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Taxaid com 5. Taxaid com   Soil and Water Conservation Expenses Table of Contents Introduction Topics - This chapter discusses: Business of Farming Plan Certification Conservation ExpensesWater well. Taxaid com Assessment by Conservation DistrictAssessment for Depreciable Property 25% Limit on DeductionNet operating loss. Taxaid com When to Deduct or Capitalize Sale of a Farm Introduction If you are in the business of farming, you can choose to deduct certain expenses for: Soil or water conservation, Prevention of erosion of land used in farming, or Endangered species recovery. Taxaid com Otherwise, these are capital expenses that must be added to the basis of the land. Taxaid com (See chapter 6 for information on determining basis. Taxaid com ) Conservation expenses for land in a foreign country do not qualify for this special treatment. Taxaid com The deduction for conservation expenses cannot be more than 25% of your gross income from farming. Taxaid com See 25% Limit on Deduction , later. Taxaid com Although some expenses are not deductible as soil and water conservation expenses, they may be deductible as ordinary and necessary farm expenses. Taxaid com These include interest and taxes, the cost of periodically clearing brush from productive land, the regular removal of sediment from a drainage ditch, and expenses paid or incurred primarily to produce an agricultural crop that may also conserve soil. Taxaid com You must include in income most government payments for approved conservation practices. Taxaid com However, you can exclude some payments you receive under certain cost-sharing conservation programs. Taxaid com For more information, see Agricultural Program Payments in chapter 3. Taxaid com To get the full deduction to which you are entitled, you should maintain your records to clearly distinguish between your ordinary and necessary farm business expenses and your soil and water conservation expenses. Taxaid com Topics - This chapter discusses: Business of farming Plan certification Conservation expenses Assessment by conservation district 25% limit on deduction When to deduct or capitalize Sale of a farm Business of Farming For purposes of soil and water conservation expenses, you are in the business of farming if you cultivate, operate, or manage a farm for profit, either as an owner or a tenant. Taxaid com You are not in the business of farming if you cultivate or operate a farm for recreation or pleasure, rather than for profit. Taxaid com You are not farming if you are engaged only in forestry or the growing of timber. Taxaid com Farm defined. Taxaid com   A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. Taxaid com It also includes plantations, ranches, ranges, and orchards. Taxaid com A fish farm is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc. Taxaid com It does not include an area where they are merely caught or harvested. Taxaid com A plant nursery is a farm for purposes of deducting soil and water conservation expenses. Taxaid com Farm rental. Taxaid com   If you own a farm and receive farm rental payments based on farm production, either in cash or crop shares, you are in the business of farming. Taxaid com If you get cash rental for a farm you own that is not used in farm production, you cannot deduct soil and water conservation expenses for that farm. Taxaid com   If you receive a fixed rental payment that is not based on farm production, you are in the business of farming only if you materially participate in operating or managing the farm. Taxaid com Example. Taxaid com You own a farm in Iowa and live in California. Taxaid com You rent the farm for $175 in cash per acre and do not materially participate in producing or managing production of the crops grown on the farm. Taxaid com You cannot deduct your soil conservation expenses for this farm. Taxaid com You must capitalize the expenses and add them to the basis of the land. Taxaid com     For more information, see Material participation for landlords under Landlord Participation in Farming in chapter 12. Taxaid com Plan Certification You can deduct soil and water conservation expenses only if they are consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture. Taxaid com If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency. Taxaid com Keep a copy of the plan with your books and records to support your deductions. Taxaid com Conservation plan. Taxaid com   A conservation plan includes the farming conservation practices approved for the area where your farmland is located. Taxaid com There are three types of approved plans. Taxaid com NRCS individual site plans. Taxaid com These plans are issued individually to farmers who request assistance from NRCS to develop a conservation plan designed specifically for their farmland. Taxaid com NRCS county plans. Taxaid com These plans include a listing of farm conservation practices approved for the county where the farmland is located. Taxaid com You can deduct expenses for conservation practices not included on the NRCS county plans only if the practice is a part of an individual site plan. Taxaid com Comparable state agency plans. Taxaid com These plans are approved by state agencies and can be approved individual site plans or county plans. Taxaid com   A list of NRCS conservation programs is available at www. Taxaid com nrcs. Taxaid com usda. Taxaid com gov/programs. Taxaid com Individual site plans can be obtained from NRCS offices and the comparable state agencies. Taxaid com Conservation Expenses You can deduct conservation expenses only for land you or your tenant are using, or have used in the past, for farming. Taxaid com These expenses include, but are not limited to, the following. Taxaid com The treatment or movement of earth, such as: Leveling, Conditioning, Grading, Terracing, Contour furrowing, and Restoration of soil fertility. Taxaid com The construction, control, and protection of: Diversion channels, Drainage ditches, Irrigation ditches, Earthen dams, and Watercourses, outlets, and ponds. Taxaid com The eradication of brush. Taxaid com The planting of windbreaks. Taxaid com You cannot deduct expenses to drain or fill wetlands, or to prepare land for center pivot irrigation systems, as soil and water conservation expenses. Taxaid com These expenses are added to the basis of the land. Taxaid com If you choose to deduct soil and water conservation expenses, you cannot exclude from gross income any cost-sharing payments you receive for those expenses. Taxaid com See chapter 3 for information about payments eligible for the cost-sharing exclusion. Taxaid com New farm or farmland. Taxaid com   If you acquire a new farm or new farmland from someone who was using it in farming immediately before you acquired the land, soil and water conservation expenses you incur on it will be treated as made on land used in farming at the time the expenses were paid or incurred. Taxaid com You can deduct soil and water conservation expenses for this land if your use of it is substantially a continuation of its use in farming. Taxaid com The new farming activity does not have to be the same as the old farming activity. Taxaid com For example, if you buy land that was used for grazing cattle and then prepare it for use as an apple orchard, you can deduct your conservation expenses. Taxaid com Land not used for farming. Taxaid com   If your conservation expenses benefit both land that does not qualify as land used for farming and land that does qualify, you must allocate the expenses between the two types of land. Taxaid com For example, if the expenses benefit 200 acres of your land, but only 120 acres of this land are used for farming, then you can deduct 60% (120 ÷ 200) of the expenses. Taxaid com You can use another method to allocate these expenses if you can clearly show that your method is more reasonable. Taxaid com Depreciable conservation assets. Taxaid com   You generally cannot deduct your expenses for depreciable conservation assets. Taxaid com However, you can deduct certain amounts you pay or incur for an assessment for depreciable property that a soil and water conservation or drainage district levies against your farm. Taxaid com See Assessment for Depreciable Property , later. Taxaid com   You must capitalize expenses to buy, build, install, or improve depreciable structures or facilities. Taxaid com These expenses include those for materials, supplies, wages, fuel, hauling, and moving dirt when making structures such as tanks, reservoirs, pipes, culverts, canals, dams, wells, or pumps composed of masonry, concrete, tile, metal, or wood. Taxaid com You recover your capital investment through annual allowances for depreciation. Taxaid com   You can deduct soil and water conservation expenses for nondepreciable earthen items. Taxaid com Nondepreciable earthen items include certain dams, ponds, and terraces described under Property Having a Determinable Useful Life in chapter 7. Taxaid com Water well. Taxaid com   You cannot deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. Taxaid com It is a capital expense. Taxaid com You recover your cost through depreciation. Taxaid com You also must capitalize your cost for drilling a test hole. Taxaid com If the test hole produces no water and you continue drilling, the cost of the test hole is added to the cost of the producing well. Taxaid com You can recover the total cost through depreciation deductions. Taxaid com   If a test hole, dry hole, or dried-up well (resulting from prolonged lack of rain, for instance) is abandoned, you can deduct your unrecovered cost in the year of abandonment. Taxaid com Abandonment means that all economic benefits from the well are terminated. Taxaid com For example, filling or sealing a well excavation or casing so that all economic benefits from the well are terminated constitutes an abandonment. Taxaid com Endangered species recovery expenses. Taxaid com   If you are in the business of farming and meet other specific requirements, you can choose to deduct the conservation expenses discussed earlier as endangered species recovery expenses. Taxaid com Otherwise, these are capital expenses that must be added to the basis of the land. Taxaid com   The expenses must be paid or incurred for the purpose of achieving site-specific management actions recommended in a recovery plan approved under section 4(f) of the Endangered Species Act of 1973. Taxaid com See Internal Revenue Code section 175 for more information. Taxaid com Assessment by Conservation District In some localities, a soil or water conservation or drainage district incurs expenses for soil or water conservation and levies an assessment against the farmers who benefit from the expenses. Taxaid com You can deduct as a conservation expense amounts