us internal revenue service: p517--1999

8/14/2019 US Internal Revenue Service: p517--1999

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ContentsIntroduction ........................................ 1

Social Security Coverage .................. 2

Exemption From Self-Employment(SE) Tax ........................................ 3

Qualified Services .............................. 5

Figuring Net Earnings From

Self-Employment for SE Tax ...... 5

Income Tax: Income and Expenses . 7

Filing Your Return .............................. 8

Retirement Savings Arrangements .. 9

Earned Income Credit ........................ 9

How To Get More Information .......... 9

Comprehensive Example .................. 10

Index .................................................... 20

Important Changesfor 1999Photographs of missing children. TheInternal Revenue Service is a proud partnerwith the National Center for Missing and Ex-ploited Children. Photographs of missingchildren selected by the Center may appearin this publication on pages that would other-wise be blank. You can help bring thesechildren home by looking at the photographsand calling 1800THELOST (18008435678) if you recognize a child.

Increased self-employed health insurancededuction. The self-employed health insur-

ance deduction increased from 45% to 60%of the cost of the insurance. See Health In-surance Costs of Self-Employed Ministers.

IntroductionSocial security and Medicare taxes are col-lected under two systems. Under the Self-Employment Contributions Act (SECA), theself-employed person pays all the taxes. Un-der the Federal Insurance Contributions Act(FICA), the employee and the employer eachpay half of the taxes. No earnings are subjectto both systems.

This publication covers the following top-ics about the collection of social security and

Medicare taxes from members of the clergyand religious workers:

Which earnings are taxed under SECAand which under FICA,

How a member of the clergy (minister,member of religious order, or ChristianScience practitioner) can apply for anexemption from self-employment tax, and

How to figure net earnings from self-employment.

This publication also covers certain in-come tax rules of interest to the clergy.

A comprehensive example shows filled-informs for a minister who has income taxed

Departmentof theTreasury

InternalRevenueService

Publica tion 517Cat. No. 15021x

Social Securityand OtherInformation forMembers of theClergy andReligiousWorkers

For use in preparing

1999 Returns


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under SECA, other income taxed under FICA,and income tax reporting of items specific tothe clergy.

Note. In this publication the termchurch is generally used in its generic senseand not in reference to any particular religion.

Useful ItemsYou may want to see:

Publication 525 Taxable and Nontaxable Income

529 Miscellaneous Deductions

533 Self-Employment Tax

535 Business Expenses

590 Individual Retirement Arrange-ments (IRAs) (Including RothIRAs and Education IRAs)

596 Earned Income Credit

Form (and Instructions)

SS8 Determination of Employee WorkStatus for Purposes of Federal

Employment Taxes and IncomeTax Withholding

SS16 Certificate of Election of Cover-age Under the Federal InsuranceContributions Act

Schedule SE (Form 1040) Self-Employment Tax

1040ES Estimated Tax For Individuals

1040X Amended U.S. Individual IncomeTax Return

4029 Application for Exemption FromSocial Security and MedicareTaxes and Waiver of Benefits

4361 Application for Exemption From

Self-Employment Tax for Use byMinisters, Members of ReligiousOrders and Christian SciencePractitioners

Ordering publications and forms. See HowTo Get More Information, near the end of thispublication, for information about gettingthese publications and forms.

Social SecurityCoverageThe services you perform in the exercise of

your ministry are covered by social securityand Medicare under SECA. Your earnings forthese services are subject to self-employmenttax (SE tax) unless one of the following ap-plies.

1) You are a member of a religious orderwho has taken a vow of poverty.

2) You request and receive from the Inter-nal Revenue Service (IRS) an exemptionfrom SE tax for the services. See Ex-emption From Self-Employment (SE)Tax, later.

3) You are subject only to the social secu-rity laws of a foreign country under theprovisions of a social security agreement

between the United States and thatcountry. For more information, seeBinational Social Security (Totalization)Agreementsin Publication 54, Tax Guidefor U.S. Citizens and Resident AliensAbroad.

Your earnings that are not from the exer-cise of your ministry may be subject to socialsecurity tax under FICA or SECA accordingto the rules that apply to taxpayers in general.See Qualified Services, later.

MinistersIf you are a minister of a church, yourearnings for the services you perform in yourcapacity as a minister are subject to SE taxunless you have requested and received anexemption. See Exemption From Self-Employment (SE) Tax, later. This is truewhether you are an employee of your churchor a self-employed person under the commonlaw rules. For the specific services covered,see Qualified Services, later.

Ministers DefinedMinisters are individuals who are duly or-dained, commissioned, or licensed by a reli-

gious body constituting a church or churchdenomination. They are given the authority toconduct religious worship, perform sacerdotalfunctions, and administer ordinances orsacraments according to the prescribed ten-ets and practices of that church or denomi-nation.

If a church or denomination ordains someministers and licenses or commissions oth-ers, anyone licensed or commissioned mustbe able to perform substantially all the reli-gious functions of an ordained minister to betreated as a minister for social security pur-poses.

Employment Status for

Other Tax PurposesEven though you are considered a self-employed individual in performing yourministerial services for social security taxpurposes, you may be considered an em-ployee for income or retirement plan tax pur-poses. For income or retirement plan taxpurposes, some of your income may be con-sidered income from self-employment andother income may be considered income fromwages.

Common-law employee. Under commonlaw rules, you are considered an employeeor a self-employed person depending on allthe facts and circumstances. Generally, youare an employee if your employer has the le-gal right to control both what you do and howyou do it, even if you have considerable dis-cretion and freedom of action. For more in-formation about the common-law rules, getPublication 15A, Employer's SupplementalTax Guide.

If you are employed by a congregation fora salary, you are generally a common-lawemployee and income from the exercise ofyour ministry is considered income fromwages for income tax purposes. However,amounts received directly from members ofthe congregation, such as fees for performingmarriages, baptisms, or other personal ser-vices, are considered income from self-employment.

Example. A church hires and pays youa salary to perform ministerial services sub-

ject to its control. Under the common lawrules, you are an employee of the churchwhile performing those services.

Form SS8. If you are not certain whetheryou are an employee or a self-employedperson, you can get a determination from theIRS by filing Form SS8.

Members ofReligious OrdersIf you are a member of a religious order whohas nottaken a vow of poverty, your earningsfor required services you performed as amember of the order are subject to SE tax.This does not apply if you have requested andreceived an exemption as discussed underExemption From Self-Employment (SE) Tax,later. To see which services are consideredrequired, see Qualified Services, later.

Vow of poverty. If you are a member of areligious order who has taken a vow of pov-erty, you are exemptfrom paying SE tax onyour earnings for required services you per-form as an agent of your church or its agen-

cies. For income tax purposes, the earningsare tax free to you. Your earnings are con-sidered the income of the religious order.

Exception. Even if you have taken a vowof poverty, the services you perform for yourchurch or its agencies may be covered undersocial security. Your services are covered ifyour order, or an autonomous subdivision ofthe order, elects social security coverage forits current and future vow-of-poverty mem-bers.

The order or subdivision elects coverageby filing Form SS16. It can elect coveragefor certain vow-of-poverty members for a ret-roactive period of up to 20 calendar quartersbefore the quarter in which it files the certif-icate. If the election is made, the order orsubdivision pays both the employer's andemployee's share of the tax. You do not pay.

Services performed outside the order.Even if you are a member of a religious orderwho has taken a vow of poverty and is re-quired to turn over to the order amounts youearn, your earnings are subject to federal in-come tax withholding and employment (FICA)tax if you:

1) Work for an organization outside yourreligious community, and

2) Perform work that is not required by, ordone on behalf of, the order.

In this case, you are considered an em-ployee of that outside organization. You may,however, be able to take a charitable de-duction for the amount you turn over to theorder. See Publication 526, Charitable Con-tributions.

Lay employees. Lay employees are gener-ally covered by social security. But seeElection to Exclude Employees From FICACoverage, later, under Religious Workers.

Rulings. Organizations and individuals mayrequest rulings from the IRS on whether theyare religious orders, or members of a religiousorder, for FICA tax, SE tax, and federal in-come tax withholding purposes. To request aruling, follow the procedures in RevenueProcedure 991. Revenue Procedure 991 is

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published in Internal Revenue Bulletin19991.

You can read this Revenue Procedure atmost IRS offices or purchase a copy of theBulletin by writing to:

Superintendent of DocumentsU.S. Government Printing OfficeP.O. Box 371954Pittsburgh, PA 152507954.

Christian SciencePractitioners and ReadersYour earnings from services you performedin your profession as a Christian Sciencepractitioner or reader are generally subject toSE tax. However, you can request an ex-emption as discussed under Exemption FromSelf-Employment (SE) Tax, later.

Practitioners. Christian Science practition-ers are members in good standing of theMother Church, The First Church of ChristScientist, in Boston, Massachusetts, whopractice healing according to the teachingsof Christian Science. Christian Science prac-titioners are specifically exempted from li-

censing by state laws.Some Christian Science practitioners also

are Christian Science teachers or lecturers.Income from teaching or lecturing is consid-ered the same as income from their work aspractitioners.

Readers. Christian Science readers areconsidered the same as ordained, commis-sioned, or licensed ministers.

