US Internal Revenue Service: p517--1997

8/14/2019 US Internal Revenue Service: p517--1997

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Contents

Introduction ........................................ 1

Social Security Coverage .................. 2

Exemption From Self-Employment(SE) Tax ........................................ 3

Qualified Services .............................. 5

Figuring Net Earnings FromSelf-Employment for SE Tax ...... 6

Income Tax Treatment of CertainItems ............................................. 7

Filing Your Return .............................. 8

How To Get More Information .......... 9

Comprehensive Example .................. 9

Index .................................................... 20

Important Changefor 1997

Increased self-employed health insurancededuction. The self-employed health insur-ance deduction increased from 30% to 40%of the cost of the insurance. See Health in-surance costs of self-employed ministers.

IntroductionSocial security and Medicare taxes are col-lected under two systems. Under the FederalInsurance Contributions Act (FICA), the em-ployee and the employer each pay half of thetaxes. Under the Self-Employment Contribu-tions Act (SECA), the self-employed personpays all the taxes. No earnings are subject toboth systems.

This publication covers several issues re-lating to the collection of social security andMedicare taxes from members of the clergyand religious workers, including:

Which earnings are taxed under FICAand which under SECA,

How to figure net earnings from self-employment, and

How a member of the clergy (minister,member of religious order, or ChristianScience practitioner) can apply for anexemption from self-employment tax.

This publication also covers certain in-come tax rules of interest to the clergy.

A comprehensive example with filled-informs, showing a minister having income thatis taxed under FICA and other income that istaxed under SECA, is at the end of this pub-lication.

Note. In this publication the termchurch is generally used in its generic senseand not in reference to any particular religion.

Departmentof theTreasury

InternalRevenueService

Publica tion 517Cat. No. 15021x

Social Securityand OtherInformation forMembers of theClergy andReligiousWorkers

For use in preparing

1997 Returns

Get forms and other information faster and easier by:COMPUTER

World Wide Web www.irs.ustreas.gov FTP ftp.irs.ustreas.gov IRIS at FedWorld (703) 321-8020

FAX From your FAX machine, dial (703) 368-9694See How To Get More Information in this publication.


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Useful ItemsYou may want to see:

Publication

525 Taxable and Nontaxable Income

529 Miscellaneous Deductions

533 Self-Employment Tax

535 Business Expenses

590 Individual Retirement Arrange-

ments (IRAs)(Including SEP-IRAsand SIMPLE IRAs)

596 Earned Income Credit

Form (and Instructions)

SS8 Determination of Employee WorkStatus for Purposes of FederalEmployment Taxes and IncomeTax Withholding

SS16 Certificate of Election of Cover-age Under the Federal InsuranceContributions Act

Schedule SE (Form 1040) Self-Employment Tax

1040ES Estimated Tax For Individuals 1040X Amended U.S. Individual Income

Tax Return

4029 Application for Exemption FromSocial Security and MedicareTaxes and Waiver of Benefits

4361 Application for Exemption FromSelf-Employment Tax for Use byMinisters, Members of ReligiousOrders and Christian SciencePractitioners

Ordering publications and forms. See HowTo Get More Information, near the end of thispublication, for information about gettingthese publications and forms.

Social SecurityCoverageThe services you perform in the exercise ofyour ministry are covered by social securityand Medicare under SECA. Your earnings forthese services are subject to self-employmenttax unless one of the following applies.

1) You are a member of a religious orderwho has taken a vow of poverty.

2) You request and receive from the Inter-nal Revenue Service (IRS) an exemption

from self-employment tax for the ser-vices. See Exemption From Self-Employment (SE) Tax, later.

3) You are subject only to the social secu-rity laws of a foreign country under theprovisions of a social security agreementbetween the United States and thatcountry. For more information, seeBinational Social Security (Totalization)Agreementsin Publication 54, Tax Guidefor U.S. Citizens and Resident AliensAbroad.

Your earnings that are not from the exer-cise of your ministry may be subject to socialsecurity tax under FICA or SECA according

to the rules that apply to taxpayers in general.See Qualified Services, later.

MinistersIf you are a minister of a church, yourearnings for the services you perform in yourcapacity as a minister are subject to self-employment tax unless you have requestedand received an exemption. See ExemptionFrom Self-Employment (SE) Tax, later. Thisis true whether you are an employee of your

church or a self-employed person under thecommon law rules. For the specific servicescovered, see Qualified Services, later.

Ministers DefinedMinisters are individuals who are duly or-dained, commissioned, or licensed by a reli-gious body constituting a church or churchdenomination. They are given the authority toconduct religious worship, perform sacerdotalfunctions, and administer ordinances orsacraments according to the prescribed ten-ets and practices of that church or denomi-nation.

If a church or denomination ordains someministers and licenses or commissions oth-ers, anyone licensed or commissioned mustbe able to perform substantially all the reli-gious functions of an ordained minister to betreated as a minister for social security pur-poses.

Employment Statusfor Other Tax PurposesEven though you are considered a self-employed individual in performing yourministerial services for social security taxpurposes, you may be considered an em-ployee for income or retirement plan tax pur-poses. Some of your income may be consid-ered income from self-employment and otherincome may be considered income fromwages.

Common-law employee. Under commonlaw rules, you are considered an employeeor a self-employed person depending on allthe facts and circumstances. Generally, youare an employee if your employer has the le-gal right to control both what you do and howyou do it, even if you have considerable dis-cretion and freedom of action. For more in-formation about the common-law rules, getPublication 15A, Employer's SupplementalTax Guide.

If you are employed by a congregation fora salary, you are generally a common-lawemployee and income from the exercise ofyour ministry is considered income fromwages for income tax purposes. However,

amounts received directly from members ofthe congregation, such as fees for performingmarriages, baptisms, or other personal ser-vices, are considered income from self-employment.

Example. A church hires and pays youa salary to perform ministerial services sub-

ject to its control. Under the common lawrules, you are an employee of the churchwhile performing those services.

Form SS8. If you are not certain whetheryou are an employee or a self-employedperson, you can get a determination from theIRS by filing Form SS8.

Members ofReligious OrdersIf you are a member of a religious order whohas nottaken a vow of poverty, your earningsfor required services you performed as amember of the order are subject to self-employment tax. This does not apply if youhave requested and received an exemptionas discussed under Exemption From Self-Employment (SE) Tax, later. To see whichservices are considered required, see Qual-

ified Services, later.

Vow of poverty. If you are a member of areligious order who has taken a vow of pov-erty, you are exempt from paying self-employment tax on your earnings for requiredservices you perform as an agent of yourchurch or its agencies. For income tax pur-poses, the earnings are tax free to you. Yourearnings are considered the income of thereligious order.

Exception. Even if you have taken a vowof poverty, the services you perform for yourchurch or its agencies may be covered undersocial security. Your services are covered ifyour order, or an autonomous subdivision ofthe order, elects social security coverage for

its current and future vow-of-poverty mem-bers.

The order or subdivision elects coverageby filing Form SS16. It can elect coveragefor certain vow-of-poverty members for a ret-roactive period of up to 20 calendar quartersbefore the quarter in which it files the certif-icate.

Services performed outside the order.Even if you are a member of a religious orderwho has taken a vow of poverty and is re-quired to turn over to the order amounts youearn, your earnings are subject to Federalincome tax withholding and employment(FICA) tax if you:

1) Work for an organization outside your

religious community, and2) Perform work that is not required by, or

done on behalf of, the order.