you pay or incur for the part of an assessment that: Covers expenses you could deduct if you had paid them directly, or Covers expenses for depreciable property used in the district's business. Taxaid com Assessment for Depreciable Property You generally can deduct as a conservation expense amounts you pay or incur for the part of a conservation or drainage district assessment that covers expenses for depreciable property. Taxaid com This includes items such as pumps, locks, concrete structures (including dams and weir gates), draglines, and similar equipment. Taxaid com The depreciable property must be used in the district's soil and water conservation activities. Taxaid com However, the following limits apply to these assessments. Taxaid com The total assessment limit. Taxaid com The yearly assessment limit. Taxaid com After you apply these limits, the amount you can deduct is added to your other conservation expenses for the year. Taxaid com The total for these expenses is then subject to the 25% of gross income from farming limit on the deduction, discussed later. Taxaid com See Table 5-1 for a brief summary of these limits. Taxaid com Table 5-1. Taxaid com Limits on Deducting an Assessment by a Conservation District for Depreciable Property Total Limit on Deduction for Assessment for Depreciable Property Yearly Limit on Deduction for Assessment for Depreciable Property Yearly Limit for All Conservation Expenses 10% of: $500 + 10% of: 25% of: Total assessment against all members of the district for the property. Taxaid com Your deductible share of the cost to the district for the property. Taxaid com Your gross income from farming. Taxaid com No one taxpayer can deduct more than 10% of the total assessment. Taxaid com Any amount over 10% is a capital expense and is added to the basis of your land. Taxaid com If an assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. Taxaid com If the amount you pay or incur for any year is more than the limit, you can deduct for that year only 10% of your deductible share of the cost. Taxaid com You can deduct the remainder in equal amounts over the next 9 tax years. Taxaid com Limit for all conservation expenses, including assessments for depreciable property. Taxaid com Amounts greater than 25% can be carried to the following year and added to that year's expenses. Taxaid com The total is then subject to the 25% of gross income from farming limit in that year. Taxaid com To ensure your deduction is within the deduction limits, keep records to show the following. Taxaid com The total assessment against all members of the district for the depreciable property. Taxaid com Your deductible share of the cost to the district for the depreciable property. Taxaid com Your gross income from farming. Taxaid com Total assessment limit. Taxaid com   You cannot deduct more than 10% of the total amount assessed to all members of the conservation or drainage district for the depreciable property. Taxaid com This applies whether you pay the assessment in one payment or in installments. Taxaid com If your assessment is more than 10% of the total amount assessed, both the following rules apply. Taxaid com The amount over 10% is a capital expense and is added to the basis of your land. Taxaid com If the assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. Taxaid com Yearly assessment limit. Taxaid com   The maximum amount you can deduct in any one year is the total of 10% of your deductible share of the cost as explained earlier, plus $500. Taxaid com If the amount you pay or incur is equal to or less than the maximum amount, you can deduct it in the year it is paid or incurred. Taxaid com If the amount you pay or incur is more, you can deduct in that year only 10% of your deductible share of the cost. Taxaid com You can deduct the remainder in equal amounts over the next 9 tax years. Taxaid com Your total conservation expense deduction for each year is also subject to the 25% of gross income from farming limit on the deduction, discussed later. Taxaid com Example 1. Taxaid com This year, the soil conservation district levies and you pay an assessment of $2,400 against your farm. Taxaid com Of the assessment, $1,500 is for digging drainage ditches. Taxaid com You can deduct this part as a soil or conservation expense as if you had paid it directly. Taxaid com The remaining $900 is for depreciable equipment to be used in the district's irrigation activities. Taxaid com The total amount assessed by the district against all its members for the depreciable equipment is $7,000. Taxaid com The total amount you can deduct for the depreciable equipment is limited to 10% of the total amount assessed by the district against all its members for depreciable equipment, or $700. Taxaid com The $200 excess ($900 − $700) is a capital expense you must add to the basis of your farm. Taxaid com To figure the maximum amount you can deduct for the depreciable equipment this year, multiply your deductible share of the total assessment ($700) by 10%. Taxaid com Add $500 to the result for a total of $570. Taxaid com Your deductible share, $700, is greater than the maximum amount deductible in one year, so you can deduct only $70 of the amount you paid or incurred for depreciable property this year (10% of $700). Taxaid com You can deduct the balance at the rate of $70 a year over the next 9 years. Taxaid com You add $70 to the $1,500 portion of the assessment for drainage ditches. Taxaid com You can deduct $1,570 of the $2,400 assessment as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed later. Taxaid com Example 2. Taxaid com Assume the same facts in Example 1 except that $1,850 of the $2,400 assessment is for digging drainage ditches and $550 is for depreciable equipment. Taxaid com The total amount assessed by the district against all its members for depreciable equipment is $5,500. Taxaid com The total amount you can deduct for the depreciable equipment is limited to 10% of this amount, or $550. Taxaid com The maximum amount you can deduct this year for the depreciable equipment is $555 (10% of your deductible share of the total assessment, $55, plus $500). Taxaid com Since your deductible share is less than the maximum amount deductible in one year, you can deduct the entire $550 this year. Taxaid com You can deduct the entire assessment, $2,400, as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed below. Taxaid com Sale or other disposal of land during 9-year period. Taxaid com   If you dispose of the land during the 9-year period for deducting conservation expenses subject to the yearly limit, any amounts you have not yet deducted because of this limit are added to the basis of the property. Taxaid com Death of farmer during 9-year period. Taxaid com   If a farmer dies during the 9-year period, any remaining amounts not yet deducted are deducted in the year of death. Taxaid com 25% Limit on Deduction The total deduction for conservation expenses in any tax year is limited to 25% of your gross income from farming for the year. Taxaid com Gross income from farming. Taxaid com   Gross income from farming is the income you derive in the business of farming from the production of crops, fish, fruits, other agricultural products, or livestock. Taxaid com Gains from sales of draft, breeding, or dairy livestock are included. Taxaid com Gains from sales of assets such as farm machinery, or from the disposition of land, are not included. Taxaid com Carryover of deduction. Taxaid com   If your deductible conservation expenses in any year are more than 25% of your gross income from farming for that year, you can carry the unused deduction over to later years. Taxaid com However, the deduction in any later year is limited to 25% of the gross income from farming for that year as well. Taxaid com Example. Taxaid com In 2012, you have gross income of $32,000 from two farms. Taxaid com During the year, you incurred $10,000 of deductible soil and water conservation expenses for one of the farms. Taxaid com However, your deduction is limited to 25% of $32,000, or $8,000. Taxaid com The $2,000 excess ($10,000 − $8,000) is carried over to 2013 and added to deductible soil and water conservation expenses made in that year. Taxaid com The total of the 2012 carryover plus 2013 expenses is deductible in 2013, subject to the limit of 25% of your gross income from farming in 2013. Taxaid com Any expenses over the limit in that year are carried to 2014 and later years. Taxaid com Net operating loss. Taxaid com   The deduction for soil and water conservation expenses, after applying the 25% limit, is included when figuring a net operating loss (NOL) for the year. Taxaid com If the NOL is carried to another year, the soil and water conservation deduction included in the NOL is not subject to the 25% limit in the year to which it is carried. Taxaid com When to Deduct or Capitalize If you choose to deduct soil and water conservation expenses, you must deduct the total allowable amount on your tax return for the first year you pay or incur these expenses. Taxaid com If you do not choose to deduct the expenses, you must capitalize them. Taxaid com Change of method. Taxaid com   If you want to change your method for the treatment of soil and water conservation expenses, or you want to treat the expenses for a particular project or a single farm in a different manner, you must get the approval of the IRS. Taxaid com To get this approval, submit a written request by the due date of your return for the first tax year you want the new method to apply. Taxaid com You or your authorized representative must sign the request. Taxaid com   The request must include the following information. Taxaid com Your name and address. Taxaid com The first tax year the method or change of method is to apply. Taxaid com Whether the method or change of method applies to all your soil and water conservation expenses or only to those for a particular project or farm. Taxaid com If the method or change of method does not apply to all your expenses, identify the project or farm to which the expenses apply. Taxaid com The total expenses you paid or incurred in the first tax year the method or change of method is to apply. Taxaid com A statement that you will account separately in your books for the expenses to which this method or change of method relates. Taxaid com Send your request to the following  address. Taxaid com  Department of the Treasury Internal Revenue Service Center Cincinnati, OH 45999  For more information, see Change in  Accounting Method in chapter 2. Taxaid com Sale of a Farm If you sell your farm, you cannot adjust the basis of the land at the time of the sale for any unused carryover of soil and water conservation expenses (except for deductions of assessments for depreciable property, discussed earlier). Taxaid com However, if you acquire another farm and return to the business of farming, you can start taking deductions again for the unused carryovers. Taxaid com Gain on sale of farmland. Taxaid com   If you held the land 5 years or less before you sold it, gain on the sale of the land is treated as ordinary income up to the amount you previously deducted for soil and water conservation expenses. Taxaid com If you held the land less than 10 but more than 5 years, the gain is treated as ordinary income up to a specified percentage of the previous deductions. Taxaid com See Section 1252 property under Other Gains in chapter 9. Taxaid com Prev  Up  Next   Home   More Online Publications