Religious Workers(Employees)If you are a religious worker (an employee)and are not in one of the classes already

discussed, your wages are generally subjectto social security and Medicare tax (FICA)and not to SE tax. Some exceptions are dis-cussed next.

Election To Exclude EmployeesFrom FICA CoverageChurches and qualified church-controlled or-ganizations (church organizations) can electnot to have their employees covered by FICA.To make the election, the church or churchorganization must certify to the IRS that, forreligious reasons, it is opposed to payingemployment taxes.

Making the election. To make this election,

churches and church organizations file twocopies of Form 8274, Certification byChurches and Qualified Church-ControlledOrganizations Electing Exemption From Em-ployer Social Security and Medicare Taxes.They file this after employees are hired, butbefore the first date on which a quarterlyemployment tax return is due (or would bedue except for this election).

Revoking the election. The church orchurch organization can revoke this election.The revocation cannot be later reversed.Also, the IRS can revoke the election if certainfiling requirements for information returns arenot met.

Table 1. The Self-Employment Tax ExemptionApplication and Approval Process

WhoCanApply

How

When

EffectiveDate

Ministers, Members of ReligiousOrders, and Christian SciencePractitioners

Member of Recognized ReligiousSect

File Form 4361

File by the due date (plus extensions)of your tax return for the second taxyear with at least $400 of net

earnings from self-employment (atleast part from qualified services)

For all tax years after 1967 with atleast $400 of net earnings fromself-employment

File Form 4029

File anytime

First day of first quarter after thequarter in which Form 4029 was filed

Approval If approved, you will receive anapproved copy of Form 4361

If approved, you will receive anapproved copy of Form 4029

Effect of election on employees. If you arean employee (other than a minister or mem-ber of a religious order) of a church or churchorganization that makes this election and theypay you $108.28 or more in wages, you mustpay SE tax on those wages.

Election by Employees ofChurches, etc., Who Choose NotTo Pay Social Security TaxesYou may be able to choose to be exempt fromsocial security and Medicare taxes, includingthe SE tax, if you work for a church (orchurch-controlled non-profit division) thatdoes not pay the employer's part of the socialsecurity tax on wages. You can make thechoice if you are a member of a religious sector division opposed to social security andMedicare. This exemption does not apply toyour service, if any, as a minister of a churchor as a member of a religious order.

You can make this choice by filing Form4029. See Requesting Exemption Form

4029, later, under Members of RecognizedReligious Sects.

Employee and employer opposed to socialsecurity and Medicare participation. If youand your employer (or, if your employer is apartnership, each partner) are members of areligious sect or division opposed to socialsecurity and Medicare participation, you eachcan apply for exemption from the social se-curity and Medicare taxes imposed on wages.See Exemption From FICA Taxes, later.

U.S. Citizens, Residentand Nonresident AliensTo be covered under the SE tax provisions(SECA), individuals generally must be citi-zens or resident aliens of the United States.Nonresident aliens are not covered underSECA.

To determine your alien status, see Pub-lication 519, U.S. Tax Guide for Aliens.

Residents of Puerto Rico, the Virgin Is-lands, Guam, and American Samoa. Resi-dents of Puerto Rico, the Virgin Islands,Guam, and American Samoa, who are notU.S. citizens, are treated the same as citizensor resident aliens of the United States for SEtax purposes. For information on figuring thetax, see Figuring Net Earnings From Self-Employment for SE Tax, later.

Exemption FromSelf-Employment(SE) TaxMembers of religious orders who have nottaken a vow of poverty, ministers, andChristian Science practitioners can requestan exemption from SE tax.

Members of a recognized religious sector a division of it can also apply for an ex-emption from the SE tax. For the rules thatapply to this exemption, see Members ofRecognized Religious Sects, later.

TIPMembers of religious orders who havetaken a vow of poverty are exemptfrom paying SE tax, as discussed

earlier under Members of Religious Orders.They do not have to request the exemption.

Who cannot be exempt? If you elected be-fore 1968 to be covered under social securityfor your ministerial services, you are stillcovered. You cannot be exempt from SE tax.

If you elected to be covered by social se-curity by filing Form 2031 for your 1986 or1987 tax year, you cannot be exempt fromSE tax.

Requesting exemption. Table 1 brieflysummarizes the procedure for requesting ex-emption from the SE tax. More detailed ex-planations follow.

CAUTION

!An approved exemption only appliesto earnings you receive for qualifiedservices, discussed later. It does not

apply to any other SE income.

Ministers, Members ofReligious Orders, andChristian SciencePractitionersTo claim the exemption from SE tax, you mustmeet all of the following conditions.

1) You file Form 4361, described later un-der Requesting exemption Form4361.

2) You are conscientiously opposed topublic insurance because of your indi-vidual religious considerations (not be-

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cause of your general conscience), orbe opposed because of the principles ofyour religious denomination.

3) You file for other than economic rea-sons.

4) You inform the ordaining, commission-ing, or licensing body of your church ororder that you are opposed to public in-surance if you are a minister or a mem-ber of a religious order (other than avow-of-poverty member). This require-ment does notapply to Christian Sci-ence practitioners.

5) You establish that the organization thatordained, commissioned, or licensedyou, or your religious order, is a tax-exempt religious organization.

6) You establish that the organization is achurch or a convention or association ofchurches.

7) You sign and return the statement theIRS mails to you to certify that you arerequesting an exemption based on thegrounds listed on the statement.

Requesting exemption Form 4361. Torequest exemption from SE tax, file Form

4361 in triplicate.

RECORDS

The IRS will return to you a copy ofthe Form 4361 that you filed indicatingwhether your exemption has been

approved. If it is approved, keep the ap-proved copy in your permanent records.

When to file. File Form 4361 by the dateyour income tax return is due, including ex-tensions, for the second tax year in which youhave net earnings from self-employment ofat least $400. This rule applies if any part ofyour net earnings for each of the two yearscame from your services as a:

Minister,

Member of a religious order, or

Christian Science practitioner.

The two years do not have to be consecutivetax years.

TIPBecause the approval process cantake some time, you should file Form4361 as soon as possible.

Example 1. Rev. Lawrence Jaeger, aclergyman ordained in 1999, has net earningsof $450 in 1999 and $500 in 2000. He mustfile his application for exemption by the duedate, including extensions, for his 2000 in-come tax return. However, if Rev. Jaegerdoes not receive his exemption by April 17,2000, his SE tax for 1999 is due by that date.

Example 2. Rev. Louise Wolfe has $300in net earnings as a minister in 1999, butearned more than $400 in both 1998 and2000. She must file her application for ex-emption by the due date, including exten-sions, for her 2000 income tax return. How-ever, if she did not receive the exemption byApril 15, 1999, her SE tax for 1998 was dueby that date.

Example 3. In 1997, Rev. David Mosswas ordained a minister and had $700 in netearnings as a minister. In 1998, he received$1,000 as a minister, but his related expenseswere over $1,000. Therefore, he had no netearnings as a minister in 1998. Also in 1998,

he opened a book store and had $8,000 innet self-employment earnings from the store.In 1999, he had net earnings of $1,500 as aminister and $10,000 net SE earnings fromthe store.

Because Rev. Moss had net earnings fromself-employment in 1997 and 1999 that were$400 or more each year, and part of theearnings in each of those years was for hisservices as a minister, he must file his appli-cation for exemption by the due date, includ-ing extensions, for his 1999 income tax re-turn.

Death of individual. The right to file anapplication for exemption ends with an indi-vidual's death. A surviving spouse, executor,or administrator cannot file an exemption ap-plication for a deceased clergy member.

Effective date of exemption. An approvedexemption is effective for all tax years after1967 in which you have $400 or more of netearnings from self-employment and any partof the earnings is for services as a memberof the clergy. Once the exemption is ap-proved, it is irrevocable.

Example. Rev. Trudy Austin, ordained in1998, had $400 or more in net earnings as a

minister in both 1998 and 1999. She files anapplication for exemption on February 15,2000. If an exemption is granted, it is effectivefor 1998 and the following years.

Refunds of SE tax. If, after receiving anapproved Form 4361, you find that you over-paid SE tax, you can file a claim for refundon Form 1040X before the period of limita-tions ends. This is generally within 3 yearsfrom the date you filed the return or within 2years from the date you paid the tax, which-ever is later. A return you filed, or tax youpaid, before the due date is considered tohave been filed or paid on the due date.

If you file a claim after the 3-year periodbut within 2 years from the time you paid thetax, the credit or refund will not be more thanthe tax you paid within the 2 years imme-diately before you file the claim.

Members of RecognizedReligious SectsIf you are a member of a recognized religioussect, or a division of a recognized religioussect, you can apply for an exemption frompayment of social security and Medicaretaxes.

Exception. If you received social securitybenefits or payments, or anyone else re-ceived these benefits or payments based onyour wages or SE income, you cannot apply.

However, if you pay your benefits back, youmay be considered for exemption. Contactyour local Social Security office to find out theamount to be paid back.

Eligibility requirements. To claim this ex-emption from SE tax, all the following re-quirements must be met.

1) You must file Form 4029, discussed laterunder Requesting exemptionForm4029.

