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In order to be considered a minister for federal income tax purposes, the employee must have been commissioned, licensed or ordained by a Faith Based Organization (FBO) (credentials issued by organizations that are not FBO’s do not qualify.) Additionally, the minister must be performing ministerial duties. For a FBO, ministerial duties include 1) the preaching, teaching and conducting of religious worship services; 2) the control, conduct & maintenance of a religious organization and their integral agencies; 3) the teaching and administration in a theological seminary; and 4) the performance of sacerdotal functions. If the employer is not a FBO, then ministerial duties are limited to #1 and #4.
Ministers are allowed to opt out of Self Employment tax by filing Form 4361 with the IRS. There is a slim window of time (2 years) during which a minister can file the form. After being filed in triplicate with the IRS, the IRS returns an approved copy of the form to the minister.
Form 4361 is a ministers most valuable asset. An approved Form 4361 is very difficult to replace. Without the approved form it is hard to convince an IRS agent that the minister is exempt from Self Employment tax. The courts have allowed the exemption without an approved form where the minister has retained proof that he filed the form.
In addition, a minister may qualify up to 34,000 in income w/o paying income tax for housing allowances if he/she is ordained, has filed form 4361 with the IRS, and the income is from the 508(c)(1)(a) or a 501(c)(3).
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