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Taxaid com Publication 517 - Main Content Table of Contents Social Security CoverageCoverage of Members of the Clergy Coverage of Religious Workers (Church Employees) U. Taxaid com S. Taxaid com Citizens and Resident and Nonresident Aliens Ministerial ServicesMinisters Members of Religious Orders Christian Science Practitioners and Readers Exemption From Self-Employment (SE) TaxMembers of the Clergy Members of Recognized Religious Sects Self-Employment Tax: Figuring Net EarningsRegular Method Nonfarm Optional Method Income Tax: Income and ExpensesIncome Items Expense Items Income Tax Withholding and Estimated Tax Filing Your Return Retirement Savings ArrangementsDeducting contributions to tax-sheltered annuity plans. Taxaid com Full-time student. Taxaid com Adjusted gross income. Taxaid com More information. Taxaid com Earned Income Credit Comprehensive ExampleForm W-2 From Church Form W-2 From College Schedule C-EZ (Form 1040) Form 2106-EZ Schedule A (Form 1040) Schedule SE (Form 1040) Form 1040 Attachment 1 Attachment 2 How To Get Tax HelpLow Income Taxpayer Clinics Social Security Coverage This section gives information about which system (SECA or FICA) is used to collect social security and Medicare taxes from members of the clergy (ministers, members of a religious order, and Christian Science practitioners and readers) and religious workers (church employees). Taxaid com Coverage of Members of the Clergy The services you perform in the exercise of your ministry, of the duties required by your religious order, or of your profession as a Christian Science practitioner or reader are covered by social security and Medicare under SECA. Taxaid com Your earnings for these ministerial services (defined later) are subject to self-employment (SE) tax unless one of the following applies. Taxaid com You are a member of a religious order who has taken a vow of poverty. Taxaid com You ask the Internal Revenue Service (IRS) for an exemption from SE tax for your services and the IRS approves your request. Taxaid com See Exemption From Self-Employment (SE) Tax , later. Taxaid com You are subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. Taxaid com For more information, see Bilateral Social Security (Totalization) Agreements in Publication 54. Taxaid com Your earnings that are not from ministerial services may be subject to social security tax under FICA or SECA according to the rules that apply to taxpayers in general. Taxaid com See Ministerial Services , later. Taxaid com Ministers If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax, even if you perform these services as an employee of that church. Taxaid com However, you can request that the IRS grant you an exemption, as discussed under Exemption From Self-Employment (SE) Tax , later. Taxaid com For the specific services covered, see Ministerial Services , later. Taxaid com Ministers defined. Taxaid com   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Taxaid com Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. Taxaid com   If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes. Taxaid com Employment status for other tax purposes. Taxaid com   Even though all of your income from performing ministerial services is subject to self-employment tax for social security tax purposes, you may be an employee for income tax or retirement plan purposes in performing those same services. Taxaid com For income tax or retirement plan purposes, your income earned as an employee will be considered wages. Taxaid com Common-law employee. Taxaid com   Under common-law rules, you are considered either an employee or a self-employed person. Taxaid com Generally, you are an employee if you perform services for someone who has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. Taxaid com For more information about the common-law rules, see Publication 15-A, Employer's Supplemental Tax Guide. Taxaid com   If a congregation employs you and pays you a salary, you are generally a common-law employee and income from the exercise of your ministry is wages for income tax purposes. Taxaid com However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are not wages; such amounts are self-employment income for both income tax purposes and social security tax purposes. Taxaid com Example. Taxaid com A church hires and pays you a salary to perform ministerial services subject to its control. Taxaid com Under the common-law rules, you are an employee of the church while performing those services. Taxaid com Form SS-8. Taxaid com   If you are not certain whether you are an employee or a self-employed person, you can get a determination from the IRS by filing Form SS-8. Taxaid com Members of Religious Orders If you are a member of a religious order who has not taken a vow of poverty, your earnings for ministerial services you perform as a member of the order are subject to SE tax. Taxaid com See Ministerial Services , later. Taxaid com However, you can request that the IRS grant you an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Taxaid com Vow of poverty. Taxaid com   If you are a member of a religious order and have taken a vow of poverty, you are already exempt from paying SE tax on your earnings for ministerial services you perform as an agent of your church or its agencies. Taxaid com You do not need to request a separate exemption. Taxaid com For income tax purposes, the earnings are tax free to you. Taxaid com Your earnings are considered the income of the religious order. Taxaid com Services covered under FICA at the election of the order. Taxaid com   However, even if you have taken a vow of poverty, the services you perform for your church or its agencies may be covered under social security. Taxaid com Your services are covered if your order, or an autonomous subdivision of the order, elects social security coverage for its current and future vow-of-poverty members. Taxaid com   The order or subdivision elects coverage by filing Form SS-16. Taxaid com The election may cover certain vow-of-poverty members for a retroactive period of up to 20 calendar quarters before the quarter in which it files the certificate. Taxaid com If the election is made, the order or subdivision pays both the employer's and employee's share of the tax. Taxaid com You do not pay any of the FICA tax. Taxaid com Services performed outside the order. Taxaid com   Even if you are a member of a religious order who has taken a vow of poverty and the order requires you to turn over amounts you earn, your earnings are subject to federal income tax and either SE tax or FICA tax (including estimated tax payments and/or withholding) if you: Are self-employed or an employee of an organization outside your religious community, and Perform work not required by, or done on behalf of, the order. Taxaid com   In these cases, your income from self-employment or as an employee of that outside organization is taxable to you directly. Taxaid com You may, however, be able to take a charitable deduction for the amount you turn over to the order. Taxaid com See Publication 526, Charitable Contributions. Taxaid com Rulings. Taxaid com   Organizations and individuals may request rulings from the IRS on whether they are religious orders, or members of a religious order, respectively, for FICA tax, SE tax, and federal income tax withholding purposes. Taxaid com To request a ruling, follow the procedures in Revenue Procedure 2014-1, 2014-1 I. Taxaid com R. Taxaid com B. Taxaid com 1, available at www. Taxaid com irs. Taxaid com gov/irb/2014-1_IRB/ar05. Taxaid com html. Taxaid com Christian Science Practitioners and Readers Generally, your earnings from services you perform in your profession as a Christian Science practitioner or reader are subject to SE tax. Taxaid com However, you can request an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Taxaid com Practitioners. Taxaid com   Christian Science practitioners are members in good standing of the Mother Church, The First Church of Christ, Scientist, in Boston, Massachusetts, who practice healing according to the teachings of Christian Science. Taxaid com State law specifically exempts Christian Science practitioners from licensing requirements. Taxaid com   Some Christian Science practitioners also are Christian Science teachers or lecturers. Taxaid com Income from teaching or lecturing is considered the same as income from their work as practitioners. Taxaid com Readers. Taxaid com   For tax purposes, Christian Science readers are considered the same as ordained, commissioned, or licensed ministers. Taxaid com Coverage of Religious Workers (Church Employees) If you are a religious worker (a church employee) and are not in one of the classes already discussed, your wages are generally subject to social security and Medicare tax under FICA, not SECA. Taxaid com Some exceptions are discussed next. Taxaid com Election by Church To Exclude Its Employees From FICA Coverage Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. Taxaid com If your employer makes this election, it does not pay the employer's portion of the FICA taxes or withhold from your pay your portion of the FICA taxes. Taxaid com Instead, your wages are subject to SECA and you must pay SE tax on your wages if they exceed $108. Taxaid com 28 during the tax year. Taxaid com However, you can request an exemption from SE tax if you are a member of a recognized religious sect, as discussed below. Taxaid com Churches and church organizations make this election by filing two copies of Form 8274. Taxaid com For more information about making this election, see Form 8274. Taxaid com Election by Certain Church Employees Who Are Opposed to Social Security and Medicare You may be able to choose to be exempt from social security and Medicare taxes, including the SE tax, if you are a member of a recognized religious sect or division and work for a church (or church-controlled nonprofit division) that does not pay the employer's part of the social security tax on wages. Taxaid com This exemption does not apply to your service, if any, as a minister