2) As a follower of the establishedteachings of the sect or division, youmust be conscientiously opposed to ac-cepting benefits of any private or public

insurance that makes payments fordeath, disability, old age, retirement, ormedical care, or provides services formedical care.

3) You must waive all rights to receive anysocial security payment or benefit andagree that no benefits or payments willbe made to anyone else based on yourwages and SE income.

4) The Commissioner of Social Securitymust determine that:

a) Your sect or division has the es-tablished teachings as in (2) above,

b) It is the practice, and has been fora substantial period of time, formembers of the sect or division toprovide for their dependent mem-bers in a manner that is reasonablein view of the members' generallevel of living, and

c) The sect or division has existed atall times since December 31, 1950.

If you have previously received approvalfor exemption from SE tax, you are consid-ered to have met the requirements and do notneed to apply for this exemption.

Requesting exemption Form 4029. Torequest the exemption, file Form 4029 intriplicate with the Social Security Adminis-tration at the address shown on the form. Thesect or division must complete part of theform.

RECORDS

The IRS will return to you a copy ofthe Form 4029 that you filed indicatingwhether your exemption has been

approved. If it is approved, keep the ap-proved copy in your permanent records.

When to file. You can file Form 4029 atany time.

Effective date of exemption. An ap-proved exemption generally is effective on thefirst day of the first quarter after the quarterin which Form 4029 is filed. It does not applyto any tax year beginning before you meet theeligibility requirements discussed earlier.

The exemption will end if you fail to meetthe eligibility requirements or if the Commis-sioner of Social Security determines that thesect or division fails to meet them. You mustnotify the IRS within 60 days if you are nolonger a member of the religious group, or ifyou no longer follow the establishedteachings of this group. The exemption willend on the date you notify the IRS.

Refunds of SE tax paid. For information onrequesting refunds, see Ministers, Membersof Religious Orders, and Christian Science

Practitioners, earlier.

Exemption From FICA TaxesGenerally, under FICA, the employer and theemployee each pay half of the social securityand Medicare tax. Both the employee and theemployer, if they meet the eligibility require-ments discussed earlier, can apply to be ex-empt from their share of FICA taxes on wagespaid by the employer to the employee.

TIPIf the employers application is ap-proved, the exemption will apply onlyto FICA taxes on wages paid to em-

ployees who also received an approval ofidentical applications.

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Information for employers. If you have anapproved Form 4029 and you have an em-ployee who has an approved Form 4029, donot report wages you paid to the employeeas social security and Medicare wages.

A partnership in which each partner holdsa religious exemption from social security andMedicare is an employer for this purpose.

Form W-2. When preparing a Form W2for an employee with an approved Form4029, write Form 4029 in the box markedOther. Do not make any entries in box 3, 4,5, or 6.

Forms 941 and 943. Do not include theseexempt wages on Form 941, Employer'sQuarterly Federal Tax Return, or on Form943, Employer's Annual Tax Return for Agri-cultural Employees, if you have received anapproved Form 4029.

On Form 941, write Form 4029 to the leftof the entry spaces on the lines for Taxablesocial security wages, Taxable social secu-rity tips, and Taxable Medicare wages andtips. Check the box on line 8 to show that thewages are not subject to these taxes.

On Form 943, write Form 4029 to the leftof the entry spaces on the lines for Totalwages subject to social security taxes, andTotal wages subject to Medicare taxes.

If you have employees who do not have

an approved Form 4029, you must withholdthe employee's share of social security andMedicare taxes and pay the employers share.

Effective date. An approved exemptionfrom FICA becomes effective on the first dayof the first calendar quarter after the quarterin which Form 4029 is filed. The exemptionwill end on the last day of the calendar quarterbefore the quarter in which the employer,employee, sect, or division fails to meet therequirements.

Qualified ServicesQualified services, in general, are the ser-vices you perform in the exercise of yourministry or in the exercise of your duties asrequired by your religious order. Income youreceive for performing qualified services issubject to SE tax unless you have an ex-emption as explained earlier. If you have anexemption, only the income you receive forperforming qualified services is exempt. Theexemption does not apply to any other SEincome.

The following discussions provide moredetailed information on qualified services ofministers, and members of religious orders,and Christian Science practitioners andreaders.

Ministers

Most services you perform as a minister,priest, rabbi, etc., are qualified services.These services include:

1) Performing sacerdotal functions,

2) Conducting religious worship, and

3) Controlling, conducting, and maintainingreligious organizations, boards, societ-ies, and other integral agencies that areunder the authority of a religious bodythat is a church or denomination.

You are considered to control, conduct,and maintain a religious organization if youdirect, manage, or promote the organization'sactivities.

A religious organization is under the au-thority of a religious body that is a church ordenomination if it is organized for and dedi-cated to carrying out the principles of a faithaccording to the requirements governing thecreation of institutions of the faith.

Services for nonreligious organizations.Your services for a nonreligious organizationare qualified services if the services are as-signed or designated by your church. As-signed or designated services qualify even if

they do not involve performing sacerdotalfunctions or conducting religious worship.If your services are not assigned or des-

ignated by your church, they are qualifiedservices only if they involve performingsacerdotal functions or conducting religiousworship.

Services that are not part of your ministry.Income from services that are not qualifiedservices is generally subject to social securitytax withholding (not self-employment tax) un-der the rules that apply to workers in general.The following are not qualified services.

1) Services you perform for nonreligiousorganizations other than the servicesstated earlier.

2) Services you perform as a duly ordained,commissioned, or licensed minister of achurch as an employee of the UnitedStates, the District of Columbia, a foreigngovernment, or any of their politicalsubdivisions. This is true even if you areperforming sacerdotal functions or con-ducting religious worship. (For example,if you perform services as a chaplain inthe Armed Forces of the United States,the services are not qualified services.)

3) Services you perform in a government-owned and operated hospital. (Theseservices are considered performed by agovernment employee, not by a ministeras part of the ministry.) However, ser-

vices that you perform at a church-related hospital or health and welfareinstitution, or a private nonprofit hospital,are considered to be part of the ministry.

Books or articles. Writing religious booksor articles is considered to be in the exerciseof your ministry.

This rule also applies to members of reli-gious orders and to Christian Science practi-tioners.

Members ofReligious OrdersServices you perform as a member of a reli-gious order in the exercise of duties requiredby the order are qualified services. The ser-vices are qualified because you perform themas an agent of the order.

For example, if you are directed to performservices for another agency of the supervisingchurch or an associated institution, you areconsidered to perform the services as anagent of the order.

However, if you are directed to work out-side the order, the employment will not beconsidered a duty required by the order un-less:

Your services are the kind that are ordi-narily performed by members of the or-der, and

Your services are part of the duties thatmust be exercised for, or on behalf of, thereligious order as its agent.

Effect of employee status. Ordinarily, ifyour services are not considered directed orrequired of you by the order, you and theoutside party for whom you work are consid-ered employee and employer. In this case,your earnings from the services are taxedunder the rules that apply to workers in gen-eral, not under the rules for services providedas agent for the order. This is true even if youhave taken a vow of poverty.

Example. Mark Brown and ElizabethGreen are members of a religious order andhave taken vows of poverty. They renounceall claims to their earnings. The earnings be-long to the order.

Mark is a licensed attorney. The superiorsof the order instructed him to get a job witha law firm. Mark joined a law firm as an em-ployee and, as he requested, the firm madethe salary payments directly to the order.

Elizabeth is a secretary. The superiors ofthe order instructed her to accept a job withthe business office of the church that super-vises the order. Elizabeth took the job andgave all her earnings to the order.

Mark's services are not duties requiredby the order. His earnings are subject to so-cial security and Medicare tax under FICAand Federal income tax.

Elizabeth's services areconsidered dutiesrequired by the order. She is acting as anagent of the order and not as an employeeof a third party. She does not include theearnings in gross income, and they are notsubject to income tax withholding, social se-curity and Medicare tax, or SE tax.

Christian SciencePractitioners and ReadersThe exemption from SE tax, discussed ear-lier, applies only to the services a Christian

Science practitioner or reader performs in theexercise of that profession. If you do not havean exemption, amounts you receive for per-forming these qualified services are subjectto SE tax.

Figuring Net EarningsFromSelf-Employmentfor SE TaxThere are three methods for figuring your netearnings from self-employment:

Regular method,

Farm optional method, or

Nonfarm optional method.

Regular MethodMost people use the regular method. Underthis method, you figure your net earnings fromself-employment by totaling your gross in-come for services you performed as aminister, a member of a religious order whohas not taken a vow of poverty, or ChristianScience practitioner. Then you subtract yourallowable business deductions and multiplythe difference by .9235 (92.35%). Use

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Schedule SE (Form 1040) to figure your netearnings and SE tax.

If you are an employee of the church thatelected to exclude you from FICA coverage,figure net earnings by multiplying your churchwages shown on Form W-2 by .9235. Do notreduce your wages by any business de-ductions when making this computation. UseSection B of Schedule SE to figure your netearnings and SE tax.

CAUTION

!If you have an approved exemption,or you are automatically exempt, do

not include the income or deductionsfrom qualified services in figuring your netearnings from self-employment.

For more information on net earnings fromself-employment, get Publication 533.

