Tax Law: Clergy Tax Rules

Understanding tax law can be tricky. Ministers, for instance, must abide by special rules in the tax code, which can make it difficult for employers to understand and comply with their obligations. Employers should address these issues before the end of the year. Here are some things to keep in mind when considering ministerial tax matters. First of all, understand the definition of ministers, found in Sec. 107. Knowing this definition will help employers identify ministers.


To be able to claim the full standard deduction, church workers must first determine their status. Are they self-employed or employees? Depending on their filing status, they must pay both employee and employer FICA tax. This tax goes toward Social Security and Medicare. Even those who opt out of the FICA tax must still pay the employer portion of Social Security taxes. But they can opt out of this tax on their secular income. That is one way to avoid a tax bill.

The second important factor in pastor tax preparation is that the position requires a unique set of rules. Church relocation fees, for example, are not tax-deductible. The church must also allocate housing allowances as income. Pastors often don’t know what tax bracket they fall into when it comes to their personal taxes. This can make it difficult to know how much tax they owe, even if they don’t pay income tax. The best way to avoid all of these issues is to seek tax advice from a tax expert.

Military pay, such as housing allowances and other benefits, is exempt from state taxes if the service member is serving outside the commonwealth. In addition, military pay includes the two-week summer training of the reserve unit. And the same rule applies for members of the Pennsylvania National Guard and Reservists, which are considered to be serving in the military outside of the commonwealth. While these exclusions apply to service members who work outside of the commonwealth, the rules for military pay are essentially the same as those for non-resident military spouses.

Qualified stock options are subject to additional requirements than other types of options. The employee must exercise the option within 10 years from the date of grant, and the option price cannot be less than the fair market value of the stock on the date of grant. Furthermore, a person who exercises a qualified stock option will owe taxes on it once the employee sells the stock. Therefore, the employer must keep in mind the different rules regarding employee stock options and qualified stock option.

Compensation is also taxable under Pennsylvania tax law. This means that compensation for services rendered does not qualify as a deduction for personal expenses. The same holds true for workers compensation benefits and federal standard deductions. The exceptions to this rule are explained in section 83 regulations. Also, compensation for business expenses is deductible when the employee receives a bonus or incentive payment from their employer. The compensation can include wages and other forms of benefits, such as fees or tips.

Stock options are subject to Pennsylvania tax when an employee exercises them. Pennsylvania tax law provides for the tax withholding on such compensation. The tax on stock options is determined by the fair market value of the stock on the date of exercise. Unlike intangible property, stock options are subject to Pennsylvania tax. Similarly, employees can apportion their income based on the hours they spend working in each state. So, how can employees get the most benefit from the tax law?

Aside from the salary, the amount of compensation for education is taxable. In the case of a scholarship, however, the recipient is a student, and must perform the same activities in order to earn a degree. If the recipient has a disability or a physical illness, this type of compensation is taxable. In addition to a scholarship, an award may be based on creative worth, but it must be deemed non-economic.

For example, an employee who works outside of Pennsylvania must file a return for their compensation if he or she receives an IRA distribution. The IRA distributions must be reported on federal tax forms in order for the Department of Revenue to treat them as taxable income. Additionally, taxpayers who receive a distribution from an IRA need not worry about the early withdrawal penalty. However, if the employee has an early withdrawal penalty, the IRA distributions should not be considered taxable income.


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