of a church or as a member of a religious order. Taxaid com Make this choice by filing Form 4029. Taxaid com See Requesting Exemption—Form 4029 , later, under Members of Recognized Religious Sects. Taxaid com U. Taxaid com S. Taxaid com Citizens and Resident and Nonresident Aliens To be covered under the SE tax provisions (SECA), individuals generally must be citizens or resident aliens of the United States. Taxaid com Nonresident aliens are not covered under SECA unless a social security agreement in effect between the United States and the foreign country determines that you are covered under the U. Taxaid com S. Taxaid com social security system. Taxaid com To determine your alien status, see Publication 519, U. Taxaid com S. Taxaid com Tax Guide for Aliens. Taxaid com Residents of Puerto Rico, the U. Taxaid com S. Taxaid com Virgin Islands, Guam, the CNMI, and American Samoa. Taxaid com   If you are a resident of one of these U. Taxaid com S. Taxaid com possessions but not a U. Taxaid com S. Taxaid com citizen, for SE tax purposes you are treated the same as a citizen or resident alien of the United States. Taxaid com For information on figuring the tax, see Self-Employment Tax: Figuring Net Earnings , later. Taxaid com Ministerial Services Ministerial services, in general, are the services you perform in the exercise of your ministry, in the exercise of your duties as required by your religious order, or in the exercise of your profession as a Christian Science practitioner or reader. Taxaid com Income you receive for performing ministerial services is subject to SE tax unless you have an exemption as explained later. Taxaid com Even if you have an exemption, only the income you receive for performing ministerial services is exempt. Taxaid com The exemption does not apply to any other income. Taxaid com The following discussions provide more detailed information on ministerial services of ministers, members of a religious order, and Christian Science practitioners and readers. Taxaid com Ministers Most services you perform as a minister, priest, rabbi, etc. Taxaid com , are ministerial services. Taxaid com These services include: Performing sacerdotal functions, Conducting religious worship, and Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination. Taxaid com You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities. Taxaid com 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. Taxaid com Services for nonreligious organizations. Taxaid com   Your services for a nonreligious organization are ministerial services if the services are assigned or designated by your church. Taxaid com Assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship. Taxaid com   If your services are not assigned or designated by your church, they are ministerial services only if they involve performing sacerdotal functions or conducting religious worship. Taxaid com Services that are not part of your ministry. Taxaid com   Income from services you perform as an employee that are not ministerial services is subject to social security and Medicare tax withholding under FICA (not SECA) under the rules that apply to employees in general. Taxaid com The following are not ministerial services. Taxaid com Services you perform for nonreligious organizations other than the services stated above. Taxaid com 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. Taxaid com These services are not ministerial services even if you are performing sacerdotal functions or conducting religious worship. Taxaid com (For example, if you perform services as a chaplain in the Armed Forces of the United States, those services are not ministerial services. Taxaid com ) Services you perform in a government-owned and operated hospital. Taxaid com (These services are considered performed by a government employee, not by a minister as part of the ministry. Taxaid com ) 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 ministerial services. Taxaid com Books or articles. Taxaid com   Writing religious books or articles is considered to be in the exercise of your ministry and is considered a ministerial service. Taxaid com   This rule also applies to members of religious orders and to Christian Science practitioners and readers. Taxaid com Members of Religious Orders Services you perform as a member of a religious order in the exercise of duties required by the order are ministerial services. Taxaid com The services are considered ministerial because you perform them as an agent of the order. Taxaid com For example, if the order directs you 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. Taxaid com However, if the order directs you to work outside the order, this 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. Taxaid com Effect of employee status. Taxaid com   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. Taxaid com In this case, your earnings from the services are taxed under the rules that apply to employees in general, not under the rules for services provided as agent for the order. Taxaid com This result is true even if you have taken a vow of poverty. Taxaid com Example. Taxaid com Pat Brown and Chris Green are members of a religious order and have taken vows of poverty. Taxaid com They renounce all claims to their earnings. Taxaid com The earnings belong to the order. Taxaid com Pat is a licensed attorney. Taxaid com The superiors of the order instructed her to get a job with a law firm. Taxaid com Pat joined a law firm as an employee and, as she requested, the firm made the salary payments directly to the order. Taxaid com Chris is a secretary. Taxaid com The superiors of the order instructed him to accept a job with the business office of the church that supervises the order. Taxaid com Chris took the job and gave all his earnings to the order. Taxaid com Pat's services are not duties required by the order. Taxaid com Her earnings are subject to social security and Medicare tax under FICA and to federal income tax. Taxaid com Chris' services are duties required by the order. Taxaid com He is acting as an agent of the order and not as an employee of a third party. Taxaid com He does not include the earnings in gross income, and they are not subject to income tax withholding or to social security and Medicare tax under FICA or SECA. Taxaid com Christian Science Practitioners and Readers Services you perform as a Christian Science practitioner or reader in the exercise of your profession are ministerial services. Taxaid com Amounts you receive for performing these services are generally subject to SE tax. Taxaid com You may request an exemption from SE tax, discussed next, which applies only to those services. Taxaid com Exemption From Self-Employment (SE) Tax You can request an exemption from SE tax if you are a member of the clergy (minister, member of a religious order, or Christian Science practitioner or reader) or a member of a recognized religious sect. Taxaid com Generally, members of religious orders who have taken a vow of poverty are already exempt from paying SE tax, as discussed earlier under Members of Religious Orders under Social Security Coverage. Taxaid com They do not have to request the exemption. Taxaid com Who cannot be exempt. Taxaid com   You cannot be exempt from SE tax if you made one of the following elections to be covered under social security. Taxaid com These elections are irrevocable. Taxaid com You elected to be covered under social security by filing Form 2031, Revocation of Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners, for your 1986, 1987, 2000, or 2001 tax year. Taxaid com You elected before 1968 to be covered under social security for your ministerial services. Taxaid com Requesting exemption. Taxaid com    Table 2, earlier, briefly summarizes the procedure for requesting exemption from the SE tax. Taxaid com More detailed explanations follow. Taxaid com If you are a minister, member of a religious order, or Christian Science practitioner, an approved exemption only applies to earnings you receive for ministerial services, discussed earlier. Taxaid com It does not apply to any other self-employment income. Taxaid com Table 2. Taxaid com The Self-Employment Tax Exemption Application and Approval Process   Who Can Apply Members of the Clergy Members of Recognized  Religious Sects How File Form 4361 File Form 4029 When File by the due date (including extensions) of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment (at least part from ministerial services) File anytime Approval If approved, you will receive an approved copy of Form 4361 If approved, you will receive an approved copy of Form 4029 Effective Date For all tax years after 1967 in which you have at least $400 of net earnings from self-employment For all tax years beginning with the first year you meet the eligibility requirements discussed later Members of the Clergy To claim the exemption from SE tax, you must meet all of the following conditions. Taxaid com You file Form 4361, described below under Requesting Exemption—Form 4361 . Taxaid com You are conscientiously opposed to public insurance because of your individual religious considerations (not because of your general conscience), or you are opposed because of the principles of your religious denomination. Taxaid com You file for other than economic reasons. Taxaid com You inform the ordaining, commissioning, or licensing body of your church or order that you are opposed to public insurance if you are a minister or a member of a religious order (other than a vow-of-poverty member). Taxaid com This requirement does not apply to Christian Science practitioners or readers. Taxaid com You establish that the organization that ordained, commissioned, or licensed you, or your religious order, is a tax-exempt religious organization. Taxaid com You establish that the organization is a church or a convention or association of churches. Taxaid com You did not make an election discussed earlier under Who cannot be exempt . Taxaid com You sign and return the statement the IRS mails to you to certify that you are requesting an exemption based on the grounds listed on the statement. Taxaid com Requesting Exemption—Form 4361 To request exemption from SE tax, file Form 4361 in triplicate (original and two copies) with the IRS. Taxaid com The IRS will return to you a copy of the Form 4361 that you filed indicating whether it has approved your exemption. Taxaid com If it is approved, keep the approved copy of Form 4361 in your permanent records. Taxaid com When to file. Taxaid com   File Form 4361 by the date your income tax return is due, including extensions, for the second tax year in which both of the following are true. Taxaid com You have net earnings from self-employment of at least $400. Taxaid com Any part of those net earnings was from