Pastors work in a complex financial situation. Their salary is frequently public and is approved as part of the church budget process. In addition, they have a unique standing before the IRS, both as common law employees and as self-employed for Social Security purposes. The complexities that result are often not well understood by pastors or their tax advisors, and there are specialists in the tax preparation industry who work solely with clergy.
But student interns are not yet clergy! It is important for internship sites to understand that interns are employees of the congregation. Internship sites should be taking taxes from the stipends they are paying their interns. If they are not, the student needs to be aware that they will have to pay taxes on their own income. It will be reported to the IRS, and they will need to set aside as much as 25% of their stipend. If they don't plan for this, they will owe a hefty tax bill in the next year.
Also, clergy taxes are paid quarterly to the IRS. Failure to do so results in additional penalties. If a congregation mistakenly identifies an intern as clergy, and the intern does not know this or fails to make the quarterly payments, the student will have penalties to pay as well as the unpaid taxes.
That's tough life-lesson for the unprepared. Interns and their congregations should take time now to ensure the student's income is being properly reported.
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To help MDiv students prepare for the complex tax reality that awaits them in their career, Luther Seminary's Financial Aid department hosts an annual Clergy Tax Workshop for graduating seniors. CPA Mark Friesen, who specializes in clergy taxes, covers how to prepare taxes, what to expect with compensation packages, payment schedules and more. Mark Friesen contributed these insights on the intern's income tax situation:
"Churches are required to classify each person that is hired as either a secular or clergy employee. This is a very crucial step in the hiring process. Clergy are taxed differently than secular employees and this treatment is mandated by law. It isn't optional, so it is important to know who qualifies as secular or clergy status. Student and intern clergy should be classified as a secular employees.
"Secular employees, such as students or intern clergy, are subject to standard federal and state withholdings. The FICA tax is 7.65% withheld from the employee's wage and 7.65% paid by the employer. Clergy are exempt from standard withholdings but are required to pay SECA (15.3%) on their individual tax return. To offset the additional 7.65% from SECA, many churches provide their clergy a social security allowance of 7.65% of total compensation. This social security allowance is always taxable income.
"Most secular employees have taxes withheld from their paychecks on a bi-weekly basis. However, if you are classified as clergy and received ministry income or other sources of income such as interest, dividends, or secular business income, then estimated tax payments may very well be required. The IRS requires that you pay estimated taxes in 2013 if you will owe $1,000 or more by year end, and if your total taxes withheld from other sources are less than the smaller of 90 percent of your 2013 return, or 100 percent of your 2012 liability.
"Only ordained, licensed or commissioned clergy are eligible for housing allowance on their ministerial earnings. Church custodians, student and intern clergy, secretaries and 'ministerial staff' are not eligible for the housing allowance. An organization may call someone a 'minister,' but the IRS may not treat that person as a minister for tax purposes."
If you'd like to learn more about managing the complexity of clergy taxes, visit www.ClergyTaxNet.com, or contact Mark Friesen at firstname.lastname@example.org or 763-425-8778.