Saturday, April 08, 2006

on taxes for priests, and advice for seminarians

So I have been doing my taxes recently and doing taxes this year was a particular pain.

In prior years as a student I have used the simplest, easiest form the IRS has made available to mortals: the 1040-EZ.

Well, now that I am ordained, gone are those EZ days. I have entered the world of 1040 Long Forms and Schedule SE’s (Self-Employment).

“What? priests are self-employed?” you may ask. Yes and no, and I’ll talk more about that later.

I have been asking other priests around and the common refrain I hear is, “Oh, I send all my tax stuff to my tax guy, so I don’t have to worry about it.”

I could have easily gone that route. The urge was great. But I thought, “No, I’ll do this on my own. I’d have to learn this stuff anyway. I have to sign the form and am responsible for it, so I’ll learn this.”

Well, sounds responsibly noble, doesn’t it? It was also borderline stupid.

But hey, I learned a lot. And I can honestly say, after speaking to those helpful folks in the IRS toll-free line, and reading up on this, that I have completed my complicated tax return by myself CORRECTLY! Allel…!!!(oh wait, it’s not yet Easter).

Anyway, part of the difficulty for priests is that we are a “hybrid” when it comes to taxes. That means we are considered employees, and therefore have our salaries reported to us by the Church on the W-2 (Wage and Tax Statement), which in turn is reported as wages in the 1040 Form.

But part of our income also comes from stipends, honoraria, and offerings for administering the sacraments and other liturgical functions (weddings, baptisms, funerals). Those may or may not be reported on the W-2. I know they weren't on mine, so I have to report these somewhere. The folks at the IRS told me to report these amounts on the Schedule C (Net Profit from Business), a form usually filed by self-employed individuals.

I was dubious at first, but hey, if you can’t trust the IRS, then whom can you…….well, you know what I mean.

And so this is the other part of that “hybrid”: priests not only file the Schedule C but are also considered self-employed when it comes to paying Social Security Taxes. That means we pay double....the whole 15.3% (the employer’s and the employee’s portion of Social Security Tax).

That’s a whopping tax folks!!!

But the big, hit-me-over-the-head-blow-to-the-cranium-until-I-fall-sideways-to-the-ground knuckle punch was when I learned that I also get taxed with this for living in the rectory! Yep, I pay Social Security on the fair rental value of this here parish house.

Cramped living quarters, little privacy, and I have to pay taxes for living here. I mean, that’s enough for me to run to the students at our seminary and shout “GET OUT!!!”

Anyway, I have a good mind to pray earnestly for the simplification of our tax system. A friend of mine who has become a CPA showed me the Internal Revenue Code. People, it’s thicker than the Bible and it’s in two volumes. It’s madness.

So now I turn to you seminarians out there. Folks in your dioceses will probably not give you adequate information about tax stuff (I know I wasn’t). And this is one of the failures of dioceses with respect to their newly-ordained: no sufficient personal tax guidance. This is sad.

But I have some simple practical advice for you, speaking as a newly-ordained:

1) Once you get your first assignment, and have been given a blank W-4 Form (Tax Withholding), have sufficient taxes taken out for income and social security taxes by indicating this on the form. This would probably mean having ZERO withholding allowances and having additional amounts taken out.

You may use the IRS’ tax withholding calculator to figure the amount of income tax and withholdings to claim on the W-4. It’s a neat online tool. Use it!

Now, as for Social Security: well, figure the amount of your wages, estimate the amount of your stipend and other ministerial income, your share of the fair rental value of your housing, and then multiply this total by 15.3%. Now, there are other incomes that are included in this, but those three are the biggies.

Then divide by the number of months remaining in the year. That’s the monthly amount of your Social Security Tax. You may choose to have this amount taken out of your pay every payday. Indicate this as well on the W-4.

Your diocese may compensate for half of the Social Security Tax, so inquire with the pastor.

2) Keep receipts and documentation of your “business” related expenses. This includes keeping a log of your business-related mileage. You will need these figures and proofs so you can deduct these business expenses. Read advice #5 to know which publication to get in order to figure what expenses may be deducted on the Schedule C.

3) Newly-ordained clergy have the legal option of opting out of paying Social Security based on religious grounds. Read about this. Some priests have told me this ain’t a prudent course of action, especially if you are not vested in Medicare. Medical costs are high, so weigh the pros and cons of opting out. Opting out is a permanent decision and can’t be revoked, so tread wisely and prudently. Speak to your vicar for priests as well about your diocese's policy on opting out on religious grounds. The IRS' information on this is found here.

4) Get a copy of the 2005 “Income Taxes For Priests Only” published by the National Federation of Priests Councils (NFPC), and written by Wayne Martin Lenell. It has useful information in there and sound tax advice. I strongly urge you to get a copy.

5) Get the free IRS publication 517 (Social Security and Other Information for Members of the Clergy). This is very helpful. Also, get Publication 535 (Business Expenses). Again, these are free, so call 1-800-TAX-FORM.

I know, I know….I shouldn'be be giving tax advice. But if I can save one seminarian out there from oweing a whopping amount of tax because his diocese didn’t care to inform him about these simple things, then it’s all for the good.

That publication from NFPC said something quite important about Catholic priests and taxes. It may be good for the laity to read this:

“For whatever reason Catholic priests earn less than their Protestant counterparts. Generally, and compared to other denominations, Catholic priests receive the greatest amount of pre-ordination training, make the most personal lifestyle sacrifices, have the largest congregations, yet earn the lowest pay.

“Further, even within the Church itself, priests are often paid less than lay employees. For example, it is not unusual for a pastor of a large parish to be responsible for the operation of a parochial school. The pastor supervises the school principal who often earns more than the pastor. Sometimes, the pastor earns less than the teachers, janitors, and office staff!....

"A priest doesn't make much money, but he sure pays a lot of tax....A priest will often find his Federal tax liability to be in the range of 30%. This is because a priest pays two Federal taxes: income taxes and self-employement Social Security tax....Add to that state and local income taxes and priests find their income tax burden absorbing over one-third of their cash income."

*Sigh*.....death and taxes, in Eden.

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