In this case, you are considered an em-ployee of that outside organization. You may,however, be able to take a charitable de-duction for the amount you turn over to theorder. See Publication 526, Charitable Con-tributions.

Lay employees. Lay employees are gener-ally covered by social security. But seeElection to Exclude Employees From FICACoverage, later, under Religious Workers.

Rulings. Organizations and individuals mayrequest rulings from the IRS on whether theyare religious orders, or members of a religiousorder, for FICA tax, self-employment tax, andfederal income tax withholding purposes. Torequest a ruling, follow the procedures inRevenue Procedure 981, which is publishedin the 19981 Internal Revenue Bulletin.

You can read this Revenue Procedure atmost IRS offices or purchase a copy of theBulletin by writing to:

Superintendent of DocumentsU.S. Government Printing OfficeP.O. Box 371954Pittsburgh, PA 152507954.

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Christian SciencePractitioners and ReadersYour earnings from services you performedin your profession as a Christian Sciencepractitioner or reader are generally subject toself-employment tax. However, you can re-quest an exemption as discussed under Ex-emption From Self-Employment (SE) Tax,later.

Practitioners. Christian Science practition-

ers are members in good standing of theMother Church, The First Church of ChristScientist, in Boston, Massachusetts, whopractice healing according to the teachingsof Christian Science. Christian Sciencepractitioners are specifically exempted fromlicensing by state laws.

Some Christian Science practitioners alsoare Christian Science teachers or lecturers.Income from teaching or lecturing is consid-ered the same as income from their work aspractitioners.

Readers. Christian Science readers areconsidered the same as ordained, commis-sioned, or licensed ministers.

Religious Workers(Employees)If you are a religious worker (an employee)and are not in one of the classes alreadydiscussed, your wages are generally subjectto social security and Medicare tax (FICA)and not to self-employment tax. Some ex-ceptions are discussed next.

Election to Exclude EmployeesFrom FICA CoverageChurches and qualified church-controlled or-ganizations (church organizations) can electnot to have their employees covered by FICA.

To make the election, the church or churchorganization must certify to the IRS that, forreligious reasons, it is opposed to payingemployment taxes.

Making the election. To make this election,churches and church organizations file twocopies of Form 8274, Certification byChurches and Qualified Church-ControlledOrganizations Electing Exemption From Em-ployer Social Security and Medicare Taxes.They file this after employees are hired, butbefore the first date on which a quarterlyemployment tax return is due (or would bedue except for this election).

Revoking the election. The church or church

organization can revoke this election. Therevocation cannot be later reversed. Also, theIRS can revoke the election if certain filingrequirements for information returns are notmet.

Effect of election on employees. If you arean employee (other than a minister or mem-ber of a religious order) of a church or churchorganization that makes this election and theypay you $108.28 or more in wages, you areresponsible for paying self-employment taxeson those wages.

When figuring your self-employment in-come, do not reduce these wages (earnings)by any deductions and do not reduce any

Table 1. The Self-Employment Tax ExemptionApplication and Approval Process

WhoCanApply

How

When

EffectiveDate

Ministers, Members of ReligiousOrders, and Christian SciencePractitioners

Member of Recognized ReligiousSect

File Form 4361

File by the due date (plus extensions)of your tax return for the second taxyear with at least $400 of net

earnings from self-employment (atleast part from qualified services)

For all tax years after 1967 with atleast $400 of net earnings fromself-employment

File Form 4029

File anytime

For all tax years after 1950, but notfor years beginning before you meetthe eligibility requirements

Approval If approved, you will receive anapproved copy of Form 4361

If approved, you will receive anapproved copy of Form 4029

other self-employment earnings by any de-duction related to these wages.

Election by Employees ofChurches, etc., Who Choose Not

to Pay Social Security TaxesYou may be able to choose to be exempt fromsocial security and Medicare taxes, includingthe self-employment tax, if you work for achurch (or church-controlled non-profit divi-sion) that does not pay the employer's partof the social security tax on wages. You canmake the choice if you are a member of areligious sect or division opposed to socialsecurity and Medicare. This exemption doesnot apply to your service, if any, as a ministerof a church or as a member of a religiousorder.

You can make this choice by filing Form4029. See Requesting Exemption Form4029, later, under Members of RecognizedReligious Sects.

Employee and employer opposed to socialsecurity and Medicare participation. If youand your employer (or, if your employer is apartnership, each partner) are members of areligious faith, or faiths, opposed to socialsecurity participation, you each can apply forexemption from the social security and Medi-care taxes imposed on wages. See Ex-emption From FICA Taxes, later.

U.S. Citizens, Residentand Nonresident AliensTo be covered under the self-employment taxprovisions (SECA), individuals generally must

be citizens or resident aliens of the UnitedStates. Nonresident aliens are not coveredunder SECA.

To determine your alien status, see Pub-lication 519, U.S. Tax Guide for Aliens.

Residents of Puerto Rico, the Virgin Is-lands, Guam, and American Samoa. Resi-dents of Puerto Rico, the Virgin Islands,Guam, and American Samoa, who are notU.S. citizens, are treated the same as citizensor resident aliens of the United States forself-employment tax purposes. For informa-tion on figuring the tax, see Figuring NetEarnings From Self-Employment for SE Tax,later.

Exemption FromSelf-Employment(SE) TaxMembers of religious orders who have nottaken a vow of poverty, ministers, andChristian Science practitioners can requestan exemption from self-employment tax.

Members of a recognized religious sector a division of it can also apply for an ex-emption from the self-employment tax. Forthe rules that apply to this exemption, seeMembers of Recognized Religious Sects,later.

TIP

Members of religious orders who havetaken a vow of poverty are exemptfrom paying self-employment tax, as

discussed earlier under Members of ReligiousOrders. They do not have to request the ex-emption.

Who cannot be exempt? If you elected be-fore 1968 to be covered under social securityfor your ministerial services, you are stillcovered. You cannot be exempt from self-employment tax.

If you elected to be covered by social se-curity by filing Form 2031 for your 1986 or1987 tax year, you cannot be exempt fromself-employment tax.

Requesting exemption. Table 1 brieflysummarizes the procedure for requesting ex-emption from the self-employment tax. Moredetailed explanations follow.

CAUTION!

An approved exemption only applies

to earnings you receive for qualifiedservices, discussed later. It does notapply to any other self-employment income.

Ministers, Members ofReligious Orders, andChristian SciencePractitionersTo claim the exemption from self-employmenttax, you must meet all of the following condi-tions:

1) File Form 4361, described later underRequesting exemption Form 4361,

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2) Be conscientiously opposed to public in-surance because of your individual reli-gious considerations (not because ofyour general conscience), or be opposedbecause of the principles of your reli-gious denomination,

3) File for other than economic reasons,

4) Inform the ordaining, commissioning, orlicensing body of your church or orderthat you are opposed to public insuranceif you are a minister or a member of a

religious order (other than a vow-of-poverty member),

5) Establish that the organization that or-dained, commissioned, or licensed you,or your religious order, is a tax-exemptreligious organization,

6) Establish that the organization is achurch or a convention or association ofchurches, and

7) Sign and return the statement the IRSmails to you to certify that you are re-questing an exemption based on thegrounds listed on the statement.

Item (4) does not apply to Christian SciencePractitioners.

