Lawyers often jokingly state that there is a simple distinction between tax evasion and tax avoidance – twenty years in federal prison. Hiding income is tax evasion and punishable by imprisonment upon conviction. However, there are several items mentioned within this document that can legitimately be excluded from taxable income for ministers. Although most will be discussed at length later, a brief mention of each will be noted here. The primary items not considered as reportable taxable income for ministers are:
- Retirement Plan Contributions – It should be noted that contributions made by the church on behalf of the minister or employee are not required to be reported at all on Form W-2. In addition, amounts contributed to the retirement plan by a salary reduction agreement are also not includible in Box 1 on the W-2 form as wages. However, on Form W-2 the “retirement plan” box should be checked on line 13. In addition, any amount contributed by salary reduction agreement should be reported in Box 12 of the W-2 form, using the code “E”. For example, if a minister or employee reduced his salary by $5,000 to make contributions to his retirement account, that amount would not be included in Box 1 of the IRS Form W-2, but “retirement plan” would be checked in Box 13 and Box 12 would report “E – $5,000.00.”
- group term life insurance premiums for policies up to $50,000
- fringe benefits (GROUP medical insurance premiums, disability insurance, etc.)
- qualified reimbursement of moving expenses
- business expense reimbursement under an accountable plan, and
- the minister’s housing allowance – which is not considered as income but is taxable for self-employment taxes.
None of the above-mentioned items should be included in Box 1 of the W-2 form. However, the church treasurer should be aware that non-ministerial employees do not receive the housing allowance benefit. If the church pays the housing of the non-ministerial employee, it is still counted as reportable income – and is included in Box 1 of the employee’s W-2 form. Additionally, retirement plan contributions made by a salary reduction agreement for non-ministerial employees are excluded from their reportable income for tax purposes, but must be included in their income for Social Security and Medicare purposes. For ministers, salary reduction contributions are excluded for both tax purposes and Social Security purposes.