ministerial services you performed as a: Minister, Member of a religious order, or Christian Science practitioner or reader. Taxaid com The 2 years do not have to be consecutive tax years. Taxaid com    The approval process can take some time, so you should file Form 4361 as soon as possible. Taxaid com Example 1. Taxaid com Rev. Taxaid com Lawrence Jaeger, a clergyman ordained in 2013, has net self-employment earnings as a minister of $450 in 2013 and $500 in 2014. Taxaid com He must file his application for exemption by the due date, including extensions, for his 2014 income tax return. Taxaid com However, if Rev. Taxaid com Jaeger does not receive IRS approval for an exemption by April 15, 2015, his SE tax for 2014 is due by that date. Taxaid com Example 2. Taxaid com Rev. Taxaid com Louise Wolfe has only $300 in net self-employment earnings as a minister in 2013, but earned more than $400 in 2012 and expects to earn more than $400 in 2014. Taxaid com She must file her application for exemption by the due date, including extensions, for her 2014 income tax return. Taxaid com However, if she does not receive IRS approval for an exemption by April 15, 2015, her SE tax for 2014 is due by that date. Taxaid com Example 3. Taxaid com In 2011, Rev. Taxaid com David Moss was ordained a minister and had $700 in net self-employment earnings as a minister. Taxaid com In 2012, he received $1,000 as a minister, but his related expenses were over $1,000. Taxaid com Therefore, he had no net self-employment earnings as a minister in 2012. Taxaid com Also in 2012, he opened a book store and had $8,000 in net self-employment earnings from the store. Taxaid com In 2013, he had net self-employment earnings of $1,500 as a minister and $10,000 net self-employment earnings from the store. Taxaid com Rev. Taxaid com Moss had net earnings from self-employment in 2011 and 2013 that were $400 or more each year, and part of the self-employment earnings in each of those years was for his services as a minister. Taxaid com Thus, he must file his application for exemption by the due date, including extensions, for his 2013 income tax return. Taxaid com Death of individual. Taxaid com   The right to file an application for exemption ends with an individual's death. Taxaid com A surviving spouse, executor, or administrator cannot file an exemption application for a deceased clergy member. Taxaid com Effective date of exemption. Taxaid com   An approved exemption is effective for all tax years after 1967 in which you have $400 or more of net earnings from self-employment and any part of those earnings is for services as a member of the clergy. Taxaid com Once the exemption is approved, it is irrevocable. Taxaid com Example. Taxaid com Rev. Taxaid com Trudy Austin, ordained in 2010, had $400 or more in net self-employment earnings as a minister in both 2010 and 2013. Taxaid com She files an application for exemption on February 20, 2014. Taxaid com If an exemption is granted, it is effective for 2010 and the following years. Taxaid com Refunds of SE tax. Taxaid com   If, after receiving an approved Form 4361, you find that you overpaid SE tax, you can file a claim for refund on Form 1040X. Taxaid com Generally, for a refund, you must file Form 1040X within 3 years from the date you filed the return or within 2 years from the date you paid the tax, whichever is later. Taxaid com A return you filed, or tax you paid, before the due date is considered to have been filed or paid on the due date. Taxaid com   If you file a claim after the 3-year period but within 2 years from the time you paid the tax, the credit or refund will not be more than the tax you paid within the 2 years immediately before you file the claim. Taxaid com Members of Recognized Religious Sects If you are a member of a recognized religious sect, or a division of a recognized religious sect, you can apply for an exemption from payment of social security and Medicare taxes on both your self-employment income and the wages you earn from an employer who also has an exemption. Taxaid com Exception. Taxaid com   If you received social security benefits or payments, or anyone else received these benefits or payments based on your wages or self-employment income, you cannot apply. Taxaid com However, if you pay your benefits back, you may be considered for exemption. Taxaid com Contact your local Social Security Administration office to find out the amount you must pay back. Taxaid com Eligibility requirements. Taxaid com   To claim this exemption from SE tax, all the following requirements must be met. Taxaid com You must file Form 4029, discussed later under Requesting Exemption—Form 4029 . Taxaid com As a follower of the established teachings of the sect or division, you must be conscientiously opposed to accepting benefits of any private or public insurance that makes payments for death, disability, old age, retirement, or medical care, or provides services for medical care. Taxaid com You must waive all rights to receive any social security payment or benefit and agree that no benefits or payments will be made to anyone else based on your wages and self-employment income. Taxaid com The Commissioner of Social Security must determine that: Your sect or division has the established teachings as described in (2) above, It is the practice, and has been for a substantial period of time, for members of the sect or division to provide for their dependent members in a manner that is reasonable in view of the members' general level of living, and The sect or division has existed at all times since December 31, 1950. Taxaid com Requesting Exemption—Form 4029 To request the exemption, file Form 4029 in triplicate (original and two copies) with the Social Security Administration at the address shown on the form. Taxaid com The sect or division must complete part of the form. Taxaid com The IRS will return to you a copy of the Form 4029 that you filed indicating whether it has approved your exemption. Taxaid com If it is approved, keep the approved copy of Form 4029 in your permanent records. Taxaid com When to file. Taxaid com   You can file Form 4029 at any time. Taxaid com   If you have an approved exemption from SE tax and for some reason that approved exemption ended, you must file a new Form 4029 if you subsequently meet the eligibility requirements, discussed earlier. Taxaid com See Effective date of exemption next for information on when the newly approved exemption would become effective. Taxaid com    If you have a previously approved exemption from SE tax and you change membership to another recognized religious sect, without any change to your eligibility requirements, then you do not need to file a new Form 4029. Taxaid com Effective date of exemption. Taxaid com   An approved exemption from SE tax generally is effective for all tax years beginning with the first year you meet the eligibility requirements discussed earlier. Taxaid com (For example, if you meet the eligibility requirements in 2011, you file Form 4029 in 2012, and the IRS approves your exemption in 2013, your exemption is effective for tax year 2011 and all later years. Taxaid com )   The exemption will end if you fail to meet the eligibility requirements or if the Commissioner of Social Security determines that the sect or division fails to meet them. Taxaid com You must notify the IRS within 60 days if you are no longer a member of the religious group, or if you no longer follow the established teachings of this group. Taxaid com The exemption will end for the tax year where you or your sect/division first fails to meet the eligibility requirements. Taxaid com Refunds of SE tax paid. Taxaid com    To get a refund of any SE tax you paid while the exemption was in effect, file Form 1040X. Taxaid com For information on filing this form, see Refunds of SE tax under Requesting Exemption—Form 4361, earlier. Taxaid com Exemption From FICA Taxes Generally, under FICA, the employer and the employee each pay half of the social security and Medicare tax. Taxaid com Both the employee and the employer, if they meet the eligibility requirements discussed earlier, can apply to be exempt from their share of FICA taxes on wages paid by the employer to the employee. Taxaid com A partnership in which each partner holds a religious exemption from social security and Medicare is an employer for this purpose. Taxaid com If the employer's application is approved, the exemption will apply only to FICA taxes on wages paid to employees who also received an approval of identical applications. Taxaid com Information for employers. Taxaid com   If you have an approved Form 4029 and you have an employee who has an approved Form 4029, do not report wages you paid to the employee as social security and Medicare wages. Taxaid com   If you have an employee who does not have an approved Form 4029, you must withhold the employee's share of social security and Medicare taxes and pay the employer's share. Taxaid com Form W-2. Taxaid com   When preparing a Form W-2 for an employee with an approved Form 4029, enter “Form 4029” in box 14, “Other. Taxaid com ” Do not make any entries in boxes 3, 4, 5, or 6. Taxaid com Forms 941, 943, and 944. Taxaid com   If both you and your employee have received approved Forms 4029, do not include these exempt wages on the following forms. Taxaid com Instead, follow the instructions given below. Taxaid com Form 941, Employer's QUARTERLY Federal Tax Return: check the box on line 4 and enter “Form 4029” in the empty space below the check box. Taxaid com Form 943, Employer's Annual Federal Tax Return for Agricultural Employees: enter “Form 4029” on the dotted line next to the lines 2 and 4 entry spaces. Taxaid com Form 944, Employer's ANNUAL Federal Tax Return: check the box on line 3 and enter “Form 4029” in the empty space below the check box. Taxaid com Effective date. Taxaid com   An approved exemption from FICA becomes effective on the first day of the first calendar quarter after the quarter in which you file Form 4029. Taxaid com The exemption will end on the last day of the calendar quarter before the quarter in which the employer, employee, sect, or division fails to meet the requirements. Taxaid com Self-Employment Tax: Figuring Net Earnings There are two methods for figuring your net earnings from self-employment as a member of the clergy or a religious worker. Taxaid com Regular method. Taxaid com Nonfarm optional method. Taxaid com You may find Worksheets 1 through 4 helpful in figuring your net earnings from self-employment. Taxaid com Blank worksheets are in the back of this publication, after the Comprehensive Example. Taxaid com Regular Method Most people use the regular method. Taxaid com Under this method, 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 or reader. Taxaid