Requesting exemption Form 4361. Torequest exemption from self-employment tax,file Form 4361 in triplicate.

Form 4361 includes a statement certifyingthat you oppose, for your services as amember of the clergy, public (governmental)insurance for death, disability, old age, or re-tirement because of your conscience or reli-gious principles. This includes insurance thathelps pay for or provide services for medicalcare, and includes benefits from a systemestablished by the Social Security Act.

RECORDS

The IRS will return to you a copy ofthe Form 4361 that you filed indicatingwhether your exemption has been

approved. If it is approved, keep the approvedcopy in your permanent records.When to file. File Form 4361 by the date

your income tax return is due, including ex-tensions, for the second tax year in which youhave net earnings from self-employment ofat least $400. This rule applies if any part ofyour net earnings for each of the two yearscame from your services as a:

Minister,

Member of a religious order, or

Christian Science practitioner.

The two years do not have to be consecutivetax years.

TIPBecause the approval process cantake some time, you should file Form4361 as soon as possible.

Example 1. Rev. Lawrence Jaeger, aclergyman ordained in 1997, has net earningsof $450 in 1997 and $500 in 1998. He mustfile his application for exemption by the duedate, including extensions, for his 1998 in-come tax return. However, if Rev. Jaegerdoes not receive his exemption by April 15,1998, his self-employment tax for 1997 is dueby that date.

Example 2. Rev. Harry Wolfe has $300in net earnings as a clergyman in 1997, butearned more than $400 in both 1996 and

1998. He must file his application for ex-emption by the due date, including exten-sions, for his 1998 income tax return. How-ever, if he did not receive the exemption byApril 15, 1997, his self-employment tax for1996 was due by that date.

Example 3. In 1995, Rev. David Mosswas ordained a minister and had $700 in netearnings as a minister. In 1996, he received$1,000 as a minister, but his related expenseswere over $1,000. Therefore, he had no netearnings as a minister in 1996. Also in 1996,he opened a book store and had $8,000 innet self-employment earnings from the store.In 1997, he had net earnings of $1,500 as aminister and $10,000 net self-employmentearnings from the store.

Because Rev. Moss had net earnings fromself-employment in 1995 and 1997 that weremore than $400 each year, and part of theearnings in each of those years was for hisservices as a minister, he must file his appli-cation for exemption by the due date, includ-ing extensions, for his 1997 income tax re-turn.

Death of individual. The right to file anapplication for exemption ends with an indi-vidual's death. A surviving spouse, executor,

or administrator cannot file an exemption ap-plication for a deceased clergy member.

Effective date of exemption. An approvedexemption is effective for all tax years after1967 in which you have $400 or more of netearnings from self-employment, part of whichis for services as a member of the clergy.

Example. Rev. Thomas Austin, ordainedin 1996, had over $400 in net earnings as aminister in both 1996 and 1997. He files anapplication for exemption on February 15,1998. If an exemption is granted, it is effectivefor 1996 and the following years.

Refunds of self-employment tax. If, afterreceiving an approved Form 4361, you findthat you overpaid self-employment tax, youcan file a claim for refund on Form 1040Xbefore the statutory period ends. This is gen-erally within 3 years from the date you filedthe return or within 2 years from the date youpaid the tax, whichever is later. A return youfiled, or tax paid, before the due date is con-sidered to have been filed or paid on the duedate.

If you file a claim after the 3-year periodbut within 2 years from the time you paid thetax, the credit or refund will not be more thanthe tax you paid within the 2 years imme-diately before you file the claim.

Members of RecognizedReligious SectsIf you are a member of a recognized religioussect, or a division of a recognized religioussect, you can apply for an exemption frompayment of social security and Medicaretaxes.

Exception. If you received social securitybenefits or payments, or anyone else re-ceived these benefits or payments based onyour wages or self-employment income, youcannot apply. However, if you pay your ben-efits back, you may be considered for ex-emption. Contact your local Social Securityoffice to find out the amount to be paid back.

Eligibility requirements. To claim this ex-emption from self-employment tax, all thefollowing requirements must be met.

1) You must file Form 4029, discussed laterunder Requesting exemption Form4029.

2) As a follower of the establishedteachings of the sect or division, youmust be conscientiously opposed to ac-cepting benefits of any private or public

insurance that makes payments fordeath, disability, old age, retirement, ormedical care, or provides services formedical care.

3) You must waive all rights to receive anysocial security payment or benefit andagree that no benefits or payments willbe made to anyone else based on yourwages and self-employment income.

4) The Commissioner of Social Securitymust determine that:

a) Your sect or division has such es-tablished teachings,

b) It is the practice, and has been for

a substantial period of time, formembers of the sect or division toprovide for their dependent mem-bers in a manner that is reasonablein view of the members' generallevel of living, and

c) The sect or division has existed atall times since December 31, 1950.

If you have previously received approvalfor exemption from self-employment tax, youare considered to have met the requirementsand do not need to apply for this exemption.

Requesting exemption Form 4029. Torequest the exemption, file Form 4029 in

triplicate with the Social Security Adminis-tration at the address shown on the form. Thesect or division must complete part of theform.

RECORDS

The IRS will return to you a copy ofthe Form 4029 that you filed indicatingwhether your exemption has been

approved. If it is approved, keep the approvedcopy in your permanent records.

When to file. You can file Form 4029 atany time.

Effective date of exemption. An ap-proved exemption generally is effective for alltax years beginning after 1950. It does notapply to any tax year beginning before youmeet the eligibility requirements discussed

earlier.The exemption will end if you fail to meetthe eligibility requirements or if the Commis-sioner of Social Security determines that thesect or division fails to meet them. You mustnotify the IRS within 60 days if you are nolonger a member of the religious group, or ifyou no longer follow the establishedteachings of this group. The exemption willend effective with the date you notify the IRS.

Refunds of self-employment tax paid. Forinformation on requesting refunds, see thediscussion under Ministers, Members of Reli-gious Orders, and Christian Science Practi-tioners, earlier.

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Exemption From FICA Taxes

Generally, under FICA, the employer and theemployee each pay half of the social securityand Medicare tax. Both the employee and theemployer, if they meet the eligibility require-ments discussed earlier in this section, canapply to be exempt from their share of FICAtaxes on wages paid by the employer to theemployee.

TIP

If the employer's application is ap-proved, the exemption will apply only

to FICA taxes on wages paid to em-ployees who also received an approval ofidentical applications.

Information for employers. If you have anapproved Form 4029 and you have employ-ees who have approved Form 4029s, do notreport wages you paid to these employeesas social security and Medicare wages.

A partnership in which each partner holdsa religious exemption from social security andMedicare is an employer for this purpose.

Form W-2. When preparing a Form W2for an employee with an approved Form4029, write Form 4029 in the box markedOther. Do not make any entries in box 3 or5.

Forms 941 and 943. Do not include theseexempt wages on Form 941, Employer'sQuarterly Federal Tax Return, or on Form943, Employer's Annual Tax Return for Agri-cultural Employees if you have received anapproved Form 4029.

On Form 941, write Form 4029 to the leftof the entry spaces on the lines for Taxablesocial security wages, Taxable social secu-rity tips, and Taxable Medicare wages andtips. Check the box on line 8 to show that thewages are not subject to these taxes.

On Form 943, write Form 4029 to the leftof the entry spaces on the lines for Totalwages subject to social security taxes, andTotal wages subject to Medicare taxes.

