Compensation paid to a minister or clergy member should be reported to them on Form W-2 (if the minister is an employee of the church), or Form 1099-MISC (if the minister performed services such as weddings and baptisms).  Ministers are required to complete a Schedule SE if they did not have SS and Medicare Taxes withheld from their W-2 salary income.  The amount from box 1 of the W-2 will need to be entered on the Schedule SE minister's worksheet.  If the minister received a  parsonage allowance, it will generally be reported in box 14.  The amount listed there is considered the fair market value of the parsonage and will also need to be entered on the Schedule SE minister's worksheet.

Step 1: Enter W-2 wages - The amount in box 1 is subject to federal income tax as well as SE tax if no SS or medicare tax was withheld.  Make note of the amounts in box 1 (wages), and box 14 (parsonage).  These amounts will need to be manually plugged into the minister's worksheet later.

Step 2: If the minister received a 1099-MISC, or has self-employment income from weddings, baptisms, etc., the income should be reported on Schedule C.  If the minister has incurred out of pocket expenses related to this income, they should be reported as expenses on the Schedule C.  You must also answer the Schedule C question to prorate the expenses for a minister/clergy 'Yes'.

To input a Schedule C for a minister or clergy member, from the Main Menu of the Tax Return (Form 1040) select:

• Income Menu
• Business Income/Loss…Sch C, C-EZ, 1099MISC - Select 'New'
• Select Schedule C or Schedule C-EZ and then Taxpayer or Spouse
• Input the Business Code - 81300 Religious Organization.  Enter the street address.  It is not necessary to enter a business name or EIN.  Select 'OK' and then Exit.
• Prorate Expenses for Minister/Clergy? - Change this menu item to 'Yes'.
• Did the Church Provide You with a Parsonage? - Select YES / NO
• Complete each line of the Tax Free Income Worksheet that applies.  This will generate the percentage of tax-free income for the minister.
• Return to the Schedule C edit menu and enter the income from the 1099-MISC as well as any income from weddings, baptisms, etc.  Also enter expenses incurred by the minister related to this income.  The expenses will be prorated based on the percentage of tax-free income.
• Exit to the Main Menu of the tax return (Form 1040)

Step 3: Schedule SE will need to be completed to calculate SE tax on the minister's W-2 wages, parsonage and utilities allowance.  The only exception to paying SE tax on these items when the minister or clergy member has filed either Form 4361 or Form 4029 which must be approved by the IRS.

To access Schedule SE from the Main Menu of the Tax Return (Form 1040) select:

• Other Taxes Menu
• Self Employment Tax (Sch SE)
• Select either Taxpayer or Spouse
• Is This Schedule SE being Filed for a Minister/Clergy? - This question should be answered 'Yes'.
• Select Non-farm Regular (including Ministers Income)
• Review the entries on the Minister / Clergy Income Menu