Gross income. To figure your net earningsfrom self-employment (on Schedule SE (Form1040)), include in gross income:

Salaries and fees for your qualified ser-vices (discussed earlier),

Offerings you receive for marriages,baptisms, funerals, masses, etc.,

The value of meals and lodging providedto you, your spouse, and your depen-dents for your employers convenience,

The fair rental value of a parsonageprovided to you (including the cost ofutilities that are furnished) and the rentalallowance (including an amount for pay-ment of utilities) paid to you, and

Any amount a church pays toward yourincome tax or SE tax, other than with-holding the amount from your salary. Thisamount is also subject to income tax.

Example. Pastor Roger Adams receivesan annual salary of $16,500 as a full-timeminister. The $16,500 includes $1,500 that isdesignated as a rental allowance to pay utili-ties. His church owns a parsonage that has

a fair rental value of $5,200 per year. PastorAdams is given the use of the parsonage.He is not exempt from SE tax. He must in-clude $21,700 ($16,500 plus $5,200) whenfiguring net earnings from self-employment.

The results would be the same if, insteadof the use of the parsonage and receipt of therental allowance for utilities, Pastor Adamshad received an annual salary of $21,700 ofwhich $6,700 ($1,500 plus $5,200) per yearwas designated as a rental allowance.

For the income tax treatment of theseamounts, see Exclusion of Rental Allowanceand Fair Rental Value of a Parsonage underIncome Tax: Income and Expenses, later.

Overseas duty. Your net earnings fromself-employment are determined without any

foreign earned income exclusion or the for-eign housing exclusion or deduction if you area U.S. citizen or resident alien who is servingabroad and living in a foreign country.

Example. Paul Jones was the ministerof a U.S. church in Mexico. He earned$22,000 and was able to exclude it all for in-come tax purposes under the foreign earnedincome exclusion. However, Mr. Jones mustinclude $22,000 when figuring net earningsfrom self-employment.

For information on excluding foreignearned income or the foreign housingamount, get Publication 54, Tax Guide forU.S. Citizens and Resident Aliens Abroad.

Specified U.S. possessions. The ex-clusion from gross income for amounts de-rived in Guam, American Samoa, or theCommonwealth of the Northern Mariana Is-lands does not apply in computing netearnings from self-employment. Also seeResidents of Puerto Rico, the Virgin Islands,Guam, and American Samoa, earlier, underU.S. Citizens, Resident and Nonresident Al-iens.

Amounts not included in gross income.Do not include the following amounts in grossincome when figuring your net earnings fromself-employment.

Offerings that others made to the church.

Contributions by your church to an an-nuity plan set up for you, including anysalary reduction, that are not included inyour gross income.

Pension payments or retirement allow-ances you receive for your past qualifiedservices.

Allowable deductions. When figuring yournet earnings from self-employment, deductall your nonemployee ministerial expenses.Also, deduct all your allowable unreimbursed

trade or business expenses that you incur inperforming ministerial services as a commonlaw employee of the church. Include this netamount on line 2 of Schedule SE (Form1040).

Reimbursement arrangements. If you re-ceived an advance, allowance, or reimburse-ment for your expenses, how you report thisamount and your expenses depends onwhether the reimbursement was paid to youunder an accountable plan or a nonaccount-able plan. If you are not sure if you are reim-bursed from an accountable plan or a non-accountable plan, ask your employer.

Accountable plans. To be an account-able plan, your employers reimbursement ar-rangement must include all three of the fol-lowing rules.

1) Your expenses must have a businessconnection that is, you must havepaid or incurred deductible expenseswhile performing services as an em-ployee of your employer.

2) You must adequately account to youremployer for these expenses within areasonable period of time.

3) You must return any excess reimburse-ment or allowance within a reasonableperiod of time.

Generally, if your expenses equal yourreimbursement, you have no deduction andthe reimbursement is not reported on yourForm W2. If your expenses are more thanyour reimbursement, you can deduct yourexcess expenses for SE tax and income taxpurposes.

Nonaccountable plan. A nonaccount-able plan is a reimbursement arrangementthat does not meet one or more of the threerules listed under Accountable plans. In ad-dition, even if your employer has an ac-countable plan, the following payments willbe treated as being paid under a nonac-countable plan.

1) Excess reimbursements you fail to returnto your employer.

2) Reimbursement of nondeductible ex-penses related to your employers busi-ness.

Your employer will combine any re-imbursement paid to you under a nonac-countable plan with your wages, salary, orother compensation. Your employer will re-port the combined total in box 1 of your FormW2. You can deduct your related expenses(for SE and income tax purposes) regardlessof whether they are more than, less than, orequal to your reimbursement.

For more information on accountable andnonaccountable plans get Publication 463,Travel, Entertainment, Gift, and Car Ex-penses.

Husband and WifeMissionary TeamIf a husband and wife are both duly ordained,commissioned, or licensed ministers of achurch and have an agreement that each willperform specific services for which they arepaid jointly or separately, they must divide theSE income according to the agreement.

If the agreement is with one spouse onlyand the other spouse is not paid for anyspecific duties, amounts received for their

services are included in only the SE incomeof the spouse having the agreement.

Maximum Earnings Subject to SETaxFor 1999, the maximum net earnings fromself-employment subject to social security(old age, survivor, and disability insurance)tax is $72,600 minus any wages and tips youearned that were subject to social securitytax. The tax rate is 12.4%. All of your netearnings are subject to the Medicare (hospitalinsurance) part of the SE tax. The tax rate is2.9%.

Optional MethodsYou may be able to use an optional methodfor figuring your net earnings from self-employment. In general, the optional methodsare intended to permit continued coverage forsocial security and Medicare purposes whenyour income for the tax year is low.

There is an optional method for farmersand an optional method for nonfarm busi-nesses. If you are in farm and nonfarm busi-nesses, you may qualify for both options.

Farm optional method. If you are in thefarming business, you may be able to use thefarm optional method. For more informationon the farm optional method, see Publication533.

Nonfarm optional method. You may usethe nonfarm optional method for nonfarm SEincome if you meet allof the following tests.

1) Your net nonfarm profits are less than$1,733.

2) Your net nonfarm profits are less than72.189% of your total gross income fromnonfarm self-employment.

3) You are self-employed or a partner on aregular basis. This means that your ac-tual net earnings from self-employmentare $400 or more in at least 2 of the 3tax years before the one for which youuse this method.

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4) You have not previously used thismethod more than 4 years (there is a5-year lifetime limit). The years do nothave to be consecutive.

If you meet these four tests, you may re-port the smaller of two-thirds of the gross in-come from your nonfarm business, or $1,600as your net earnings from self-employment.

CAUTION

!You may not report less than youractual net earnings from nonfarmself-employment.

Income Tax:Income andExpensesSome income and expense items are treatedthe same for income tax and SE tax purposesand some are treated differently.

Income ItemsThe tax treatment of offerings and fees, out-side earnings, rental allowances, rental valueof parsonage, pay of members of religiousorders, and foreign earned income is dis-cussed here.

Offerings and FeesIf you are a member of the clergy, you mustinclude in your income offerings and fees youreceive for marriages, baptisms, funerals,masses, etc., in addition to your salary. If theoffering is made to the religious institution, itis not taxable to you.

Outside EarningsIf you are a member of a religious organiza-

tion and you give your outside earnings to theorganization, you still must include theearnings in your income. However, you maybe entitled to a charitable contribution de-duction for the amount paid to the organiza-tion. Get Publication 526.

Exclusion of Rental Allowanceand Fair Rental Value of aParsonageOrdained, commissioned, or licensedministers of the gospel may be able to ex-clude the rental allowance or fair rental valueof a parsonage that is provided to them aspay for their services. Services include:

Qualified services, discussed earlier,

Administrative duties and teaching attheological seminaries, and

The ordinary duties of a minister per-formed as an employee of the UnitedStates (other than as a chaplain in theArmed Forces), a state, possession, pol-itical subdivision, or the District ofColumbia.

This exclusion applies only for income taxpurposes. It does not apply for SE tax pur-poses, as discussed earlier under FiguringNet Earnings From Self-Employment for SETax.

Rental allowances. If you receive in yourpay an amount officially designated as arental allowance, you can exclude the allow-ance from your gross income if:

1) The amount is used to provide or rent ahome, and

2) The amount is not more than reasonablepay for your services.

The term rental allowance includes anamount to pay utility costs.

Fair rental value of parsonage. You canexclude from gross income the fair rentalvalue of a house or parsonage, includingutilities, furnished to you as part of your pay.However, the exclusion cannot be more thanthe reasonable pay for your services. If youpay for the utilities, you can exclude any al-lowance designated for utility costs, up toyour actual cost.

Example. Rev. Joanna Baker is a full-time minister at the Central Mission Church.The church allows her to use the parsonagethat has an annual fair rental value of $4,800.The church pays her an annual salary of$13,200, of which $1,200 is designated forutility costs. Her utility costs during the yearwere $1,000.

For income tax purposes, Rev. Baker ex-cludes $5,800 from gross income (the fairrental value of the parsonage plus $1,000from the allowance for utility costs). She willreport $12,200 ($12,000 salary and $200 ofunused utility allowance). Her income for SEtax purposes, however, is $18,000 ($13,200salary + $4,800 fair rental value of theparsonage).

