As a church planter, there are certain considerations you need to think through and take action on regarding your taxes and your financial picture as a whole. Church Extension Board Member and professional financial advisor Ken Klein prepared the following general advice for church planters. While this can be used for general information, please consult a tax professional for specific advice that applies to your specific financial picture.
Estimated Quarterly Payments
While some of our pastors and church planters choose to set up tax withholding voluntarily, other pastors decide to withhold the tax themselves throughout the year from their paycheck and pay quarterly estimated taxes. This approach takes diligence and self-control to set aside a portion of each paycheck for estimated quarterly taxes. It is helpful to have a bank account for the estimated taxes to keep it separate from your regular cash flow. Your tax professional can provide payment vouchers for the estimated taxes which includes where to mail the payment or where to submit it online. Work closely with your tax professional to get as accurate an estimate as possible. If you have any financial changes throughout the year, let your tax professional know to see if the change impacts your estimated taxes. Estimated quarterly payments can be made for federal, state, and local taxes.
Housing Allowance
You can determine how much of your salary is designated for your housing allowance, but it must be determined before payment is received and it must be written down in an official employment contract or church minutes or official budget. The Church Extension Director will talk this through with you when determining your salary package and will have this amount written in your yearly appropriations.
At tax time, your predetermined housing allowance will appear on your W2. You must be able to prove that this amount was actually spent on housing expenses. Keep receipts for your mortgage/rent payments, home insurance/renters insurance, water, sewer, electric, garbage, real estate taxes, home repairs, furniture, HOA, pest control, appliances, etc. Landline phones count towards housing allowance, but cell phones do not.
If you did not spend the entire predetermined housing allowance on your housing expenses, you will only be able to deduct what you have actually spent. Check with your tax professional for how to handle the difference between your housing allowance and your housing expenses. If you are living in a parsonage, check with your tax professional for how to determine housing allowance.
State Tax Withholding
Most states follow the IRS rules in exempting Ministers Housing Allowance from state income taxes. There are a few notable exceptions, including Pennsylvania. If you are a Minister in Pennsylvania, your Salary AND your Housing Allowance are subject to PA Income Tax of 3.07%. You may want to opt for some extra PA tax withholding or make a PA Estimated Tax payment on the amount of your Housing Allowance. PA also tacks on high penalties and interest if you don’t withhold enough PA tax throughout the year.
Health Insurance and Taxes
The Affordable Care Act Health Insurance is a common option for church planters under age 65. There are some unique factors that will affect your premiums, including the age of each person in the household as well as the Modified Adjusted Gross Income of the household. Premiums go up with age. The net costs after Premium Tax Credits are lower for married couples and are also lower depending on the number of children. The rules and income thresholds for Affordable Care Act health insurance change each year. For non-licensed church planters, your gross W2 income is what will determine the cost of your ACA health insurance premium. For credentialed pastors collecting a Housing Allowance, the Housing Allowance is NOT included to compute the cost of your ACA health insurance premium, so this may result in even lower cost for your family’s health insurance premiums.
For those with children, a healthcare plan overseen by the state may be a good option for covering the children. For example, there are several pastors in PA who use the CHIP Program for healthcare for their children while the pastor and his wife are covered by an ACA plan. See Pennie.com for information on PA’s healthcare for children. Maryland has an MCHP program and Delaware has a DCHP program.
Christian Health Cost Sharing Ministries
For some church planters, either those with a working spouse or those church planters still working a second job for a time, you will need to consider all household income, and it may exceed the level that ACA health insurance is affordable. For those situations, it may be worthwhile to consider one of the Christian Medical Cost Sharing Ministries. Three of these with solid plans and track records are Samaritan Health Ministries, Christian Healthcare Ministries and Medi-Share Christian Health Care. None of these are traditional Health Insurance plans but rather they are health cost sharing ministries. They can offer a very good solution for Christians and they do not factor in your household income to determine your costs, just your ages. Take a careful look at what these plans include. Many of the programs do not cover routine doctor visits. You will need to have enough cash flow or savings to pay for these expenses.
Retirement Savings
Many church planters do not have retirement savings on their minds as a top priority. However, retirement savings is a biblical concept and starting early is extremely helpful to be prepared for retirement. For new church planters who are not yet licensed, your best option is to start saving some funds in a Traditional IRA or optionally into a ROTH IRA. In most cases, your Traditional IRA contributions will be tax deductible and will grow tax deferred. If you contribute to a ROTH IRA, your savings will grow tax free and come out tax free after age 59 ½ years of age.
Once you become licensed, you will become eligible to have Church Extension begin making Employer’s contributions to the BFC 403B Retirement Plan. You can also make your own contributions to the 403B plan or you can continue contributing to your Traditional or ROTH IRA account. For any of you looking for a guideline or goal to aim for retirement savings, many financial advisors recommend saving at least 10% towards retirement. If you are still paying down student loan debts or saving towards a home downpayment, you may need to start at a lower amount, but aim to increase this sum each year until you are up to at least 10% of your income going into retirement savings.
Know Your Credentials Designation
As a church planter, your BFC Credentials designation will dictate your tax planning considerations.
Before Licensed Probationer Status
Some church planters begin with the Bible Fellowship Church prior to becoming a licensed probationer through the BFC Credentialing process. If this is the case for you and you are not yet a licensed probationer, you will be hired by the Church Extension Ministries of the Bible Fellowship Church as a traditional W2 employee, subject to regular FICA and Medicare tax withholding along with Federal and State income taxes, similar to how any secular job does tax withholding. You will need to complete a W4 form to set up regular payroll tax withholding.
Federal Tax Withholding After Licensed Probationer Status
Once you have become a Licensed Probationer, you will be eligible to receive a Call from the Bible Fellowship Church. At that point, the IRS now considers you a Dual Status Pastor. This means that for Income Tax purposes you no longer are subject to FICA and Medicare Tax withholding (combined tax rates of 7.65%) but are eligible for a Ministry Housing Allowance that is exempt from Federal Income Taxes. This is a nice benefit. However, it also means that you are subject to Self-Employment Tax of 15.3% on both your Salary AND your Housing Allowance. If you do not set up voluntary tax withholding initially, you will receive a very unwelcome large Tax Bill due on your first tax return as a Dual Status Pastor. To avoid this issue, it is best to consult with a tax professional for guidance on the proper amount of taxes to withhold through the year.