com Then, subtract your allowable business deductions and multiply the difference by 92. Taxaid com 35% (. Taxaid com 9235). Taxaid com Use Schedule SE (Form 1040) to figure your net earnings and SE tax. Taxaid com 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 92. Taxaid com 35% (. Taxaid com 9235). Taxaid com Do not reduce your wages by any business deductions when making this computation. Taxaid com Use Schedule SE (Form 1040), Section B, to figure your net earnings and SE tax. Taxaid com If you have an approved exemption, or you are automatically exempt, do not include the income or deductions from ministerial services in figuring your net earnings from self-employment. Taxaid com Amounts included in gross income. Taxaid com   To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income: Salaries and fees for your ministerial services (discussed earlier), Offerings you receive for marriages, baptisms, funerals, masses, etc. Taxaid com , 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. Taxaid com This amount is also subject to income tax. Taxaid com   For the income tax treatment of items (2) and (4), see Income Tax: Income and Expenses , later. Taxaid com Example. Taxaid com Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. Taxaid com The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. Taxaid com His church owns a parsonage that has a fair rental value of $12,000 per year. Taxaid com The church gives Pastor Adams the use of the parsonage. Taxaid com He is not exempt from SE tax. Taxaid com He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes. Taxaid com 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 $51,000 of which $17,000 ($5,000 plus $12,000) per year was designated as a rental allowance. Taxaid com Overseas duty. Taxaid com   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. Taxaid com S. Taxaid com citizen or resident alien serving abroad and living in a foreign country. Taxaid com   For information on excluding foreign earned income or the foreign housing amount, see Publication 54. Taxaid com Example. Taxaid com Diane Jones was the minister of a U. Taxaid com S. Taxaid com church in Mexico. Taxaid com She earned $35,000 in that position and was able to exclude it all for income tax purposes under the foreign earned income exclusion. Taxaid com The United States does not have a social security agreement with Mexico, so Mrs. Taxaid com Jones is subject to U. Taxaid com S. Taxaid com SE tax and must include $35,000 when figuring net earnings from self-employment. Taxaid com Specified U. Taxaid com S. Taxaid com possessions. Taxaid com    The exclusion from gross income for amounts derived from American Samoa or Puerto Rico does not apply in computing net earnings from self-employment. Taxaid com Also see Residents of Puerto Rico, the U. Taxaid com S. Taxaid com Virgin Islands, Guam, the CNMI, and American Samoa , earlier, under U. Taxaid com S. Taxaid com Citizens and Resident and Nonresident Aliens. Taxaid com Amounts not included in gross income. Taxaid com   Do not include the following amounts in gross income when figuring your net earnings from self-employment. Taxaid com Offerings that others made to the church. Taxaid com 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. Taxaid com Pension payments or retirement allowances you receive for your past ministerial services. Taxaid com The rental value of a parsonage or a parsonage allowance provided to you after you retire. Taxaid com Allowable deductions. Taxaid com   When figuring your net earnings from self-employment, deduct all your expenses related to your ministerial services performed as a self-employed person. Taxaid com These are ministerial expenses you incurred while working other than as a common-law employee of the church. Taxaid com They include expenses incurred in performing marriages and baptisms, and in delivering speeches. Taxaid com Deduct these expenses on Schedule C or C-EZ (Form 1040), and carry the net amount to line 2 of Schedule SE (Form 1040), Section A or B. Taxaid com   Wages earned as a common-law employee (explained earlier) of a church are generally subject to self-employment tax unless an exemption is requested, as discussed earlier under Exemption From Self-Employment (SE) Tax . Taxaid com Subtract any allowable expenses (including unreimbursed employee business expenses) from those wages, include the net amount on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Taxaid com Do not complete Schedule C or C-EZ (Form 1040). Taxaid com However, for income tax purposes, the expenses are allowed only as an itemized deduction on Schedule A (Form 1040) to the extent they exceed 2% of adjusted gross income. Taxaid com Employee reimbursement arrangements. Taxaid com   If you received an advance, allowance, or reimbursement for your employee expenses, how you report this amount and your employee expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. Taxaid com Ask your employer if you are not sure if it reimburses you using an accountable or a nonaccountable plan. Taxaid com Accountable plans. Taxaid com   To be an accountable plan, your employer's reimbursement arrangement must include all three of the following rules. Taxaid com 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. Taxaid com You must adequately account to your employer for these expenses within a reasonable period of time. Taxaid com You must return any excess reimbursement or allowance within a reasonable period of time. Taxaid com   The reimbursement is not reported on your Form W-2. Taxaid com Generally, if your expenses equal your reimbursement, you have no deduction. Taxaid com If your expenses are more than your reimbursement, you can deduct your excess expenses for SE tax and income tax purposes. Taxaid com Nonaccountable plan. Taxaid com   A nonaccountable plan is a reimbursement arrangement that does not meet all three of the rules listed under Accountable plans above. Taxaid com In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan. Taxaid com Excess reimbursements you fail to return to your employer. Taxaid com Reimbursement of nondeductible expenses related to your employer's business. Taxaid com   Your employer will combine any reimbursement paid to you under a nonaccountable plan with your wages, salary, or other compensation and report the combined total in box 1 of your Form W-2. Taxaid com Since reimbursements under a nonaccountable plan are included in your gross income, you can deduct your related expenses (for SE tax and income tax purposes) regardless of whether they are more than, less than, or equal to your reimbursement. Taxaid com   For more information on accountable and nonaccountable plans, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Taxaid com Married Couple Missionary Team If both spouses are 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 self-employment income according to the agreement. Taxaid com 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 only in the self-employment income of the spouse having the agreement. Taxaid com Earnings Subject to SE Tax For 2013, the maximum net earnings from self-employment subject to social security (old age, survivors, and disability insurance) tax is $113,700 minus any wages and tips you earned that were subject to social security tax. Taxaid com The tax rate for the social security part is 12. Taxaid com 4%. Taxaid com In addition, all of your net earnings are subject to the Medicare (hospital insurance) part of the SE tax. Taxaid com This tax rate is 2. Taxaid com 9%. Taxaid com The combined self-employment tax rate is 15. Taxaid com 3%. Taxaid com Additional Medicare Tax. Taxaid com   Beginning in 2013, a 0. Taxaid com 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status. Taxaid com Medicare wages and self-employment income are combined to determine if income exceeds the threshold. Taxaid com A self-employment loss is not considered for purposes of this tax. Taxaid com RRTA compensation is separately compared to the threshold. Taxaid com For more information, see Form 8959, Additional Medicare Tax, and its separate instructions. Taxaid com Nonfarm Optional Method You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. Taxaid com 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. Taxaid com You may use the nonfarm optional method if you meet all the following tests. Taxaid com You are self-employed on a regular basis. Taxaid com You meet this test if your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. Taxaid com The net earnings can be from either farm or nonfarm earnings or both. Taxaid com You have used this method less than 5 prior years. Taxaid com (There is a 5-year lifetime limit. Taxaid com ) The years do not have to be consecutive. Taxaid com Your net nonfarm profits were: Less than $5,024, and Less than 72. Taxaid com 189% of your gross nonfarm income. Taxaid com If you meet all three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method. Taxaid com Table 3. Taxaid com Figuring Nonfarm Net Earnings IF your gross nonfarm income is . Taxaid com . Taxaid com . Taxaid com THEN your net earnings are equal to . Taxaid com . Taxaid com . Taxaid com $6,960 or less Two-thirds of your gross nonfarm income. Taxaid com More than $6,960 $4,640. Taxaid com Actual net earnings. Taxaid com   Multiply your total earnings subject to SE tax by 92. Taxaid com 35% (. Taxaid com 9235) to get actual net earnings. Taxaid com Actual net earnings are equivalent to net earnings under the “Regular Method. Taxaid com ” More information. Taxaid com   For more information on the nonfarm optional method, see Publication 334, Tax Guide for Small Business, and the Schedule SE (Form 1040) instructions. Taxaid com Income Tax: Income and Expenses Some income and expense items are treated the same for both income tax and SE tax purposes and some are treated differently. Taxaid com Note. Taxaid com For purposes of this section, references to members of the clergy are only to ministers or members of a religious order. Taxaid com Income Items The tax treatment of offerings and fees, outside earnings, rental allowances, rental value of a parsonage, earnings of members of religious orders, and foreign earned income is discussed here. Taxaid com Offerings and Fees If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc. Taxaid com , in addition to your salary. Taxaid com If the offering is made to the religious institution, it is not taxable to you. Taxaid com Outside Earnings If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. Taxaid com However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. Taxaid com For more information, see Publication 526. Taxaid com Exclusion of Rental Allowance and Fair Rental Value of a Parsonage Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services. Taxaid