Home ownership. If you own your home andyou receive as part of your pay a housing orrental allowance, you may exclude from grossincome the smallest of the following:

The amount actually used to provide ahome,

The amount officially designated as arental allowance, or

The fair rental value of the home, includ-ing furnishings, utilities, garage, etc.

You must include in gross income theamount of any rental allowance that is morethan the smallest of your reasonable pay, thefair rental value of the home plus utilities, orthe amount actually used to provide a home.

TIPYou may deduct the home mortgageinterest and real estate taxes you payon your home even though all or part

of the mortgage is paid with funds you getthrough a tax-free rental or parsonage allow-ance.

Retired ministers. If you are a retiredminister, you exclude from your gross in-come the rental value of a home (plus utili-ties) furnished to you by your church as a partof your pay for past services, or the part ofyour pension that was designated as a rentalallowance. However, a minister's survivingspouse cannot exclude the rental value un-less the rental value is for ministerial serviceshe or she performs or performed.

Self-employment earnings. If you are aretired minister, you can exclude from yournet earnings from self-employment the rentalvalue of a parsonage or a parsonage allow-

ance you are provided after you retire. Thisrule applies whether or not you can excludethe amount for income tax purposes. You canalso exclude from your net earnings fromself-employment any retirement benefits youreceive from a church plan.

Theological students. If you are a theolog-ical student serving a required internship asa part-time or assistant pastor, you cannotexclude a parsonage or rental allowance fromyour income unless you are ordained, com-missioned, or licensed as a minister.

Traveling evangelists. You can exclude adesignated rental allowance from out-of-townchurches if you meet all of the following re-quirements.

1) You are an ordained minister.

2) You perform qualified services atchurches located away from your com-munity.

3) You actually use the rental allowance tomaintain your permanent home.

Cantors. If you have a bona fide commissionand your congregation employs you on afull-time basis to perform substantially all the

religious functions of the Jewish faith, you canexclude a rental allowance from your grossincome.

Pay Members of ReligiousOrdersYour pay may be exempt from both incometax and SE tax if you are a member of a reli-gious order who:

Has taken a vow of poverty,

Receives pay for services performed asan agent of the order and in the exerciseof duties required by the order, and

Renounces the pay and gives it to theorder.

See Members of Religious Orders, earlier,under Social Security Coverage.

Foreign Earned IncomeCertain income may be exempt from incometax if you work in a foreign country or in aspecified U.S. possession. Publication 54discusses the foreign earned income exclu-sion. Publication 570, Tax Guide for Individ-uals With Income From U.S. Possessions,covers the rules for taxpayers in U.S. pos-sessions. You may get these free publicationsfrom the Internal Revenue Service or frommost U.S. Embassies or consulates.

Expense ItemsThe tax treatment of ministerial trade orbusiness expenses, expenses allocable totax-free income, and health insurance costsis discussed here.

Ministerial Trade or BusinessExpenses as an EmployeeWhen you figure your income tax, you mustitemize your deductions on Schedule A (Form1040) to claim allowable deductions forministerial trade or business expenses in-curred while working as an employee. Youmay also have to file Form 2106, EmployeeBusiness Expenses(or Form 2106EZ).

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These expenses are claimed as miscella-neous itemized deductions and are subject tothe 2% of adjusted gross income (AGI) limit.See Publication 529 for more information onthis limit.

Additionally, these expenses may have tobe reduced by the amount that is allocable totax-free income (discussed next) before beinglimited by the 2% AGI limit.

Expenses Allocable to Tax-Free

IncomeIf you receive a rental or parsonage allow-ance that is exempt from income tax (tax-free), you must allocate a portion of the ex-penses of operating your ministry to thattax-free income. You cannot deduct the por-tion of your expenses that is allocated to yourtax-free rental or parsonage allowance.

Exception. This rule does not apply to yourdeductions for home mortgage interest or realestate taxes on your home.

Figuring the allocation. Figure the portionof your otherwise deductible expenses thatyou cannot deduct (because that portion must

be allocated to tax-free income) by multiplyingthe 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 theincome and expenses related to theministerial duties you perform both as anemployee and as a self-employed person.

TIPReduce your otherwise deductibleexpenses only in figuring your incometax, not your SE tax.

Example. Rev. Charles Ashford received$40,000 in ministerial earnings consisting of

a $28,000 salary for ministerial services,$2,000 for weddings and baptisms, and a$10,000 tax-free parsonage allowance. Heincurred $4,000 of unreimbursed expensesconnected with his ministerial earnings.$3,500 of the $4,000 is related to hisministerial salary, and $500 is related to theweddings and baptisms he performed as aself-employed person.

The nondeductible portion of expensesrelated to Rev. Ashford's ministerial salary isfigured as follows:

$10,000

$40,000 $3,500 = $875

The nondeductible portion of expensesrelated to Rev. Ashford's wedding and

baptism income is figured as follows:

$10,000

$40,000 $500 = $125

Required statement. If you receive a tax-free rental or parsonage allowance and haveministerial expenses, attach a statement toyour tax return. The statement must containall of the following information.

1) A list of each item of taxable ministerialincome by source (such as wages, sal-ary, weddings, baptisms, etc.) plus theamount.

2) A list of each item of tax-free ministerialincome by source (parsonage allow-ance) plus the amount.

3) A list of each item of otherwise deduct-ible ministerial expenses plus theamount.

4) How you figured the nondeductible partof your otherwise deductible expenses.

5) A statement that the other deductionsclaimed on your tax return are notallocable to your tax-free income.

See the statement prepared for the Com-prehensive Example, later.

Health Insurance Costs ofSelf-Employed MinistersIf you are self-employed, you may be able todeduct a percentage of the amount you payfor medical insurance coverage for yourselfand your family. For 1999, the percentage is60%.

You can take this deduction even if youdo not itemize deductions on Schedule A(Form 1040). You take the deduction as anadjustment to income on Form 1040. Thereis a worksheet in the instructions for Form1040 that you can use to figure this deduction.

The following special rules apply to theself-employed health insurance deduction.

The expenses taken into account forpurposes of this deduction are not al-lowed as a medical expense deductionon Schedule A.

The deduction is not allowed for anymonth you are eligible to participate in asubsidized plan of your or your spouse'semployer.

The deduction is not used to reduce yournet earnings for your SE tax.

The deduction cannot exceed your netearnings from the business under whichthe insurance plan is established. Your

net earnings under this rule do notin-clude the income you earned as a com-mon-law employee (discussed earlier) ofa church.

More information. For more informationabout the self-employed health insurancededuction, see chapter 10 in Publication 535.

Deduction for SE TaxYou can deduct one-half of your SE tax infiguring adjusted gross income. This is an in-come tax deduction only, and you deduct iton line 27 of Form 1040.

CAUTION

!This is not a deduction in figuring netearnings from self-employment sub-

ject to SE tax.

Income Tax Withholdingand Estimated TaxThe federal income tax is a pay-as-you-gotax. You must pay the tax as you earn or re-ceive income during the year. An employeeusually has income tax withheld from his orher pay. However, your pay is generally notsubject to federal income tax withholding ifboth the following conditions apply.

You are a duly ordained, commissioned,or licensed minister, a member of a reli-gious order (who has not taken a vow of

poverty), or a Christian Science practi-tioner.

Your pay is for qualified services (seeQualified Services, earlier).

If your salary is not subject to withholding,or if you do not pay enough tax throughwithholding, you might have to pay estimatedtax to avoid penalties for not paying enoughtax as you earn your income.

You generally must make estimated taxpayments if you expect to owe taxes, includ-

ing self-employment tax, of $1,000 or morewhen you file your return.Determine your estimated tax by using the

worksheet in Form 1040-ES. Then, using theForm 1040-ES payment voucher, pay theentire estimated tax or the first installment byApril 17, 2000. The April 17 date applieswhether or not your tax home and your abodeare outside the United States and PuertoRico. For more information get Publication505, Tax Withholding and Estimated Tax.

If you perform your services as a com-mon-law employee of the church and yourpay is not subject to income tax withholding,you can enter into a voluntary withholdingagreement with the church to cover any in-come and SE tax that may be due.

Filing Your ReturnYou have to file an income tax return for 1999if your gross income was at least the amountshown in the second column. (Gross incomemeans all income you received in the formof money, goods, property, and services thatis not exempt from income tax.)

Additional requirements. Even if your in-come was less than the amount shownabove, you must file an income tax return on

Form 1040, and attach a completed ScheduleSE, if:

You are not exempt from SE tax, and youhave net earnings from self-employment(discussed earlier under Figuring NetEarnings From Self-Employment for SETax) of $400 or more in the tax year,

You are exempt from SE tax on earningsfrom qualified services and you have$400 or more of other earnings subjectto SE tax, or

You had wages of $108.28 or more froman electing church or church-controlledorganization (discussed earlier underReligious Workers).

