers

For use in preparing 2002 Returns

Filing Your Return

You have to file an income tax return for 2002 if your gross income was at least the amount shown in the second column of Table 4. (Gross income means all income you received in the form of money, goods, property, and services that is not exempt from income tax.)

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

• You are not exempt from SE tax, and you have net earnings from self-employment (discussed earlier under Figuring Net Earnings From Self-Employment for SE Tax) of $400 or more in the tax year,
• You are exempt from SE tax on earnings from qualified services and you have $400 or more of other earnings subject to SE tax, or
• You had wages of $108.28 or more from an electing church or church-controlled organization (discussed earlier under Religious Workers (Church Employees)).

Self-employment tax.   If you are liable for SE tax, you must file Schedule SE (Form 1040) with your return.

Exemption from SE tax.   If you filed Form 4361 and received IRS approval not to be taxed on those earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Instead, write Exempt - Form 4361 on Form 1040, line 56.

If you filed Form 4029 and received IRS approval not to be taxed on those earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Instead, write Exempt - Form 4029 on Form 1040, line 56.

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 are not taxed until they are distributed.

Retirement plans for the self-employed.   To set up a qualified retirement plan (also called a Keogh or H.R. 10 plan), a simplified employee pension (SEP) plan, or a SIMPLE plan, you must be self-employed.

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, earlier. This is true even if your pay for qualified services (discussed earlier) is subject to SE tax.

For example, if a congregation pays you a salary for performing qualified services, and you are subject to the congregation's control, you are a common-law employee. You are not a self-employed person for purposes of setting up a retirement plan. This 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 are reported on Schedule C or C-EZ, are earnings from self-employment for all tax purposes.

For more information on establishing a SEP, SIMPLE, or qualified retirement plan, get Publication 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. You generally are allowed to make contributions to either a traditional or a Roth IRA of up to $3,000 ($3,500 if you are age 50 or older) for 2002, or the amount of your pay, whichever is less. $3,000 ($3,500 if you are age 50 or older) is the most you can contribute for 2002 regardless of whether you contribute to one or both of these IRAs. Contributions to a traditional IRA may be deductible. Your deduction for contributions to your traditional IRA may be reduced or eliminated if you or your spouse is covered by an employer retirement plan (including, but not limited to a SEP or SIMPLE, or qualified retirement plan). Unlike contributions to a traditional IRA, contributions to a Roth IRA are not deductible. However, 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 you withdraw them.

For more information on IRAs, get Publication 590.

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 Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations.

Deducting contributions to tax-sheltered annuity plans.   You generally cannot deduct contributions to a tax-sheltered annuity (403(b)) plan on your tax return. However, an exception applies to your contributions 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 is not exempt from tax under section 501(c)(3) of the Internal Revenue Code and with that you do not share common religious bonds. If the exception applies, you can deduct your contributions to a 403(b) plan as explained below.

• If you are self-employed, deduct your contributions on line 31 of Form 1040.
• If you are not self-employed, deduct your contributions on line 34 of Form 1040. Write 403(b) on the dotted line next to line 34.

Retirement savings contributions credit.    You may be able to take a tax credit for certain contributions you make to any of the retirement plans or IRAs discussed above. The amount of the credit is based on the contributions you make and your credit rate. The maximum contribution eligible for the credit is $2,000. The credit rate can be as low as 10% or as high as 50%, depending on your adjusted gross income. You figure the credit on Form 8880, Credit for Qualified Retirement Savings Contributions.

You cannot take the credit if any of the following apply.

1. You were born after January 1, 1985.
2. You were a full-time student in 2002.
3. Someone, such as your parent(s), claims an exemption for you on his or her 2002 tax return.
4. Your adjusted gross income for 2002 is more than:
   1. $25,000, if your filing status is single, married filing separately, or qualifying widow(er) with dependent child.
   2. $37,500, if your filing status is head of household.
   3. $50,000, if your filing status is married filing jointly.

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

1. Foreign earned income,
2. Foreign housing costs,
3. Income for bona fide residents of American Samoa, and
4. Income from Puerto Rico.

More information.   For more information about the credit, see Publication 590.