com Services include: Ministerial services, discussed earlier, Administrative duties and teaching at theological seminaries, and The ordinary duties of a minister performed as an employee of the United States (other than as a chaplain in the Armed Forces), a state, possession, political subdivision, or the District of Columbia. Taxaid com This exclusion applies only for income tax purposes. Taxaid com It does not apply for SE tax purposes, as discussed earlier under Amounts included in gross income under Self-Employment Tax: Figuring Net Earnings. Taxaid com Designation requirement. Taxaid com   The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. Taxaid com It must designate a definite amount. Taxaid com It cannot determine the amount of the housing allowance at a later date. Taxaid com If the church or organization does not officially designate a definite amount as a housing allowance, you must include your total salary in your income. Taxaid com   If you are employed and paid by a local congregation, a resolution by a national church agency of your denomination does not effectively designate a housing allowance for you. Taxaid com The local congregation must officially designate the part of your salary that is a housing allowance. Taxaid com However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the national agency. Taxaid com Rental allowances. Taxaid com   If you receive in your salary an amount officially designated as a rental allowance (including an amount to pay utility costs), you can exclude the allowance from your gross income if: You use the amount to provide or rent a home, and The amount is not more than reasonable pay for your services. Taxaid com   The amount you exclude cannot be more than the fair rental value of the home, including furnishings, plus the cost of utilities. Taxaid com Fair rental value of parsonage. Taxaid com   You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. Taxaid com However, the exclusion cannot be more than the reasonable pay for your services. Taxaid com If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost. Taxaid com Example. Taxaid com Rev. Taxaid com Joanna Baker is a full-time minister. Taxaid com The church allows her to use a parsonage that has an annual fair rental value of $24,000. Taxaid com The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. Taxaid com Her actual utility costs during the year were $7,000. Taxaid com For income tax purposes, Rev. Taxaid com Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). Taxaid com She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). Taxaid com Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage). Taxaid com Home ownership. Taxaid com   If you own your home and you receive as part of your salary a housing or rental allowance, you may exclude from gross income the smallest of: The amount actually used to provide a home, The amount officially designated as a rental allowance, or The fair rental value of the home, including furnishings, utilities, garage, etc. Taxaid com Excess rental allowance. Taxaid com   You must include in gross income the amount of any rental allowance that is more than the smallest of: Your reasonable salary, The fair rental value of the home plus utilities, or The amount actually used to provide a home. Taxaid com   Include in the total on Form 1040, line 7. Taxaid com On the dotted line next to line 7, enter “Excess allowance” and the amount. Taxaid com You may deduct the home mortgage interest and real estate taxes paid on your home even though you pay all or part of those expenses with funds you get through a tax-free rental or parsonage allowance. Taxaid com However, you can only deduct these expenses as itemized deductions on Schedule A (Form 1040). Taxaid com Retired ministers. Taxaid com   If you are a retired minister, you can exclude from your gross income the rental value of a home (plus utilities) furnished to you by your church as a part of your pay for past services, or the part of your pension that was designated as a rental allowance. Taxaid com However, a minister's surviving spouse cannot exclude the rental value unless the rental value is for ministerial services he or she performs or performed. Taxaid com Teachers or administrators. Taxaid com   If you are a minister employed as a teacher or administrator by a church school, college, or university, you are performing ministerial services for purposes of the housing exclusion. Taxaid com However, if you perform services as a teacher or administrator on the faculty of a nonchurch college, you cannot exclude from your income a housing allowance or the value of a home that the college provides to you. Taxaid com    If you live in faculty lodging as an employee of an educational institution or academic health center, all or part of the value of that lodging may be nontaxable under a different rule. Taxaid com In Publication 525, see Faculty lodging in the discussion on meals and lodging under Fringe Benefits. Taxaid com   If you serve as a minister of music or minister of education, or serve in an administrative or other function of your religious organization, but are not authorized to perform substantially all of the religious duties of an ordained minister in your church (even if you are commissioned as a minister of the gospel), the housing exclusion does not apply to you. Taxaid com Theological students. Taxaid com   If you are a theological student serving a required internship as a part-time or assistant pastor, you cannot exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister. Taxaid com Traveling evangelists. Taxaid com   You can exclude a designated rental allowance from out-of-town churches if you meet all of the following requirements. Taxaid com You are an ordained minister. Taxaid com You perform ministerial services at churches located away from your community. Taxaid com You actually use the rental allowance to maintain your permanent home. Taxaid com Cantors. Taxaid com   If you have a bona fide commission and your congregation employs you on a full-time basis to perform substantially all the religious functions of the Jewish faith, you can exclude a rental allowance from your gross income. Taxaid com Earnings—Members of Religious Orders Your earnings may be exempt from both income tax and SE tax if you are a member of a religious order who: Has taken a vow of poverty, Receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and Renounces the earnings and gives them to the order. Taxaid com See Members of Religious Orders , earlier, under Social Security Coverage. Taxaid com Foreign Earned Income Certain income may be exempt from income tax if you work in a foreign country or in a specified U. Taxaid com S. Taxaid com possession. Taxaid com Publication 54 discusses the foreign earned income exclusion. Taxaid com Publication 570, Tax Guide for Individuals With Income From U. Taxaid com S. Taxaid com Possessions, covers the rules for taxpayers with income from U. Taxaid com S. Taxaid com possessions. Taxaid com You can get these free publications from the Internal Revenue Service at IRS. Taxaid com gov or from most U. Taxaid com S. Taxaid com Embassies or consulates. Taxaid com Expense Items The tax treatment of ministerial trade or business expenses, expenses allocable to tax-free income, and health insurance costs is discussed here. Taxaid com Ministerial Trade or Business Expenses as an Employee When you figure your income tax, you must itemize your deductions on Schedule A (Form 1040) to claim allowable deductions for ministerial trade or business expenses incurred while working as an employee. Taxaid com You also may have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses). Taxaid com You claim these expenses as miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) limit. Taxaid com See Publication 529 for more information on this limit. Taxaid com However, you cannot deduct any of your employee business expenses that are allocable to tax-free income (discussed next). Taxaid com Expenses Allocable to Tax-Free Income If you receive a rental or parsonage allowance that is exempt from income tax (tax free), you must allocate a portion of the expenses of operating your ministry to that tax-free income. Taxaid com You cannot deduct the portion of your expenses that you allocate to your tax-free rental or parsonage allowance. Taxaid com Exception. Taxaid com   This rule does not apply to your deductions for home mortgage interest or real estate taxes on your home. Taxaid com Figuring the allocation. Taxaid com   Figure the portion of your otherwise deductible expenses that you cannot deduct (because you must allocate that portion to tax-free income) by multiplying the expenses by the following fraction:      Tax-free rental or parsonage allowance     All income (taxable and tax free) earned from your ministry           When figuring the allocation, include the income and expenses related to the ministerial duties you perform both as an employee and as a self-employed person. Taxaid com    Reduce your otherwise deductible expenses only in figuring your income tax, not your SE tax. Taxaid com Example. Taxaid com Rev. Taxaid com Charles Ashford received $40,000 in earnings for ministerial services consisting of a $28,000 salary for ministerial services performed as an employee, $2,000 for weddings and baptisms performed as a self-employed person, and a $10,000 tax-free parsonage allowance. Taxaid com He incurred $4,000 of unreimbursed expenses connected with his earnings for ministerial services. Taxaid com $3,500 of the $4,000 is for employee expenses related to his ministerial salary, and $500 is related to the weddings and baptisms he performed as a self-employed person. Taxaid com Rev. Taxaid com Ashford figures the nondeductible (tax-free) portion of expenses related to his ministerial salary as follows: ($10,000 ÷ $40,000) x $3,500 = $875   Rev. Taxaid com Ashford figures the nondeductible (tax-free) portion of expenses related to his wedding and baptism income as follows: ($10,000 ÷ $40,000) x $500 = $125 Required statement. Taxaid com   If you receive a tax-free rental or parsonage allowance and have ministerial expenses, attach a statement to your tax return. Taxaid com The statement must contain all of the following information. Taxaid com A list of each item of taxable ministerial income by source (such as wages, salary, weddings, baptisms, etc. Taxaid com ) plus the amount. Taxaid com A list of each item of tax-free ministerial income by source (parsonage allowance) plus the amount. Taxaid com A list of each item of otherwise deductible ministerial expenses plus the amount. Taxaid com How you figured the nondeductible part of your otherwise deductible expenses. Taxaid com A statement that the other deductions claimed on your tax return