Who Must File

Filing IncomeStatus Is: At Least:

SingleUnder 65 ............................................... 7,05065 or older ............................................ 8,100

Married, filing jointly

Both under 65 ....................................... 12,700One spouse 65 or older ....................... 13,550Both 65 or older ................................... 14,400Not living with spouse at end of year(or on date spouse died) ...................... 2,750

Married, filing separatelyAll (any age) ......................................... 2,750

Head of householdUnder 65 ............................................... 9,10065 or older ............................................ 10,150

Qualifying widow(er) withdependent child

Under 65 ............................................... 9,95065 or older ............................................ 10,800

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Selfemployment tax. If you are liable forSE tax, you must file Schedule SE (Form1040) with your return.

Exemption from SE tax. If you filed Form4361 and received IRS approval not to betaxed on those earnings, and you do not haveany other income subject to SE tax, do not fileSchedule SE. Instead, write ExemptForm4361 on Form 1040, line 50.

If you filed Form 4029 and received IRSapproval not to be taxed on those earnings,

and you do not have any other income subjectto SE tax, do not file Schedule SE. Instead,write ExemptForm 4029 on Form 1040,line 50.

For more information on filing your return,including when and where to file it, see theinstructions for Form 1040.

Retirement SavingsArrangementsRetirement savings arrangements are plansthat offer you a tax-favored way to save foryour retirement. You generally can deductyour contributions to the plan. Your contribu-tions and the earnings on them are not taxeduntil they are distributed.

Retirement plans for the self-employed.To set up a qualified retirement plan (alsocalled a Keogh or H.R. 10 plan), a simplifiedemployee pension (SEP) plan, or a SIMPLEplan, you must be self-employed.

The common law rules determine whetheryou are an employee or a self-employedperson for purposes of setting up a retirementplan. See Employment Status for Other TaxPurposes, earlier. This is true even if your payfor qualified services (discussed earlier) issubject to SE tax.

For example, if a congregation pays youa salary for performing qualified services, andyou are subject to the congregation's control,you are a common-law employee. You arenot a self-employed person for purposes ofsetting up a retirement plan. This is true evenif you salary is subject to SE tax.

On the other hand, amounts received di-rectly from members of the congregation,such as fees for performing marriages,baptisms, or other personal services that arereported on Schedule C or C-EZ, areearnings from self-employment for all taxpurposes.

For more information on establishing aSEP, SIMPLE, or qualified retirement plan,get Publication 560, Retirement Plans forSmall Business.

Individual retirement arrangements (IRAs).The traditional IRA and the Roth IRA are twoindividual retirement arrangements you canuse to save money for your retirement. Yougenerally are allowed to make contributionsto either a traditional or a Roth IRA of up to$2,000 or the amount of your pay, whicheveris less. $2,000 is the most you can contributeregardless of whether you contribute to oneor both of these IRAs. Contributions to a tra-ditional IRA may be deductible. Your de-duction for contributions to your traditionalIRA may be reduced or eliminated if you oryour spouse is covered by an employer re-tirement plan (including, but not limited to aSEP or SIMPLE, or qualified retirement plan).

Unlike contributions to a traditional IRA, con-tributions to a Roth IRA are not deductible.But, if you satisfy certain requirements, allearnings in the Roth IRA are tax free andneither your nondeductible contributions norany earnings on them are taxable when youwithdraw them.

For more information on IRAs, get Publi-cation 590.

Church plans. If you are a duly ordained,commissioned, or licensed minister workingas a minister or chaplain, and are self-employed or employed by an organizationthat is not a tax-exempt organization, you canparticipate in a church plan. For more infor-mation, see Publication 571, Tax-ShelteredAnnuity Programs for Employees of PublicSchools and Certain Tax-Exempt Organiza-tions.

Earned Income CreditThe earned income credit is a special creditfor certain people who work. If you qualify forit, the earned income credit reduces the taxyou owe. Even if you do not owe tax, you canget a refund of the credit. Also, you may be

able to get part of the credit added to yourpay instead of waiting until after the end of theyear.

You cannot take the credit if your earnedincome (or modified adjusted gross income,if greater) is:

$10,200 or more if you do not have aqualifying child,

$26,928 or more if you have one qualify-ing child, or

$30,580 or more if you have more thanone qualifying child.

Earned income. Earned income includesyour:

Wages, salaries, tips, and other pay, and

Net earnings from self-employment mi-nus the amount you claimed (or shouldhave claimed) on Form 1040, line 27, forone-half of your SE tax.

Earned income for a minister with anapproved Form 4361. If you have earningsfrom qualified services that are exempt fromSECA (have an approved Form 4361),amounts you received for performingministerial duties as an employee are earnedincome. This includes wages, salaries, tips,and other employee pay. It also includes paythat is not taxed, such as the housing andutility allowance received as part of your payfor services as an employee.

Amounts you received for nonemployeeministerial duties are not earned income. Thisincludes fees for performing marriages,baptisms, and honoraria for deliveringspeeches.

If you had nonministerial duties, any netearnings from self-employment, minus one-half of your SE tax, or any pay received asan employee is earned income.

Earned income for a minister whoseincome from qualified services is not ex-empt from SECA. Earned income includesyour net earnings from self-employment plusany pay you received for nonministerial dutiesminus your Form 1040, line 27, amount forone-half of SE tax.

Your net earnings from self-employmentincludes those net earnings from qualifiedservices. See Figuring Net Earnings FromSelf-Employment for SE Tax, earlier. Netearnings also includes net earnings fromself-employment related to nonministerial du-ties.

Earned income for a member of a rec-ognized religious sect with an approvedForm 4029. If you have an approved Form4029, all wages, salaries, tips, and other em-ployee compensation are earned income.Amounts you received as a self-employedindividual are not earned income. Also,losses from Schedules C, CEZ, or F cannotbe subtracted from wages on line 7 of Form1040.

More information. For the detailed rules onthis credit, get Publication 596. To figure theamount of your credit, you will have to fill outa worksheet or have the IRS compute thecredit for you. You may need to completeSchedule EIC and attach it to your tax return.For details on getting part of the credit addedto your pay, get Form W5, Earned IncomeCredit Advance Payment Certificatefrom youremployer or the IRS.

How To Get MoreInformationYou can order free publications and forms,ask tax questions, and get more informationfrom the IRS in several ways. By selecting themethod that is best for you, you will havequick and easy access to tax help.

Free tax services. To find out what servicesare available, get Publication 910, Guide toFree Tax Services. It contains a list of free taxpublications and an index of tax topics. It alsodescribes other free tax information services,including tax education and assistance pro-

grams and a list of TeleTax topics.

Personal computer. With your per-sonal computer and modem, you canaccess the IRS on the Internet at

www.irs.gov. While visiting our web site, youcan select:

Frequently Asked Tax Questions(locatedunder Taxpayer Help & Ed) to find an-swers to questions you may have.

Forms & Pubsto download forms andpublications or search for forms andpublications by topic or keyword.

Fill-in Forms(located under Forms &Pubs) to enter information while the formis displayed and then print the completedform.

Tax Info For Youto view Internal Reve-nue Bulletins published in the last fewyears.

Tax Regs in Englishto search regulationsand the Internal Revenue Code (underthe United States Code (USC)).

Comments & Helpto e-mail us withcomments about the site or with taxquestions.

Digital Dispatchand IRS Local News Net(both located under Tax Info For Busi-ness) to receive our electronic newslet-ters on hot tax issues and news.

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Small Business Corner(located underTax Info For Business) to get informationon starting and operating a small busi-ness.

You can also reach us with your computerusing File Transfer Protocol at ftp.irs.gov.

TaxFax Service. Using the phoneattached to your fax machine, you can

receive forms and instructions bycalling 7033689694. Follow the directionsfrom the prompts. When you order forms,enter the catalog number for the form youneed. The items you request will be faxed toyou.

Phone. Many services are availableby phone.

Ordering forms, instructions, and publi-cations. Call 18008293676 to ordercurrent and prior year forms, instructions,and publications.

Asking tax questions. Call the IRS withyour tax questions at 18008291040.

TTY/TDD equipment. If you have accessto TTY/TDD equipment, call18008294059 to ask tax questions orto order forms and publications.

TeleTax topics. Call 18008294477 tolisten to pre-recorded messages coveringvarious tax topics.

Evaluating the quality of our telephoneservices. To ensure that IRS representativesgive accurate, courteous, and professionalanswers, we evaluate the quality of our tele-phone services in several ways.

A second IRS representative sometimesmonitors live telephone calls. That persononly evaluates the IRS assistor and doesnot keep a record of any taxpayer's nameor tax identification number.

We sometimes record telephone calls toevaluate IRS assistors objectively. Wehold these recordings no longer than oneweek and use them only to measure thequality of assistance.

We value our customers' opinions.Throughout this year, we will be survey-ing our customers for their opinions onour service.

Walk-in. You can walk in to manypost offices, libraries, and IRS officesto pick up certain forms, instructions,

and publications. Also, some libraries and IRSoffices have:

An extensive collection of products avail-able to print from a CD-ROM or photo-copy from reproducible proofs.

The Internal Revenue Code, regulations,Internal Revenue Bulletins, and Cumula-tive Bulletins available for research pur-poses.

Mail. You can send your order forforms, instructions, and publicationsto the Distribution Center nearest to

you and receive a response within 10 work-days after your request is received. Find theaddress that applies to your part of thecountry.