Earned Income Credit

The earned income credit is a special credit for certain people who work. If you qualify for it, the earned income credit reduces the tax you owe. Even if you do not owe tax, you can get a refund of the credit. Also, you may be able to get part of the credit added to your pay instead of waiting until after the end of the year.

You cannot take the credit if your earned income (or adjusted gross income, if greater) is:

• $11,060 or more ($12,060 or more for married filing jointly) and you do not have a qualifying child,
• $29,201 or more ($30,201 or more for married filing jointly) and you have one qualifying child, or
• $33,178 or more ($34,178 or more for married filing jointly) and you have more than one qualifying child.

Earned income.    Earned income includes your:

• Wages, salaries, tips, and
• Net earnings from self-employment minus the amount you claimed (or should have claimed) on Form 1040, line 29, for one-half of your SE tax.

Earned income for a minister with an approved Form 4361.   If you have earnings from qualified services that are exempt from SECA (have an approved Form 4361), amounts you received for performing ministerial duties as an employee are earned income. This includes wages, salaries, tips, and other taxable employee pay.

Amounts you received for nonemployee ministerial duties are not earned income. This includes fees for performing marriages and baptisms, and honoraria for delivering speeches.

If you had nonministerial duties, any net earnings from self-employment, minus one-half of your SE tax, and any pay received as an employee, is earned income.

Earned income for a minister whose income from qualified services is not exempt from SECA.   Earned income includes your net earnings from self-employment plus any pay you received for nonministerial duties minus your Form 1040, line 29, amount for one-half of SE tax.

Your net earnings from self-employment include those net earnings from qualified services. See Figuring Net Earnings From Self-Employment for SE Tax, earlier. Net earnings also include net earnings from self-employment related to nonministerial duties.

Earned income for a member of a recognized religious sect with an approved Form 4029.   If you have an approved Form 4029, all wages, salaries, tips, and other taxable employee compensation are earned income. Amounts you received as a self-employed individual are not earned income. Also, in figuring earned income, losses from Schedules C, C-EZ, or F cannot be subtracted from wages on line 7 of Form 1040.

More information.   For the detailed rules on this credit, get Publication 596. To figure the amount of your credit, you can either fill out a worksheet or have the IRS compute the credit for you. You may need to complete Schedule EIC and attach it to your tax return. For details on getting part of the credit added to your pay, get Form W-5, Earned Income Credit Advance Payment Certificate, from your employer or the IRS.

How To Get Tax Help

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Contacting your Taxpayer Advocate.   If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.

The Taxpayer Advocate represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.

To contact your Taxpayer Advocate:

• Call the Taxpayer Advocate at
  1-877-777-4778.
• Call, write, or fax the Taxpayer Advocate office in your area.
• Call 1-800-829-4059 if you are a
  TTY/TDD user.

For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS.

Free tax services.   To find out what services are available, get Publication 910, Guide to Free Tax Services. It contains a list of free tax publications and an index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics.

Personal computer. With your personal computer and modem, you can access the IRS on the Internet at www.irs.gov. While visiting our web site, you can:

• See answers to frequently asked tax questions or request help by e-mail.
• Download forms and publications or search for forms and publications by topic or keyword.
• Order IRS products on-line.
• View forms that may be filled in electronically, print the completed form, and then save the form for recordkeeping.
• View Internal Revenue Bulletins published in the last few years.
• Search regulations and the Internal Revenue Code.
• Receive our electronic newsletters on hot tax issues and news.
• Learn about the benefits of filing electronically (IRS e-file).
• Get information on starting and operating a small business.

You can also reach us with your computer using File Transfer Protocol at ftp.irs.gov.

TaxFax Service. Using the phone attached to your fax machine, you can receive forms and instructions by calling 703-368-9694. Follow the directions from the prompts. When you order forms, enter the catalog number for the form you need. The items you request will be faxed to you.

For help with transmission problems, call the FedWorld Help Desk at 703-487-4608.

Phone. Many services are available by phone.
 

• Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current and prior year forms, instructions, and publications.
• Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
• Solving problems. Take advantage of Everyday Tax Solutions service by calling your local IRS office to set up an in-person appointment at your convenience. Check your local directory assistance or www.irs.gov for the numbers.
• TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829- 4059 to ask tax questions or to order forms and publications.
• TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.

Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to sometimes listen in on or record telephone calls. Another is to ask some callers to complete a short survey at the end of the call.

Walk-in. Many products and services are available on a walk-in basis.
 

• Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, grocery stores, copy centers, city and county governments, credit unions, and office supply stores have an extensive collection of products available to print from a CD-ROM or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
• Services. You can walk in to your local IRS office to ask tax questions or get help with a tax problem. Now you can set up an appointment by calling your local IRS office number and, at the prompt, leaving a message requesting Everyday Tax Solutions help. A representative will call you back within 2 business days to schedule an in-person appointment at your convenience.

Mail. You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a response within 10 workdays after your request is received. Find the address that applies to your part of the country.

• Western part of U.S.:
  Western Area Distribution Center
  Rancho Cordova, CA 95743-0001
• Central part of U.S.:
  Central Area Distribution Center
  P.O. Box 8903
  Bloomington, IL 61702-8903
• Eastern part of U.S. and foreign addresses:
  Eastern Area Distribution Center
  P.O. Box 85074
  Richmond, VA 23261-5074

CD-ROM for tax products. You can order IRS Publication 1796, Federal Tax Products on CD-ROM, and obtain:

• Current tax forms, instructions, and publications.
• Prior-year tax forms and instructions.
• Popular tax forms that may be filled in electronically, printed out for submission, and saved for recordkeeping.
• Internal Revenue Bulletins.

The CD-ROM can be purchased from National Technical Information Service (NTIS) by calling 1-877-233-6767 or on the Internet at http://www.irs.gov/cdorders. The first release is available in early January and the final release is available in late February.

CD-ROM for small businesses. IRS Publication 3207, Small Business Resource Guide, is a must for every small business owner or any taxpayer about to start a business. This handy, interactive CD contains all the business tax forms, instructions and publications needed to successfully manage a business. In addition, the CD provides an abundance of other helpful information, such as how to prepare a business plan, finding financing for your business, and much more. The design of the CD makes finding information easy and quick and incorporates file formats and browsers that can be run on virtually any desktop or laptop computer.

It is available in March. You can get a free copy by calling 1-800-829-3676 or by visiting the website at www.irs.gov/smallbiz.

Comprehensive
Example

Rev. John Michaels is the minister of the First United Church. He is married and has one child. The child is considered a qualifying child for the child tax credit. Mrs. Michaels is not employed outside the home. Rev. Michaels is a common-law employee of the church, and he has not applied for an exemption from SE tax.

The church paid Rev. Michaels 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 $8,400. He taught a course at the local community college, for which he was paid $3,400.

Rev. Michaels owns a home next to the church. He makes an $800 per month mortgage payment of principal and interest only. The church paid him $800 per month as his parsonage allowance (excluding utilities). The home's fair rental value is $900 per month. The utility bills for the year totaled $960. The church paid him $100 per month designated as an allowance for utility costs.

The parts of Rev. and Mrs. Michaels' income tax return are explained in the order they are completed. They are illustrated in the order that the Rev. Michaels will assemble the return to send it to the IRS.

Form W-2 From Church

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

Box 1.   The church entered Rev. Michaels' $31,000 salary.

Box 2.   The church left this box blank because Rev. Michaels did not request federal income tax withholding.

Boxes 3 through 6.   Rev. Michaels 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. Michaels' total parsonage and utilities allowance for the year and identified them.

Form W-2 From College

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

Box 1.   The college entered Rev. Michaels' $3,400 salary.

Box 2.   The college withheld $272 in federal income tax on Rev. Michaels' behalf.

Boxes 3 and 5.   As an employee of the college, Rev. Michaels is subject to social security and Medicare withholding on his full 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. Michaels' entries on Schedule C-EZ are explained here.

Line 1.   Rev. Michaels reports the $4,000 from weddings, baptisms, and honoraria.

Line 2.   Rev. Michaels reports his expenses related to the line 1 amount. The total consisted of $87 for marriage and family booklets and $174 for 477 miles of business use of his car, mainly in connection with honoraria. Rev. Michaels used the standard mileage rate to figure his car expense. He multiplied the standard mileage rate of 36.5 cents by 477 miles to get $174.