are not allocable to your tax-free income. Taxaid com   See the attachments prepared for the Comprehensive Example , later. Taxaid com Following the example, you will find blank worksheets for your own use. Taxaid com Health Insurance Costs of Self-Employed Ministers If you are self-employed, you may be able to deduct the amount you paid in 2013 for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents. Taxaid com If you qualify, you can take this deduction as an adjustment to income on Form 1040, line 29. Taxaid com See the Instructions for Form 1040 to figure your deduction. Taxaid com The following special rules apply to the self-employed health insurance deduction. Taxaid com You cannot take a medical expense deduction on Schedule A (Form 1040) for any expenses you claim for purposes of the self-employed health insurance deduction. Taxaid com You cannot take the deduction for any month you are eligible to participate in a subsidized plan of your (or your spouse's) employer. Taxaid com The deduction cannot exceed your net earnings from the business under which the insurance plan is established. Taxaid com Your net earnings under this rule do not include the income you earned as a common-law employee (discussed earlier) of a church. Taxaid com More information. Taxaid com   For more information about the self-employed health insurance deduction, see chapter 6 in Publication 535. Taxaid com Deduction for SE Tax You can deduct one-half of your SE tax in figuring adjusted gross income. Taxaid com This is an income tax deduction only, on Form 1040, line 27. Taxaid com Do not claim this deduction in figuring net earnings from self-employment subject to SE tax. Taxaid com Income Tax Withholding and Estimated Tax The federal income tax is a pay-as-you-go tax. Taxaid com You must pay the tax as you earn or receive income during the year. Taxaid com An employee usually has income tax withheld from his or her wages or salary. Taxaid com However, your salary is not subject to federal income tax withholding if both of the following conditions apply. Taxaid com You are a duly ordained, commissioned, or licensed minister, a member of a religious order (who has not taken a vow of poverty), or a Christian Science practitioner or reader. Taxaid com Your salary is for ministerial services (see Ministerial Services , earlier). Taxaid com If your salary is not subject to withholding, or if you do not pay enough tax through withholding, you may need to make estimated tax payments to avoid penalties for not paying enough tax as you earn your income. Taxaid com You generally must make estimated tax payments if you expect to owe taxes, including SE tax, of $1,000 or more, when you file your return. Taxaid com Determine your estimated tax by using the worksheets in Publication 505, Tax Withholding and Estimated Tax. Taxaid com Pay the entire estimated tax for 2014 or the first installment by April 15, 2014. Taxaid com See Form 1040-ES for the different payment methods. Taxaid com The April 15 date applies whether or not your tax home and your abode are outside the United States and Puerto Rico. Taxaid com For more information, see chapter 2 of Publication 505. Taxaid com If you perform your services as a common-law employee of the church and your salary is not subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and SE tax that may be due. Taxaid com Filing Your Return You must file an income tax return for 2013 if your gross income was at least the amount shown in the third column of Table 4 above. Taxaid com Table 4. Taxaid com 2013 Filing Requirements for Most Taxpayers IF your filing status is . Taxaid com . Taxaid com . Taxaid com AND at the end of 2013 you were* . Taxaid com . Taxaid com . Taxaid com THEN file a return if your gross income** was at least . Taxaid com . Taxaid com . Taxaid com single under age 65 65 or older   $10,000 $11,500   married filing jointly*** under 65 (both spouses) 65 or older (one spouse) 65 or older (both spouses)   $20,000  $21,200  $22,400   married filing separately any age   $3,900   head of household under 65 65 or older   $12,850 $14,350   qualifying widow(er) with dependent child under 65 65 or older   $16,100  $17,300   * If you were born on January 1, 1949, you are considered to be age 65 at the end of 2013. Taxaid com ** Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Taxaid com Do not include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2013, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). Taxaid com If (a) or (b) applies, see the instructions for Form 1040, lines 20a and 20b, to figure the taxable part of social security benefits you must include in gross income. Taxaid com Gross income includes gains, but not losses, reported on Form 8949 or Schedule D (Form 1040). Taxaid com Gross income from a business means, for example, the amount on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Taxaid com But, in figuring gross income, do not reduce your income by any losses, including any loss on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Taxaid com *** If you did not live with your spouse at the end of 2013 (or on the date your spouse died) and your gross income was at least $3,900, you must file a return regardless of your age. Taxaid com Additional requirements. Taxaid com   Even if your income was less than the amount shown in Table 4, 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 Self-Employment Tax: Figuring Net Earnings ) of $400 or more in the tax year, You are exempt from SE tax on earnings from ministerial services and you have $400 or more of other net earnings subject to SE tax, or You had wages of $108. Taxaid com 28 or more from an electing church or church-controlled organization (see Coverage of Religious Workers (Church Employees) , earlier, under Social Security Coverage). Taxaid com Self-employment tax. Taxaid com   If you are liable for SE tax, you must file Schedule SE (Form 1040) with your return. Taxaid com   If you filed Form 4361 and did not receive approval from the IRS, you must pay SE tax on your ministerial earnings, as explained earlier. Taxaid com You should report ministerial earnings and expenses from nonemployee ministerial services on Schedule C or C-EZ (Form 1040). Taxaid com You should then carry the net amount over to line 2 of Schedule SE (Form 1040), Section A or B. Taxaid com However, if you were a duly ordained minister who was an employee of a church and you must pay SE tax on the wages you earned for those services, do not report those wages on Schedule C or C-EZ (Form 1040). Taxaid com Instead, report those wages less any allowable expenses (including any unreimbursed employee business expenses), on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Taxaid com Note. Taxaid com For income tax purposes, the unreimbursed employee business expenses that you incurred as an employee of the church and subtracted from your wages on line 2 of Schedule SE (Form 1040) are allowed only as an itemized deduction on Schedule A (Form 1040) if they exceed 2% of your adjusted gross income. Taxaid com You cannot deduct these expenses on Schedule C or C-EZ (Form 1040) as a trade or business expense. Taxaid com Exemption from SE tax. Taxaid com   If you filed Form 4361 and received IRS approval not to be taxed on your ministerial earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Taxaid com Instead, enter “Exempt—Form 4361” on the dotted line next to Form 1040, line 56. Taxaid com However, if you had net earnings from another trade or business of $400 or more subject to SE tax, see line A at the top of Schedule SE (Form 1040), Section B. Taxaid com    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). Taxaid com Instead, enter “Exempt—Form 4029” on the dotted line next to Form 1040, line 56. Taxaid com More information. Taxaid com   For more information on filing your return, including when and where to file it, see the Instructions for Form 1040. Taxaid com Retirement Savings Arrangements Retirement savings arrangements are plans that offer you a tax-favored way to save for your retirement. Taxaid com You generally can deduct your contributions to the plan. Taxaid com Your contributions and the earnings on them are not taxed until they are distributed. Taxaid com Retirement plans for the self-employed. Taxaid com   To set up one of the following plans you must be self-employed. Taxaid com SEP (simplified employee pension) plan. Taxaid com SIMPLE (savings incentive match plan for employees) plan. Taxaid com Qualified retirement plan (also called a Keogh or H. Taxaid com R. Taxaid com 10 plan). Taxaid com   The common-law rules determine whether you are an employee or a self-employed person for purposes of setting up a retirement plan. Taxaid com See Employment status for other tax purposes under Coverage of Members of the Clergy, earlier. Taxaid com This result is true even if your compensation for ministerial services (defined earlier) is subject to SE tax. Taxaid com   For example, if a congregation pays you a salary for performing ministerial services and you are subject to the congregation's control, you generally are a common-law employee. Taxaid com You are not a self-employed person for purposes of setting up a retirement plan. Taxaid com This result is true even if your salary is subject to SE tax. Taxaid com   On the other hand, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services that you report on Schedule C or C-EZ (Form 1040), are earnings from self-employment for all tax purposes. Taxaid com   For more information on establishing a SEP, SIMPLE, or qualified retirement plan, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Taxaid com Individual retirement arrangements (IRAs). Taxaid com   The traditional IRA and the Roth IRA are two individual retirement arrangements you can use to save money for your retirement. Taxaid com Generally, your maximum contribution for 2013 to either of these plans (or to a combination of the two) is the smaller of your taxable compensation or $5,500 ($6,500 if you are age 50 or older). Taxaid com   However, your maximum contribution to a Roth IRA will be further reduced or eliminated if your adjusted gross income is above a certain amount. Taxaid com You cannot deduct Roth IRA contributions, but 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 distributed. Taxaid com   If you contribute to a traditional IRA, your contribution may be deductible. Taxaid com However, your deduction may be reduced or eliminated if you or your spouse is covered by an employer retirement plan (including, but not limited to, a SEP, SIMPLE, or qualified retirement plan). Taxaid com   For more information on IRAs, see Publication 590. Taxaid com Tax-sheltered annuity plans. Taxaid com   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. Taxaid com For more