The good news is that, to the best of our knowledge, tax reform did not directly impact the calculation of a minister’s self-employment social security tax.
Let’s look at some tax elements that might cause someone to think that tax reform impacted the social security calculation for ministers:
Moving expenses. Under the law in effect in 2017, there were two avenues through which an employee might gain some tax advantage:
Moving expenses paid by the minister and not reimbursed by the church. In this situation in 2017, the minister often qualified to deduct the moving expenses on Form 1040, page 1. This was a so-called “above-the-line” deduction before arriving at adjusted gross income.
For 2017, this deduction did not impact the self-employment social security tax calculation. The moving expense deduction was eliminated as of January 1, 2018. Neither is there an impact for 2018 on the self-employment social security tax calculation.
Moving expenses either paid by the minister and reimbursed by the church or paid directly by the church. In this scenario, a minister could have paid all of the moving expenses personally. If the expenses qualify under the law and are substantiated, the church could reimburse the minister on a tax-free basis.
Alternately, the church could pay the moving expenses directly and if the expenses qualify, the expenses would be tax-free for the minister.
If the moving expenses were handled under either of the above two scenarios in 2017, the payments would not only be tax-free for income tax purposes but the expenses would have no impact on the self-employment social security tax calculation.
For 2018, if the moving expenses were either paid by the minister and reimbursed by the church or paid directly by the church, the amounts are fully taxable for income and social security tax purposes. So, one could say that the calculation of self-employment social security taxes are impacted beginning in 2018 for these employer payments.
Home equity interest. Beginning with 2018, home equity interest is no longer deductible on Schedule A. However, the loss of this deduction on Schedule A does not impact whether a minister can include certain home equity interest in the determination of a minister’s housing expenses eligible for the housing exclusion. Note: Under prior and current law, home equity loan or mortgage payments are excludable as housing expenses only if the loan proceeds are used for housing expenses. The exclusion is not available if the loan proceeds are used for personal expenses such as the purchase of an auto or for a child’s college education.
Unreimbursed business expenses. For 2017, a minister’s unreimbursed business expenses were eligible for deduction on Schedule A if the minister itemized deductions. Of course, those expenses were subject to a 2% of adjusted gross income limitation. For 2018, there is no deduction on Schedule A for unreimbursed business expenses.
However, for both 2017 and 2018, unreimbursed business expenses are deductible for self-employment social security tax purposes. Note: The Deason rule that requires an allocation of unreimbursed expenses between taxable and tax-free income does not apply to the computation of a minister’s self-employment taxes.
So, in nearly every situation, the minister’s self-employment social security tax calculation on Schedule SE is not affected by The Tax Cuts and Jobs Act of 2017.
For more information on Tax Reform and its implications for churches and nonprofits, please consider attending one of the free, in-person National Forums on Tax Reform and/or watching our free Tax Reform Webinar-on-Demand.
Zondervan 2018 Minister’s Tax & Financial Guide, Dan Busby, Vonna Laue, Michael Martin, John Van Drunen, 62.