Monday, April 16, 2012

Do Clergy Pay Lower Taxes than Regular People?

There is a myth that clergy pay a lower tax rate, when in fact in total tax (SE tax + income tax) often they pay far higher taxes than the typical W2 wage earner.  How is this so?  Because they are considered "self-employed" by the IRS and thus pay a whopping 15.3% off their gross income (before adjustments and exemptions) AND regular income tax.  Effectively this means they pay more in total tax. 

The regular wage earner pays half (or in 2011 less than half) of Social Security (the equivalent of "self-employment tax") and the employer pays the rest.

Obviously this is a bad situation, so much so that Congress began to allow clergy to exclude the lower of fair market value of their home or actual expenses for housing from regular income tax (but not from self-employment tax, that still comes off the top).

So a minister earning $50,000 pays $6141 in SE tax (13.3%, down from 15.3 last tax year) on that income PLUS any regular income tax.  If a minister spent $15,000 total on housing, he would still pay regular income tax on $35,000 at the going rate.  That would be about an additional $2871, for a total of $9012, or an effective total tax rate of 18% tax on just $50,000 income.  That's a dead heat with a regular income earner ($9081).

NOW let's add a non-working spouse and 2 dependents to the above:

Regular Tax payers total tax:  $5544 (includes $2850 FICA + Medicare)

Clergy total tax:  $6649 (includes $6164 SE tax)

A pastor earning $50k with a wife and two kids pays $1105 more in taxes than a regular W2 tax payer!  Bottom line is most clergy would love to be treated are regular tax payers!

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