If you have employees who do not have

an approved Form 4029, you must withholdthe employee share of social security andMedicare taxes and pay the employer'sshare.

Effective date. An approved exemptionfrom FICA becomes effective on the first dayof the first calendar quarter after the quarterin which Form 4029 is filed. The exemptionwill end on the last day of the calendar quarterbefore the quarter in which the employer,employee, sect, or division fails to meet therequirements.

Qualified ServicesThe exemption from self-employment tax ap-plies only to qualified services. Qualified ser-vices, in general, are the services you per-form in the exercise of your ministry or in theexercise of your duties as required by yourreligious order. The exemption does not applyto any other self-employment income.

CAUTION

!If you do not have an exemption,amounts you receive for performingqualified services are subject to self-

employment tax.The following discussions provide more

detailed information on qualified services ofministers, members of religious orders, andChristian Science practitioners and readers.

MinistersMost services you perform as a minister,priest, rabbi, etc., are qualified services.These services include:

1) Performing sacerdotal functions,

2) Conducting religious worship, and

3) Controlling, conducting, and maintainingreligious organizations, boards, societ-ies, and other integral agencies that are

under the authority of a religious bodythat is a church or denomination.

You are considered to control, conduct,and maintain a religious organization if youdirect, manage, or promote the organization'sactivities.

A religious organization is under the au-thority of a religious body that is a church ordenomination if it is organized for and dedi-cated to carrying out the principles of a faithaccording to the requirements governing thecreation of institutions of the faith.

Services for nonreligious organizations.Your services for a nonreligious organizationare qualified services if the services are as-signed or designated by your church. As-signed or designated services qualify even ifthey do not involve performing sacerdotalfunctions or conducting religious worship.

If your services are not assigned or des-ignated by your church, they are qualifiedservices only if they involve performingsacerdotal functions or conducting religiousworship.

Services that are not part of your ministry.Income from services that are not qualifiedservices is generally subject to FICA (notSECA) taxes under the rules that apply toworkers in general. The following are notqualified services.

1) Services you perform for nonreligiousorganizations other than the servicesstated earlier.

2) Services you perform as a duly ordained,commissioned, or licensed minister of achurch as an employee of the UnitedStates, the District of Columbia, a foreigngovernment, or any of their politicalsubdivisions. This is true even if you areperforming sacerdotal functions or con-ducting religious worship. (For example,if you perform services as a chaplain inthe Armed Forces of the United States,the services are not qualified services.)

3) Services you perform in a government-

owned and operated hospital (servicesare considered performed by a govern-ment employee, not by a minister as partof the ministry). However, services thatyou perform at a church-related hospitalor health and welfare institution, or aprivate nonprofit hospital, are consideredto be part of the ministry.

Books or articles. Writing religious booksor articles is considered to be in the exerciseof your ministry. Royalty income from the saleof books or articles is not subject to the self-employment tax unless you elect to be cov-ered by the social security and Medicare in-surance system.

This rule also applies to members of reli-gious orders and to Christian Science practi-tioners.

Members ofReligious OrdersServices you perform as a member of a reli-gious order in the exercise of duties requiredby the order are qualified services. The ser-vices are qualified because you perform themas an agent of the order.

For example, if you are directed to performservices for another agency of the supervisingchurch or an associated institution, you areconsidered to perform the services as anagent of the order.

However, if you are directed to work out-side the order, the employment will not beconsidered a duty required by the order un-less:

Your services are the kind that are ordi-narily performed by members of the or-der, and

Your services are part of the duties thatmust be exercised for, or on behalf of, thereligious order as its agent.

Effect of employee status. Ordinarily, ifyour services are not considered directed orrequired of you by the order, you and theoutside party for whom you work are consid-ered employee and employer. In this case,your earnings from the services are taxedunder the rules that apply to workers in gen-eral, not under the rules for services providedas agent for the order. This is true even if youhave taken a vow of poverty.

Example. Mark Brown and ElizabethGreen are members of a religious order andhave taken vows of poverty. They renounceall claims to their earnings. The earnings be-long to the order.

Mark is a licensed attorney. The superiorsof the order instructed him to get a job witha law firm. Mark joined a law firm as an em-ployee and, as he requested, the firm madethe salary payments directly to the order.

Elizabeth is a secretary. The superiors ofthe order instructed her to accept a job withthe business office of the church that super-vises the order. Elizabeth took the job andgave all her earnings to the order.

Mark's services are not duties requiredby the order. His earnings are subject to so-cial security and Medicare tax under FICAand Federal income tax.

Elizabeth's services areconsidered dutiesrequired by the order. She is acting as anagent of the order and not as an employeeof a third party. She does not include theearnings in gross income, and they are notsubject to income tax withholding, social se-curity and Medicare tax, or self-employmenttax.

Christian SciencePractitioners and ReadersThe exemption from self-employment tax,discussed earlier, applies only to the servicesa Christian Science practitioner or readerperforms in the exercise of that profession. Ifyou do not have an exemption, amounts youreceive for performing these qualified ser-vices are subject to self-employment tax.

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Figuring Net EarningsFromSelf-Employmentfor SE TaxGenerally, your net earnings from self-employment is your gross income from yourtrade or business minus allowable businessdeductions.

For the self-employment tax, your netearnings from self-employment include yourgross income from qualified services (seeQualified Services, earlier) minus the de-ductions related to that income.

CAUTION

!If you have an approved exemption,or you are automatically exempt, donot include the income or deductions

from qualified services in figuring your netearnings from self-employment.

For more information on net earnings fromself-employment, get Publication 533.

Gross income. To figure your net earningsfrom self-employment (on Schedule SE (Form1040)), include in gross income:

Salaries and fees for your qualified ser-vices,

Offerings you receive for marriages,baptisms, funerals, masses, etc.,

The value of meals and lodging providedto you, your spouse, and your depen-dents for your employer's convenience,and

The fair rental value of a parsonageprovided to you (including the cost ofutilities that are furnished) and the rentalallowance (including an amount for pay-ment of utilities) paid to you.

If a church pays any amount toward yourincome tax or self-employment tax, other thanwithholding the amount from your salary, it isincome to you. You must include the amountin your gross income and self-employmentincome.

Example. Pastor Roger Adams receivesan annual salary of $16,500 as a full-timeminister. The $16,500 includes $1,500 that isdesignated as a rental allowance to pay utili-ties. His church owns a parsonage that hasa fair rental value of $5,200 per year. PastorAdams is given the use of the parsonage. Heis not exempt from self-employment tax. Hisnet earnings for self-employment tax pur-poses are $21,700 ($16,500 plus $5,200).

The results would be the same if, insteadof the use of the parsonage and receipt of therental allowance for utilities, Pastor Adamshad received an annual salary of $21,700 ofwhich $6,700 ($1,500 plus $5,200) per yearwas designated as a rental allowance.

For the income tax treatment of theseamounts, see Exclusion of Rental Allowanceand Fair Rental Value of a ParsonageunderIncome Tax Treatment of Certain Items, later.

Overseas duty. Your net earnings fromself-employment are determined without anyforeign earned income exclusion or the for-eign housing exclusion or deduction if you area U.S. citizen or resident alien who is servingabroad and living in a foreign country.

Example. Paul Jones was the ministerof a U.S. church in Mexico. He earned$22,000 and was able to exclude it all for in-come tax purposes under the foreign earnedincome exclusion. Mr. Jones would, however,compute self-employment tax on $22,000.