Western part of U.S.:Western Area Distribution CenterRancho Cordova, CA 957430001

Central part of U.S.:

Central Area Distribution CenterP.O. Box 8903Bloomington, IL 617028903

Eastern part of U.S. and foreign ad-dresses:Eastern Area Distribution CenterP.O. Box 85074Richmond, VA 232615074

CD-ROM. You can order IRS Publi-cation 1796, Federal Tax Products onCD-ROM, and obtain:

Current tax forms, instructions, and pub-

lications. Prior-year tax forms, instructions, and

publications.

Popular tax forms which may be filled inelectronically, printed out for submission,and saved for recordkeeping.

Internal Revenue Bulletins.

The CD-ROM can be purchased fromNational Technical Information Service (NTIS)by calling 18772336767 or on the Internetat www.irs.gov/cdorders. The first releaseis available in mid-December and the finalrelease is available in late January.

IRS Publication 3207, Small BusinessResource Guide, is an interactive CD-ROM

that contains information important to smallbusinesses. It is available in mid-February.You can get one free copy by calling18008293676.

ComprehensiveExampleRev. John Michaels is the minister of the FirstUnited Church. He is married and has onechild. Mrs. Michaels is not employed outsidethe home. Rev. Michaels is a common-lawemployee of the church, and he has not ap-plied for an exemption from SE tax.

The church paid Rev. Michaels a salaryof $31,000. In addition, as a self-employedperson, he earned $4,000 during the year forweddings, baptisms, and honoraria. He madeestimated tax payments during the year to-taling $8,400. He taught a course at the localcommunity college, for which he was paid$3,400.

In an earlier year, Rev. Michaels boughta home next to the church. He makes an$800 per month mortgage payment of princi-pal and interest only. The church paid him$800 per month as his parsonage allowance(excluding utilities). The home's fair rental

value is $900 per month. The utility bills forthe year totaled $960. The church paid him$100 per month designated as an allowancefor utility costs.

The parts of Rev. and Mrs. Michaels' re-turn are explained in the order they werecompleted. They are illustrated in the orderthat the Rev. Michaels will assemble the re-turn to send it to the IRS.

Form W-2 From ChurchThe church completed its Form W-2 for Rev.Michaels as follows:

Box 1. The church entered Rev. Michaels'$31,000 salary.

Box 2. The church left this box blank becauseRev. Michaels did not request federal incometax withholding.

Boxes 3-6. Because Rev. Michaels is con-sidered a self-employed person for purposesof social security and Medicare tax withhold-ing, the church left these boxes blank.

Box 14. The church entered Rev. Michaels'total parsonage and utilities allowance for the

year and identified them.

Form W-2 From CollegeThe community college gave Rev. Michaelsa Form W-2 that showed the following:

Box 1. The college entered Rev. Michaels'$3,400 salary.

Box 2. The college withheld $272 in federalincome tax on Rev. Michaels' behalf.

Boxes 3 and 5. As an employee of the col-lege, Rev. Michaels is subject to social secu-rity and Medicare withholding on his full salaryfrom the college.

Box 4. The college withheld $210.80 in socialsecurity taxes.

Box 6. The college withheld $49.30 in Medi-care taxes.

Schedule CEZ (Form 1040)Some of Rev. Michaels' entries on ScheduleC-EZ are explained here.

Line 1. Rev. Michaels reports the $4,000 fromweddings, baptisms, and honoraria.

Line 2. Rev. Michaels reports his expensesrelated to the line 1 amount. The total con-sisted of $87 for marriage and family bookletsand $155 for 495 miles of business use of hiscar, mainly in connection with honoraria. Rev.Michaels used the standard mileage rate tofigure his car expense. From January throughMarch, when his records show that he drove123 miles, the expense totals $40 (32.5 centsx 123 miles). From April through December,when he drove 372 miles, the expense totals$115 (31 cents x 372 miles).

These expenses total $242. However, hecannot deduct the part of his expensesallocable to his tax-free parsonage allowance.He attaches the required statement (shownlater) to his return that explains how he fig-ures the nondeductible part of $56. He sub-

Page 10


11/20

tracts the $56 from the $242 and enters the$186 difference on line 2.

Line 3. He enters his net profit of $3,814 bothon line 3 and on Form 1040, line 12.

Lines 48b. Rev. Michaels fills out theselines to report information about his car.

Form 2106-EZRev. Michaels fills out Form 2106-EZ to reportthe unreimbursed business expenses he had

as a common-law employee of First UnitedChurch.

Line 1. Before completing line 1 Rev.Michaels fills out Part II because he used hiscar for church business. Then he checks hisrecords and sees that, of the 2806 businessmiles he reported in Part II, he drove 705miles before April 1, 1999, and 2,101 milesafter March 31, 1999. On line 1 he multipliesthe miles by the mileage rate in effect for eachpart of the year. The result is $229 for the firstpart of the year, and $651 for the rest. Thetotal is $880.

Line 4. He enters $219 for his professionalpublications and booklets.

Line 6. Before entering the total expenses online 6, Rev. Michaels must reduce them bythe amount allocable to his tax-freeparsonage allowance. On the required At-tachment 1(shown later), he shows how hefigured the nondeductible part of his ex-penses. The result is $253 of expensesallocable to the tax-free parsonage allow-ance. He subtracts $253 from $1,099 andenters the result, $846, on line 6. He alsoenters $846 on line 20 of Schedule A (Form1040).

Schedule A (Form 1040)Rev. Michaels' fills out Schedule A as ex-plained here.

Line 6. Rev. Michaels deducts $1,750 in realestate taxes.

Line 10. He deducts $6,810 of home mort-gage interest.

Line 15. Rev. and Mrs. Michaels contributed$4,800 in cash during the year to variousqualifying charities. Each individual contribu-tion was less than $250.

Line 20. Rev. Michaels enters his unreim-bursed employee business expenses fromForm 2106-EZ, line 6.

Lines 24, 25, and 26. He can deduct only thepart of his employee business expenses thatexceeds 2% of his adjusted gross income.He fills out these lines to figure the amounthe can deduct.

Line 28. The total of all the Michaels' itemizeddeductions is $13,500, which they enter online 28 and on Form 1040, line 36.

Schedule SE (Form 1040)After Rev. Michaels prepares Schedule C-EZand Form 2106EZ, he fills out Schedule SE.He reads the chart on page 1 of the schedulewhich tells him he can use Section AShortSchedule SE to figure his self-employment

tax. Because Rev. Michaels is a minister, hissalary from the church is not consideredchurch employee income. Thus, he does nothave to use Section BLong Schedule SE.He fills out the following lines in Section A.

Line 2. Rev. Michaels attaches a statement(see Attachment 2, later) that explains howhe figures the amount ($44,459) to enter.

Line 4. He multiplies $44,459 by .9235 to gethis net earnings from self-employment($41,058).

Line 5. Because the amount on line 4 is lessthan $72,600, Rev. Michaels multiplies the

amount on line 4 ($41,058) by .153 to get hisself-employment tax of $6,282. He enters thatamount here and on Form 1040, line 50.

Line 6. Rev. Michaels multiplies the amounton line 5 by .5 to get his deduction for one-halfof selfemployment tax of $3,141. He entersthat amount here and on Form 1040, line 27.

Form 1040After Rev. Michaels prepares Form 2106EZand the other schedules, he fills out Form1040. He files a joint return with his wife. Firsthe fills out the address area and completesthe appropriate lines for his filing status andexemptions. Then he fills out the rest of the

form as follows:

Line 7. Rev. Michaels reports $34,400. Thisamount is the total of his $31,000 churchsalary and $3,400 college salary, which werereported to him in box 1 of the Forms W-2 hereceived.

Line 12. He reports his net profit of $3,814from Schedule C-EZ, line 3.

Line 21. He reports $240, the excess of hisutility allowance over his utility costs. Theparsonage allowance is not taxable for in-come tax purposes.

Line 27. He enters half his SE tax fromSchedule SE, line 6.

Line 36. He enters the total itemized de-ductions from Schedule A, line 28.

Line 43. The Michaels can take the child taxcredit for their daughter, Jennifer. Rev.Michaels figures the credit by completing theChild Tax Credit Worksheet (not shown) inthe instructions for Form 1040. He enters the$500 credit on line 43.

Line 50. He enters the self-employment taxfrom Schedule SE, line 5.

Line 57. He enters the federal income taxshown in box 2 of his Form W-2 from thecollege.

Line 58. He enters the $8,400 estimated taxpayments he made for the year.

Page 11


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00 -02468 10

Homet own College40 Honor RoadHomet own, Texas 770 99

0 11-0 0 -2222

John E. Michaels10 40 Main St reetHomet own, TX 77099

31,0 0 0 .0 0

0 0 -13579 13

First Unit ed Church10 42 Main St reet

Homet own, Texas 770 99

3,400.00

0 11-0 0 -2222

John E. Michaels10 40 Main St reetHomet own, TX 77099

1 99 9

1 99

1

Control number

Deceased Pensionplan

Legalrep.

Deferredcompensation

Statutoryemployee

6

2

Employers name, address, and ZIP code

Allocated t ips7

Advance EIC payment

8

109

Wages, tips, other compensation Federal income tax withheld

Social security tax withheldSocial security wages

1211

Employers state I.D. no.

