Business Tax Policy: Filing Exemption for Ministers
The dual tax status for federal tax reporting purposes of ministers of religion has resulted in different denominations reporting remuneration for ministerial (pastoral) services either as W2 wages or Form 1099 income.
For business license tax and business income tax reporting purposes, duly ordained, commissioned or licensed ministers of a church may be exempt by reason of gross receipts from the filing requirements of both programs. The exemption may apply whether or not the minister is an employee of the church
or is a self-employed person under the common law rules or the 7-factor test*. Regardless of employment status, the minister must have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of the church or denomination in which she or he is duly ordained, commissioned or licensed (Revenue Ruling 65-124, 1965 CB 60; Publication 517.)
The exemption may be requested when a minister's remuneration is reported for federal tax purposes on Form 1099 and subsequently on Form 1040, Schedule C - Profit and Loss from Business Activities. For business license tax and business income tax purposes, remuneration for ministerial services reported on Form 1099 is excluded in the calculation of gross receipts. Therefore, an exemption by reason of gross receipts may result.
To determine whether or not a minister is exempt by reason of gross receipts, subtract Form 1099 remuneration from the total Schedule C gross receipts. If the remainder is $50,000 or less, the minister is exempt from licensing and filing requirements. However, if the remainder is greater than $50,000, the following apportionment formula must be used. All remuneration, excluding W2 wages but including Form 1099 income for ministerial services, is totaled together in the denominator. Form 1099 income for ministerial services is not included in the numerator. Taxes are then calculated using this percent multiplied by the subject net income on the Combined Tax Return.
Remuneration for honoraria (weddings, funerals, etc.) or other business activity, both within and without the city and county, must be less than $50,000 to qualify for an exemption by reason of gross receipts.
Example 1: Pastor Tom Christopher is a duly ordained minister of religion. His church reports his remuneration of $50,000 for federal tax purposes on Form 1099. During the course of the year he officiated at weddings and funerals receiving $1,200 in total honoraria for these services. Both his Form 1099 remuneration and honoraria are reported on Form 1040, Schedule C - Profit and Loss from Business Activities resulting in total gross receipts of $51,200. For business license tax and business income tax purposes, the $50,000 of Form 1099 remuneration for pastoral services may be deducted from the total Schedule C gross receipts to determine exemption by reason of gross receipts. The remaining $1,200 is less than the $50,000 threshold amount. Therefore, Pastor Christopher is exempt from the filing requirements for both business license tax and business income tax purposes.
Example 2: Pastor Joan Sorenson is a duly ordained minister of religion. Her church reports her remuneration of $30,000 for federal tax purposes as wages on Form W2. She received $2,500 in honoraria and $48,000 in Form 1099 income for business activities unrelated to the performance of pastoral services. The $30,000 is reported as wages on Form 1040; the remaining $50,500 is reported on Schedule C - Profit and Loss from Business Activities. She is not exempt from the filing requirements for both business license tax and business income tax purposes.
Example 3: Peter Lewis is the minister of music at Peace Church. He is not ordained, commissioned, or licensed by his church or denomination. His duties relate specifically to the music program of the church. He is remunerated $5,000 for his duties and receives a Form 1099. His total Schedule C income from business activities is $54,000 including the $5,000 for his duties as minister of music. He is not exempt from the filing requirements by reason of gross receipts since he does not meet the definition of a minister as defined by this policy.
7/15/2009 Sue Klobertanz
Date Director, Revenue Bureau
Revised: July 2009
* Weber V Commissioner, 103 T.C. (1994) [PCL1B]