For information on excluding foreignearned income or the foreign housingamount, get Publication 54, Tax Guide forU.S. Citizens and Resident Aliens Abroad.

Specified U.S. possessions. The ex-clusion from gross income for amounts de-

rived in Guam, American Samoa, or theCommonwealth of the Northern Mariana Is-lands does not apply in computing netearnings from self-employment. Also seeResidents of Puerto Rico, the Virgin Islands,Guam, and American Samoa, earlier, underU.S. Citizens, Resident and Nonresident Al-iens.

Amounts not included in gross income.Do not include the following amounts in grossincome when figuring your net earnings fromself-employment.

Offerings that others made to the church.

Contributions by your church to an an-nuity plan set up for you, including any

salary reduction, that are not included inyour gross income.

Pension payments or retirement allow-ances you receive for your past qualifiedservices.

Allowable deductions. To determine yournet earnings from self-employment, deductall your nonemployee ministerial expenses.Also, deduct all your allowable unreimbursedtrade or business expenses that you incur inperforming ministerial services as a commonlaw employee of the church. Include this netamount on line 2 of Schedule SE (Form1040).

Reimbursement arrangements. If you re-ceived an advance, allowance, or reimburse-ment for your expenses, how you report thisamount and your expenses depends onwhether the reimbursement was paid to youunder an accountable plan or a nonaccount-able plan. If you are not sure if you are reim-bursed from an accountable plan or a non-accountable plan, ask your employer.

Accountable plans. To be an account-able plan, your employer's reimbursementarrangement must require you to meet allofthe following rules.

1) Your expenses must have a businessconnection that is, you must havepaid or incurred deductible expenseswhile performing services as an em-

ployee of your employer.

2) You must adequately account to youremployer for these expenses within areasonable period of time.

3) You must return any excess reimburse-ment or allowance within a reasonableperiod of time.

Generally, if your expenses equal yourreimbursement, you have no deduction andthe reimbursement is not reported on yourForm W2. If your expenses are more thanyour reimbursement, you can deduct yourexcess expenses for self-employment tax andincome tax purposes.

Nonaccountable plan. A nonaccount-able plan is a reimbursement arrangementunder which you do not meet all three ruleslisted under Accountable plans. In addition,the following payments made under an ac-countable plan will be treated as being paidunder a nonaccountable plan.

1) Excess reimbursements you fail to returnto your employer.

2) Reimbursement of nondeductible ex-penses related to your employer's busi-

ness.

Your employer will combine any reimburse-ment paid to you under a nonaccountableplan with your wages, salary, or other com-pensation. Your employer will report thecombined total on your Form W2. You candeduct your expenses (for self-employmenttax and income tax purposes) regardless ofwhether they are more than, less than, orequal to your reimbursement.

For more information on accountable andnonaccountable plans get Publication 463,Travel, Entertainment, Gift, and Car Ex-penses.

Husband and WifeMissionary TeamIf a husband and wife are both duly ordained,commissioned, or licensed ministers of achurch and have an agreement that each willperform specific services for which they arepaid jointly or separately, they must divide theself-employment income according to theagreement.

If the agreement is with one spouse onlyand the other spouse is not paid for anyspecific duties, amounts received for theirservices are included in only the self-employment income of the spouse having theagreement.

Maximum Earnings Subjectto Self-Employment TaxFor 1997, the maximum net earnings fromself-employment subject to social security(old age, survivor, and disability insurance)tax is $65,400 minus any wages and tips youearned that were subject to social securitytax. The tax rate is 12.4%. All of your netearnings are subject to the Medicare (hospitalinsurance) part of the self-employment tax.The tax rate is 2.9%.

Optional Methods forFiguring Net Earningsfrom Self-EmploymentYou may be able to use an optional methodfor figuring your net earnings from self-employment. In general, the optional methodsare intended to permit continued coverage forsocial security and Medicare purposes whenyour income for the tax year is low.

There is an optional method for farmersand an optional method for nonfarm busi-nesses. If you are in farm and nonfarm busi-nesses, you may qualify for both options.

Farm optional method. If you are in thefarming business, you may be able to use thefarm optional method. For more informationon the farm optional method, see Publication533.

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Nonfarm optional method. You may usethe nonfarm optional method for nonfarmself-employment income if you meet allof thefollowing tests.

1) Your net nonfarm profits are less than$1,733.

2) Your net nonfarm profits are less than72.189% of your total gross income fromnonfarm self-employment.

3) You are self-employed or a partner on a

regular basis. This means that your ac-tual net earnings from self-employmentare $400 or more in at least 2 of the 3tax years before the one for which youuse this method.

4) You have not previously used thismethod more than 4 years (there is a5-year lifetime limit). The years do nothave to be consecutive.

If you meet these four tests, you may re-port the smaller of two-thirds of the gross in-come from your nonfarm business, or $1,600as your net earnings from self-employment.

CAUTION

!You may not report less than youractual net earnings for nonfarm self-

employment.

Income Tax Treatmentof Certain ItemsSome income and expense items are treatedthe same for income tax and self-employmenttax purposes and some are treated differently.

Income ItemsThe tax treatment of offerings and fees, out-side earnings, rental allowances, rental valueof parsonage, pay of members of religious

orders, and foreign earned income is dis-cussed here.

Offerings and FeesIf you are a member of the clergy, you mustinclude in your income offerings and fees youreceive for marriages, baptisms, funerals,masses, etc., in addition to your salary. If theoffering is made to the religious institution, itis not taxable to you.

Outside EarningsIf you are a member of a religious organiza-tion and you give your outside earnings to theorganization, you still must include theearnings in your income. However, you may

be entitled to a charitable contribution de-duction for the amount paid to the organiza-tion. Get Publication 526, Charitable Contri-butions.

Exclusion of Rental Allowanceand Fair Rental Value of aParsonageIf you receive in your pay an amount officiallydesignated as a rental allowance, you canexclude the allowance from your gross in-come if:

1) The amount is used to provide or rent ahome, and

2) The amount is not more than reasonablepay for your services.

The term rental allowance includes anamount to pay utility costs.

You can exclude from gross income thefair rental value of a house or parsonage,including utilities, furnished to you as part ofyour pay. However, the exclusion cannot bemore than the reasonable pay for your ser-vices. If you pay for the utilities, you can ex-clude any allowance designated for utility

costs, up to your actual cost.This exclusion applies only for income taxpurposes. It does not apply for self-employment tax purposes, as discussed ear-lier under Figuring Net Earnings From Self-Employment for SE Tax.

This exclusion applies to ordained, com-missioned, or licensed ministers of the gos-pel. To exclude the allowance, it must beprovided as pay for your services, including:

Qualified services, discussed earlier un-der Ministers,

Administrative duties and teaching attheological seminaries, and

The ordinary duties of a minister per-formed as an employee of the UnitedStates (other than as a chaplain in theArmed Forces), a state, possession, pol-itical subdivision, or the District ofColumbia.

Example. Rev. Amos Baker is a full-timeminister at the Central Mission Church. Thechurch allows him to use the parsonage thathas an annual fair rental value of $4,800. Thechurch pays him an annual salary of $13,200,of which $1,200 is designated for utility costs.His utility costs during the year were $1,000.