These expenses total $261 ($174 + $87). However, he cannot deduct the part of his expenses allocable to his tax-free parsonage allowance. He attaches the required statement, Attachment 1 (shown later) to his return showing that 23% (or $60) of his business expenses are not deductible because they are allocable to that allowance. He subtracts the $60 from the $261 and enters the $201 difference on line 2.

Line 3.   He enters his net profit of $3,799 both on line 3 and on Form 1040, line 12.

Lines 4 through 8b.   Rev. Michaels fills out these lines to report information about his car.

Form 2106-EZ

Rev. Michaels 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. Michaels fills out Part II because he used his car for church business. His records show that he drove 2,708 business miles, which he reports in Part II. On line 1, he multiplies 2,708 miles by the mileage rate of 36.5 cents for the year. The result is $988.

Line 4.   He enters $219 for his professional publications and booklets.

Line 6.   Before entering the total expenses on line 6, Rev. Michaels must reduce them by the amount allocable to his tax-free parsonage allowance. On the required Attachment 1 (shown later), he shows that 23% (or $278) of his employee business expenses are not deductible because they are allocable to the tax-free parsonage allowance. He subtracts $278 from $1,207 and enters the result, $929, on line 6. He also enters $929 on line 20 of Schedule A (Form 1040).

Schedule A (Form 1040)

Rev. Michaels fills out Schedule A as explained here.

Line 6.   Rev. Michaels deducts $1,750 in real estate taxes.

Line 10.   He deducts $6,810 of home mortgage interest.

Line 15.   Rev. and Mrs. Michaels contributed $4,800 in cash during the year to various qualifying charities. Each individual contribution was less than $250.

Line 20.   Rev. Michaels enters his unreimbursed employee business expenses from Form 2106-EZ, line 6.

Lines 24, 25, and 26.   He can deduct only the part of his employee business expenses that exceeds 2% of his adjusted gross income. He fills out these lines to figure the amount he can deduct.

Line 28.   The total of all the Michaels' itemized deductions is $13,583, which they enter on line 28 and on Form 1040, line 38.

Schedule SE (Form 1040)

After Rev. Michaels 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 which tells him he can use Section A - Short Schedule SE to figure his self-employment tax. Rev. Michaels is a minister, so his salary from the church is not considered church employee income. Thus, he does not have to use Section B - Long Schedule SE. He fills out the following lines in Section A.

Line 2.   Rev. Michaels attaches a statement (see Attachment 2, later) that explains how he figures the amount ($44,332) to enter.

Line 4.   He multiplies $44,332 by .9235 to get his net earnings from self-employment ($40,941).

Line 5.   The amount on line 4 is less than $84,900, so Rev. Michaels multiplies the amount on line 4 ($40,941) by .153 to get his self-employment tax of $6,264. He enters that amount here and on Form 1040, line 56.

Line 6.   Rev. Michaels multiplies the amount on line 5 by .5 to get his deduction for one-half of self-employment tax of $3,132. He enters that amount here and on Form 1040, line 29.

Form 1040

After Rev. Michaels 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. Michaels reports $34,640. This amount is the total of his $31,000 church salary, $3,400 college salary, and $240, the excess of his utility allowance over his utility costs. The two salaries were reported to him in box 1 of the Forms W-2 he received.

Line 12.   He reports his net profit of $3,799 from Schedule C-EZ, line 3.

Line 29.   He enters $3,132, half his SE tax from Schedule SE, line 6.

Line 38.   He enters the total itemized deductions from Schedule A, line 28.

Line 50.   The Michaels can take the child tax credit for their daughter, Jennifer. Rev. Michaels figures the credit by completing the Child Tax Credit Worksheet (not shown) in the instructions for Form 1040. He enters the $600 credit on line 50.

Line 56.   He enters the self-employment tax from Schedule SE, line 5.

Line 62.   He enters the federal income tax shown in box 2 of his Form W-2 from the college.

Line 63.   He enters the $8,400 estimated tax payments he made for the year.

Forms W-2, (2) for John E. Michaels

Form 1040, page 1 for John E. and Susan R. Michaels

Form 1040, page 2

Schedule A (Form 1040)

Schedule C - EZ (Form 1040)

Schedule SE (Form 1040)

Form 2106-EZ

Tax Publications and Commonly Used Tax Forms for Individuals