43

Employer identification number

Medicare wages and tips

Social security tips

13 14

5

Employees social security number

Employees name, address, and ZIP code Nonqualified plans

Medicare tax withheld

16

15

Other

1817 19 2120State income taxState State wages, tips, etc. Locality name Local wages, tips, etc. Local income tax

Copy B To Be Filed With Employees FEDERAL Tax Return

Department of the TreasuryInternal Revenue Service

Form

Dependent care benefits

Benefits included in box 1

a

b

c

d

e

W-2Wage and TaxStatement This information is being furnished

to the Internal Revenue Service.

See instrs. for box 13

OMB No. 1545-0008

1

Control number

Deceased Pensionplan

Legalrep.

Deferredcompensation

Statutoryemployee

6

2

Employers name, address, and ZIP code

Allocated t ips7

Advance EIC payment

8

109

Wages, tips, other compensation Federal income tax withheld

Social security tax withheldSocial security wages

1211

Employers state I.D. no.

43

Employer identification number

Medicare wages and tips

Social security tips

13 14

5

Employees social security number

Employees name, address, and ZIP code Nonqualified plans

Medicare tax withheld

16

15

Other

1817 19 2120State income taxState State wages, tips, etc. Locality name Local wages, tips, etc. Local income tax

Copy B To Be Filed With Employees FEDERAL Tax Return


Form

Dependent care benefits

Benefits included in box 1

a

b

c

d

e

W-2Wage and TaxStatement This information is being furnished

to the Internal Revenue Service.

See instrs. for box 13

OMB No. 1545-0008

Parsonage Allowance9,600.00Ut ilit ies Allowance1,200 .00

9

3,400.00

3,400.00

272.00

210 .80

49.30

Page 12


13/20

John E.

Susan R.

Michaels

10 40 Main St reet

Homet own, TX 77099

0 11 0 0 2222

0 11 0 0 1111

X

Jennifer Michaels 111 0 0 1113 daught er

2

1

3

34,400

3,814

240

38,454

3,141

3,141

35,313

Michaels

X

X

X

Excess ut ilit y allowance

X


1040 U.S. Individual Income Tax ReturnOMB No. 1545-0074For the year Jan. 1Dec. 31, 1999, or other tax year beginning , 1999, ending ,

Last nameYour first name and initial Your social security number

(Seeinstructionson page 18.)

LABEL

HERE

Last name Spouses socialsecuritynumberIf a joint return, spouses first name and initial

Use the IRSlabel.

Otherwise,please printor type.

Home address (number and st reet ). If you have a P.O. box, see page 18. Apt. no. IMPORTANT!

City, town or post office, state, and ZIP code. If you have a foreign address, see page 18.

PresidentialElection Campaign(See page 18.)

Note. CheckingYes will notchange your tax orreduce your refund.

NoYes

Do you want $3 to go to this fund?

If a joint return, does your spouse want $3 to go to this fund?

1 SingleFiling Status 2 Married filing joint return (even if only one had income)

3

Check onlyone box.

4

Qualifying widow(er) with dependent child (year spouse died 19 ). (See page 18.)5

6a Yourself. If your parent (or someone else) can claim you as a dependent on his or her tax

return, do not check box 6aExemptionsSpouseb

(4) if qualifyingchild for child tax

credit (see page 19)

Dependents:c (2) Dependentssocial security number

(3) Dependentsrelationship to

you(1) First name Last name

If more than sixdependents,see page 19.

d Total number of exemptions claimed

7Wages, salaries, tips, etc. Attach Form(s) W-27

8a8a Taxable interest. Attach Schedule B if requiredIncome8bb Tax-exempt interest. DO NOT include on line 8aAttach

Copy B of your

Forms W-2 andW-2G here.Also attachForm(s) 1099-Rif tax waswithheld.

99 Ordinary dividends. Attach Schedule B if required

1010 Taxable refunds, credits, or offsets of state and local income taxes (see page 21)

1111 Alimony received

1212 Business income or (loss). Attach Schedule C or C-EZ

Enclose, but donot staple, anypayment. Also,please useForm 1040-V.

1313 Capital gain or (loss). Attach Schedule D if required. If not required, check here

1414 Other gains or (losses). Attach Form 4797

15a 15bTotal IRA distributions b Taxable amount (see page 22)15a

16b16aTotal pensions and annuities b Taxable amount (see page 22)16a

1717 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E

1818 Farm income or (loss). Attach Schedule F

1919 Unemployment compensation

20b20a b Taxable amount (see page 24)20a Social security benefits

2121

22 Add the amounts in the far right column for lines 7 through 21. This is your total income 22

23IRA deduction (see page 26)23

Medical savings account deduction. Attach Form 8853 2525

One-half of self-employment tax. Attach Schedule SE

26

Self-employed health insurance deduction (see page 28)

26

2727

Keogh and self-employed SEP and SIMPLE plans

2828

Penalty on early withdrawal of savings

2929

Alimony paid b Recipients SSN

32Add lines 23 through 31a

30

Subtract line 32 from line 22. This is your adjusted gross income

31a

AdjustedGrossIncome

33

If you did notget a W-2,see page 20.

Form

Married filing separate return. Enter spouses social security no. above and full name here.

Cat. No. 11320B

Label

Form 1040 (1999)

IRS Use OnlyDo not write or staple in this space.

Head of household (with qualifying person). (See page 18.) If the qualifying person is a child but not your dependent,

enter this childs name here.

Other income. List type and amount (see page 24)

Moving expenses. Attach Form 3903

24 24

(99)

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 54.

No. of boxeschecked on6a and 6b

No. of yourchildren on 6cwho:

Dependents on 6cnot entered above

Add numbersentered onlines above

lived with you

did not live withyou due to divorceor separation(see page 19)

32

31a

Student loan interest deduction (see page 26)

30

33

You must enteryour SSN(s) above.

1999

Page 13


14/20

35,313

13,50 0

21,8 13

8,250

13,56 3

2,036

1,53 6

6,282

7,8 18

272

8,400

8,672

8 54

8 54

John E. Michaels 3/1/20 0 0 Minist er

Susan R. Michaels 3/1/20 00 Homemaker

50 0

50 0

Enter your itemized deductions from Schedule A, line 28, OR standard deductionshown on the left. But see page 30 to find your standard deduction if you checked anybox on line 35a or 35b or if someone can claim you as a dependent

Add lines 57, 58, 59a, and 60 through 63. These are your total payments

Page 2Form 1040 (1999)

Amount from line 33 (adjusted gross income)34 34

Check if:35aTax andCredits

35aAdd the number of boxes checked above and enter the total here

Single:$4,300

If you are married filing separately and your spouse itemizes deductions oryou were a dual-status alien, see page 30 and check here

b35b

36

36

37Subtract line 36 from line 3437

38If line 34 is $94,975 or less, multiply $2,750 by the total number of exemptions claimed on

line 6d. If line 34 is over $94,975, see the worksheet on page 31 for the amount to enter

38

39Taxable income. Subtract line 38 from line 37. If line 38 is more than line 37, enter -0-39

40 40

4141 Credit for child and dependent care expenses. Attach Form 2441

43

Credit for the elderly or the disabled. Attach Schedule R

44

Foreign tax credit. Attach Form 1116 if required

45

Other. Check if from

47

48

46

49

Add lines 41 through 47. These are your total credits

47

50

Subtract line 48 from line 40. If line 48 is more than line 40, enter -0- 48

51

Self-employment tax. Attach Schedule SE

49

OtherTaxes

52

Alternative minimum tax. Attach Form 6251

50

65

51

Social security and Medicare tax on tip income not reported to employer. Attach Form 4137

54

Tax on IRAs, other retirement plans, and MSAs. Attach Form 5329 if required53

55

Add lines 49 through 55. This is your total tax 56 56

Federal income tax withheld from Forms W-2 and 109957 57

581999 estimated tax payments and amount applied from 1998 return58

Payments

59a

59a

61Amount paid with request for extension to file (see page 48)61

62Excess social security and RRTA tax withheld (see page 48)62

64

Other payments. Check if from63

66a66a

67 67

If line 64 is more than line 56, subtract line 56 from line 64. This is the amount you OVERPAID

68

68

Amount of line 65 you want REFUNDED TO YOU Refund

69

Amount of line 65 you want APPLIED TO YOUR 2000 ESTIMATED TAX

Estimated tax penalty. Also include on line 68Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge andbelief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

69

You w ere 65 or older, Blind; Spouse w as 65 or older, Blind.

a Form 3800 b Form 8396

c Form 8801 d Form (specify)

a Form 2439 b Form 4136

54

Household employment taxes. Attach Schedule H 55

63

AmountYou Owe

SignHere

DateYour signature

Keep a copyfor yourrecords.

DateSpouses signature. If a joint return, BOTH must sign.

Preparers SSN or PTINDatePreparerssignature

Check ifself-employed

PaidPreparersUse Only

Firms name (or yoursif self-employed) andaddress

EIN

ZIP code

Your occupation

Spouses occupation

Tax (see page 31). Check if any tax is from

If line 56 is more than lin