For income tax purposes, Rev. Baker ex-cludes $5,800 from gross income (the fairrental value of the parsonage plus $1,000from the allowance for utility costs). He willreport $12,200 ($12,000 salary and $200 ofunused utility allowance). His income forself-employment tax purposes, however, is$18,000 ($13,200 salary + $4,800 fair rentalvalue of the parsonage).

Home ownership. If you own your home andyou receive as part of your pay a housing orrental allowance, you may exclude from grossincome the smallest of the following:

The amount actually used to provide ahome,

The amount officially designated as arental allowance, or

The fair rental value of the home, includ-ing furnishings, utilities, garage, etc.

You must include in gross income theamount of any rental allowance that is morethan the smallest of your reasonable pay, thefair rental value of the home plus utilities, orthe amount actually used to provide a home.

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You may deduct the home mortgageinterest and real estate taxes you payon your home even though all or part

of the mortgage is paid with funds you getthrough a tax-free rental or parsonage allow-ance.

Retired ministers. If you are a retiredminister, you exclude from your gross in-come the rental value of a home (plus utili-ties) furnished to you by your church as a partof your pay for past services, or the part ofyour pension that was designated as a rentalallowance. However, a minister's survivingspouse cannot exclude the rental value un-less the rental value is for ministerial serviceshe or she performs or performed.

Self-employment earnings. If you are aretired minister, you can exclude from yournet earnings from self-employment the rentalvalue of a parsonage or a parsonage allow-ance you are provided after you retire. Thisapplies whether or not you can exclude theamount for income tax purposes. You canalso exclude from your net earnings fromself-employment any retirement benefits youreceive from a church plan.

Theological students. If you are a theolog-ical student serving a required internship asa part-time or assistant pastor, you cannotexclude a parsonage or rental allowance fromyour income unless you are ordained, com-missioned, or licensed as a minister.

Traveling evangelists. You can exclude a

designated rental allowance from out-of-townchurches if you meet all of the following re-quirements.

1) You are an ordained minister.

2) You perform qualified services atchurches located away from your com-munity.

3) You actually use the rental allowance tomaintain your permanent home.

Jewish cantors. If you have a bona fidecommission and your congregation employsyou on a full-time basis to perform substan-tially all the religious functions of the Jewishfaith, you can exclude a rental allowance from

your gross income.

Pay Members of ReligiousOrdersYour pay may be exempt from both incometax and self-employment tax if you are amember of a religious order who:

Has taken a vow of poverty,

Receives pay for services performed asan agent of the order and in the exerciseof duties required by the order, and

Renounces the pay and gives it to theorder.

See Members of Religious Orders, earlier.

Foreign Earned IncomeCertain income may be exempt from incometax if you work in a foreign country or in aspecified U.S. possession. Publication 54,Tax Guide for U.S. Citizens and Resident Al-iens Abroad, discusses the foreign earnedincome exclusion. Publication 570, Tax Guidefor Individuals With Income From U.S. Pos-sessions, covers the rules for taxpayers inU.S. possessions. You may get these freepublications from the Internal Revenue Ser-vice or from most U.S. Embassies or consu-lates.

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Expense ItemsThe tax treatment of ministerial trade orbusiness expenses, expenses allocable totax-free income, and health insurance costsis discussed here.

Ministerial Trade or BusinessExpenses as an EmployeeWhen you figure your income tax, you mustitemize your deductions on Schedule A (Form1040) to claim allowable deductions forministerial trade or business expenses in-curred while working as an employee. Youmay also have to file Form 2106, EmployeeBusiness Expenses(or Form 2106EZ).

These expenses are claimed as miscella-neous itemized deductions and are subject tothe 2% of adjusted gross income (AGI) limit.See Publication 529, Miscellaneous De-ductions, for more information on this limit.

Additionally, these expenses may have tobe reduced by the amount that is allocable totax-free income (discussed next) before beinglimited by the 2% AGI limit.

Expenses Allocable to Tax-FreeIncomeThe income and deductions relative to yourministry include amounts related to ministerialduties you perform both as an employee andas a self-employed person.

If you receive a rental or parsonage al-lowance that is exempt from income tax (tax-free), you must allocate a portion of the ex-penses of operating your ministry to thattax-free income. You cannot deduct the por-tion of your expenses that is allocated to yourtax-free rental or parsonage allowance.

Exception. This rule does not apply toyour deductions for home mortgage interestor real estate taxes on your home.

Figuring the allocation. Figure the portion

of your otherwise deductible expenses thatyou cannot deduct (because that portion mustbe allocated to tax-free income) by multiplyingthe expenses by a fraction.

The fraction's numerator is the tax-freerental or parsonage allowance. The denomi-nator is all income (both taxable and tax-free)earned from your ministry.

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Reduce your deductible expensesonly in figuring your income tax, notyour self-employment tax.

Required statement. If you receive a tax-free rental or parsonage allowance and haveministerial expenses, attach a statement toyour tax return. The statement must containall of the following information:

1) A list of each item of taxable ministerialincome by source (such as wages, sal-ary, weddings, baptisms, etc.) plus theamount,

2) A list of each item of tax-free ministerialincome by source (parsonage allow-ance) plus the amount,

3) A list of each item of otherwise deduct-ible ministerial expenses plus theamount,

4) How you figured the nondeductible partof your otherwise deductible expenses,and

5) A statement that the other deductionsclaimed on your tax return are notallocable to your tax-free income.

See the statement prepared for the Com-prehensive Example, later.

Example. Rev. Charles Ashford received$40,000 in ministerial earnings consisting of:a $28,000 salary for ministerial services;$2,000 for weddings and baptisms; and a$10,000 tax-free housing allowance. He in-curred $4,000 of unreimbursed expensesconnected with his ministerial earnings.$3,500 of the $4,000 is related to hisministerial salary, and $500 is related to hiswedding and baptism income. He figures theunallowable part of his expenses as follows:

1) $10,000 $40,000 = 25%;

2) $3,500 25% = $875;

3) $500 25% = $125.

$875 of the $3,500 salary-related expensesis not deductible, and $125 of the $500 self-employment related expenses is not deduct-ible.

Health Insurance Costs ofSelf-Employed MinistersIf you are self-employed, you may be able todeduct a percentage of the amount you payfor medical insurance coverage for yourselfand your family. For 1997, the percentage is40%.

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For 1998, the deduction percentagewill increase to 45%.

You can take this deduction even if youdo not itemize deductions on Schedule A(Form 1040). You take the deduction as anadjustment to income on Form 1040. Theexpenses taken into account for purposes of

this deduction are not allowed as a medicalexpense deduction on Schedule A.

CAUTION

!You cannot take the deduction for anymonth you can participate in a subsi-dized plan of your or your spouse's

employer. For more information, see Publi-cation 535.

Your deduction cannot exceed your netearnings from the business under which theinsurance plan is established. Also, theamount you deduct does not reduce your in-come for self-employment tax purposes.

Common-law employee. As a common-lawemployee (discussed earlier) of the church,you are not considered to be a self-employedindividual for the income from that employ-ment. Do not include that income when de-termining if your deduction exceeds your netearnings.

Deduction for Self-EmploymentTaxYou can deduct one-half of your self-employment tax as a business expense infiguring adjusted gross income. This is an in-come tax deduction only, and you deduct iton line 26 of Form 1040.

CAUTION

!It is not a deduction in figuring netearnings from self-employment sub-ject to self-employment tax.

Income Tax Withholdingand Estimated TaxIf you are a duly ordained, commissioned, orlicensed minister, a member of a religiousorder (who has not taken a vow of poverty),or a Christian Science practitioner, and youperform qualified services, your salary issubject to income tax. However, it is generallynot subject to federal income tax withholding.

If your salary is not subject to withholding,you should make estimated tax payments to

avoid penalties for not paying tax as you earnyour income. For more information, see Pay-ment of Estimated Tax, later.

If you perform your services as an em-ployee of the church (under the common lawrules) and your pay is not subject to incometax withholding, you can enter into a voluntarywithholding agreement with your employer,the church, to cover any income and self-employment tax that may be due.

Filing Your ReturnEven if you are not otherwise required to file,you must file an income tax return on Form

1040 if:

You are not exempt from self-employment tax, and you have netearnings from self-employment (dis-cussed earlier under Figuring NetEarnings From Self-Employment for SETax) of $400 or more in the tax year,

You are exempt from self-employmenttax on earnings from qualified servicesand you have $400 or more of otherearnings subject to self-employment tax,or

You had wages of $108.28 or more froman electing church or church-controlledorganization (discussed earlier under

Religious Workers).

Self-employment tax. If you are liable forself-employment tax, you must file ScheduleSE (Form 1040) with your return. Publication533 has information about completing theschedule.

Exemption from self-employment tax.If you filed Form 4361 and received IRS ap-proval not to be taxed on those earnings, andyou do not have any other income subject toself-employment tax, do not file Schedule SE.Instead, write ExemptForm 4361 on Form1040, line 47.

If you filed Form 4029 and received IRSapproval not to be taxed on those earnings,and you do not have any other income subject

to self-employment tax, do not file ScheduleSE. Instead, write Form 4029 on Form 1040,line 47.

For more information on filing your return,including when and where to file it, see theinstructions for Form 1040.

Payment of Estimated TaxEstimated tax is the method used to pay in-come, self-employment, and other taxes youreport on Form 1040 for income that is eithernot subject to withholding, or from which notenough tax is withheld. Your estimated tax isyour expected tax for the year minus yourexpected withholding and credits.

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Generally, you must make estimated taxpayments if your estimated tax for the yearwill be $500 or more.

Determine your estimated tax by using theworksheet in Form 1040ES. Then, using theForm 1040ES payment-voucher, pay theentire estimated tax or the first installment byApril 15, 1998. The April 15th date applieswhether or not your tax home and your abodeare outside the United States and PuertoRico.

For more information get Publication 505,Tax Withholding and Estimated Tax.

Retirement SavingsArrangements

Retirement plans for the self-employed.To set up a qualified retirement plan (suchas a Keogh (H.R. 10) plan, a simplified em-ployee pension (SEP) plan, or a SIMPLEplan), you must be self-employed.

Ministers, members of religious orders,and Christian Science practitioners andreaders treat their pay for qualified services(discussed earlier) as self-employmentearnings for social security and Medicare

taxes.The common law rules determine whetheryou are an employee or a self-employedperson for purposes of setting up a retirementplan for the self-employed. See EmploymentStatus for Other Tax Purposes, earlier.

For example, if a congregation pays aminister a salary for performing qualified ser-vices, and the minister is subject to the con-gregation's control, the minister is a com-mon-law employee. The minister is not aself-employed person for purposes of settingup a retirement plan. This is true even though,for social security and Medicare purposes, hisor her pay is counted when figuring netearnings from self-employment.

On the other hand, amounts received di-rectly from members of the congregation,such as fees for performing marriages,baptisms, or other personal services, areearnings from self-employment for all taxpurposes.

For more information on establishing aKeogh, SEP, or SIMPLE plan, get Publication560, Retirement Plans for Small Business.

Individual retirement arrangements (IRAs).You generally are allowed to make contribu-tions to your IRA of up to $2,000 or theamount of your pay, whichever is less. Thesecontributions may be fully or partly deductible,or nondeductible, if you or your spouse iscovered by an employer retirement plan (in-cluding a Keogh, SEP, or SIMPLE plan). If

you are covered (or considered covered), theamount of your deduction is affected by yourincome and your filing status.

For more information on IRAs, get Publi-cation 590.

Church plans. If you are a duly ordained,commissioned, or licensed minister workingas a minister or chaplain, and are self-employed or employed by an organizationthat is not a tax-exempt organization, you canparticipate in a church plan. For more infor-mation, see Publication 571, Tax-ShelteredAnnuity Programs for Employees of PublicSchools and Certain Tax-Exempt Organiza-tions.

Earned Income CreditIf you qualify for it, the earned income creditreduces the tax you owe. Even if you do notowe tax, you can get a refund of the credit.Depending on your situation, the credit canbe as high as $3,656. Also, you may be ableto get part of the credit added to your payinstead of waiting until after the end of theyear.

You cannot take the credit if your earnedincome ( or modified adjusted gross income,if greater) is more than:

$9,770 if you do not have a qualifyingchild,

$25,760 if you have one qualifying child,or

$29,290 if you have more than one qual-ifying child.

Earned Income. Earned income includesyour:

Wages, salaries, tips, and other pay, and

Net earnings from self-employment mi-nus the amount you claimed (or shouldhave claimed) on Form 1040, line 26, forone-half of your self-employment tax.

Earned income for a minister with anapproved Form 4361. If you have earningsfrom qualified services that are exempt fromSECA (have an approved Form 4361),amounts you received for performingministerial duties as an employee are earnedincome. This includes wages, salaries, tips,and other employee pay. It also includes paythat is not taxed, such as the housing andutility allowance received as part of your payfor services as an employee.

Amounts you received for nonemployeeministerial duties are not earned income. Thisincludes fees for performing marriages,baptisms, and honoraria for deliveringspeeches.

If you had nonministerial duties, any netearnings from self-employment, minus one-half of your self-employment tax, or any payreceived as an employee is earned income.

Earned income for a minister whoseincome from qualified services is not ex-empt from SECA. Earned income includesyour net earnings from self-employment plusany pay you received for nonministerial dutiesminus your Form 1040, line 26, amount forone-half of self-employment tax.

Your net earnings from self-employmentincludes those net earnings from qualifiedservices. See Figuring Net Earnings FromSelf-Employment for SE Tax, earlier. Netearnings also includes net earnings fromself-employment related to nonministerial du-ties.

Earned income for a member of a re-cognized religious sect with an approvedForm 4029. If you have an approved Form4029, all wages, salaries, tips, and other em-ployee compensation are earned income.Amounts you received as a self-employedindividual are not earned income. Also, lossesfrom Schedules C, CEZ, or F cannot besubtracted from wages on line 7 of Form1040.

Where to get Information. For the detailedrules on this credit, get Publication 596. Youmay need to complete Schedule EIC and at-tach it to your tax return. To figure the amountof your credit, you will have to fill out a work-

sheet or have the IRS compute the credit foryou. For details on getting part of the creditadded to your pay, get Form W5 from youremployer or by calling the IRS at1800TAXFORM (18008293676).

How To Get MoreInformation

You can get help from the IRS in severalways.

Free publications and forms. To order freepublications and forms, call1800TAX-FORM (18008293676). Youcan also write to the IRS Forms DistributionCenter nearest you. Check your income taxpackage for the address. Your local libraryor post office also may have the items youneed.

For a list of free tax publications, orderPublication 910, Guide to Free Tax Services.It also contains an index of tax topics andrelated publications and describes other free

tax information services available from theIRS, including tax education and assistanceprograms.

If you have access to a personal computerand modem, you also can get many formsand publications electronically. See Quickand Easy Access to Tax Help and Forms inyour income tax package for details.

Tax questions. You can call the IRS withyour tax questions. Check your income taxpackage or telephone book for the localnumber, or you can call 18008291040.

TTY/TDD equipment. If you have access toTTY/TDD equipment, you can call18008294059 to ask tax questions or to

order forms and publication. See your incometax package for the hours of operation.

Evaluating the quality of our telephoneservices. To ensure that IRS representativesgive accurate, courteous, and professionalanswers, we evaluate the quality of our 800number telephone services in several ways.

A second IRS representative sometimesmonitors live telephone calls. That persononly evaluates the IRS assistor and doesnot keep a record of any taxpayer's nameor tax identification number.

We sometimes record telephone calls toevaluate IRS assistors objectively. Wehold these recordings no longer than one

week and use them only to measure thequality of assistance.

We value our customers' opinions.Throughout this year, we will be survey-ing our customers for their opinions onour service.

ComprehensiveExampleRev. John Michaels is the minister of the FirstUnited Church. He is married and has onechild. He is a common-law employee of the

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church, and he has not applied for an ex-emption from self-employment tax. Thechurch paid him a salary of $31,000. In addi-tion, as a self-employed person, he earned$4,000 during the year for weddings,baptisms, and honoraria.

In an earlier year, Rev. Michaels boughta home next to the church. He makes an$800 per month mortgage payment of princi-pal and interest only. The church paid him$800 per month as his parsonage allowance(excluding utilities). The home's fair rentalvalue is $900 per month. The utility bills forthe year totaled $960. The church paid him$100 per month designated as an allowancefor utility costs.

The church did not withhold social secu-rity, Medicare, or federal income taxes be-cause Rev. Michaels had not requested it.The church reports his salary for income taxpurposes on Form W2, box 1, leaving blankthe boxes for social security and Medicarewages. Box 1 of the Form W2 shows hiswages of $31,000. He made estimated taxpayments during the year totaling $8,400.

Rev. Michaels taught a course at a localcommunity college. He was paid $3,400,which was reported on a Form W2. Thefederal income tax withheld was $272. As anemployee of the college, he was subject to

social security and Medicare withholding. HisForm W2 shows $210.80 withheld for socialsecurity taxes and $49.30 withheld for Medi-care taxes.

Form 1040On Form 1040, Rev. Michaels reports$34,400 ($31,000 from the church and $3,400from the college) on line 7 and $240 (the ex-cess of the utility allowance over the utilitycosts) on line 21. (The parsonage allowanceis not taxable for income tax purposes.)

Schedule CEZ (Form 1040)On Schedule CEZ, Rev. Michaels reportsthe $4,000 from weddings, baptisms, andhonoraria. His related expenses for the yearwere $87 for marriage and family bookletsand $156 for 495 miles of business use of hiscar (mainly for trips in connection withhonoraria) figured at the standard mileagerate of 31.5 cents a mile. He cannot deductthe part of his expenses allocable to his tax-free income. He attaches the required state-ment (example shown later) to his tax returnthat explains how he figures the nondeduct-ible part ($56). He subtracts the $56 from the$243 and enters the $187 difference on line2 of Schedule CEZ. He reports his net profitof $3,813 on line 12 of Form 1040.

Schedule SE (Form 1040)On Schedule SE, Rev. Michaels includes the$800 per month parsonage allowance($9,600), the entire $100 per month utility al-lowance ($1,200), his salary from the church($31,000), and the net income from ScheduleCEZ ($3,813). He subtracts from this the$56 of nondeductible Schedule CEZ ex-penses and the $1,103 ($884 + $219) of al-lowable employee business expenses (dis-cussed below). He reports his net income of$44,454 in Section A of Schedule SE. (As aminister, his church salary is not consideredchurch employee income.)

After completing Schedule SE (Form1040), Rev. Michaels enters the self-employment tax ($6,281) on Form 1040, line47. Also, he enters half of this amount($3,141) on Form 1040, line 26.

Form 2106EZRev. Michaels completes lines 711b. His carwas used 2,806 miles for church business.Using the standard mileage rate, he figuresthat his car expense is $884. He enters the$884 on line 1. He has $219 of expenses forpublications and booklets that he enters online 4.

Before entering the total expenses on line6, he must reduce them by the amount thatis allocable to his tax-free parsonage allow-ance. On the attached required statement(shown later), he shows how he figured thenondeductible part of his expense. The resultis $254 of expenses allocable to the tax-freeincome. He subtracts $254 from $1,103 andenters the result, $849, on line 6. He thenenters the line 6 amount on line 20 ofSchedule A (Form 1040).

Schedule A (Form 1040)Rev. Michaels contributed $4,800 in cashduring the year to various qualifying charities.Each individual contribution was for less than$250. He deducts the $4,800 as an itemizeddeduction on line 15. He deducts $1,750 inreal estate taxes on line 6 and $6,810 ofhome mortgage interest on line 10. He limitshis employee business expenses to theamount exceeding 2% of his adjusted grossincome. He enters $143 as the total of hismiscellaneous deductions on line 26. Thetotal of all itemized deductions is $13,503,which he enters on line 28 of Schedule A andon line 35 of Form 1040.

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1

Control number

Deceased Pensionplan

Legalrep.

Hshld.emp.

Subtotal Deferredcompensation

Statutoryemployee

6

2

Employers name, address, and ZIP code

Allocated tips7

Advance EIC payment

8

109

Wages, tips, other compensation Federal income tax withheld

Social security tax withheldSocial security wages

1211

Employers state I.D. No.

43

Employers identification number

Medicare wages and tips

Social security tips

13 14

5

Employees social security number

Employees name, address, and ZIP code Nonqualified plans

Medicare tax withheld

16

15

Other

1817 19 2120State income taxState State wages, tips, etc. Locality name Local wages, tips, etc. Local income tax

Copy B To Be Filed With Employees FEDERAL Tax Return

Department of the TreasuryInternal Revenue Service

Form

Dependent care benefits

Benefits included in box 1

a

b

c

d

e

W-2Wage and TaxStatement

This information is being furnished

to the Internal Revenue Service.

See Instrs. for box 13

OMB No. 1545-0008

1 99 7

1

Control number

Deceased Pensionplan

Legalrep.

Hshld.emp.

Subtotal Deferredcompensation

Statutoryemployee

6

2

Employers name, address, and ZIP code

Allocated tips7

Advance EIC payment

8

109

Wages, tips, other compensation Federal income tax withheld

Social security tax withheldSocial security wages

1211

Employers state I.D. No.

43

Employers identification number

Medicare wages and tips

Social security tips

13 14

5

Employees social security number

Employees name, address, and ZIP code Nonqualified plans

Medicare tax withheld

16

15

Other

1817 19 2120State income taxState State wages, tips, etc. Locality name Local wages, tips, etc. Local income tax

Copy B To Be Filed With Employees FEDERAL Tax Return


Form

Dependent care benefits

Benefits included in box 1

a

b

c

d

e

W-2Wage and TaxStatement

This information is being furnished

to the Internal Revenue Service.

See Instrs. for box 13

OMB No. 1545-0008

1 99 7

0 0 -135 7913

Homet own College40 Honor Rd.Homet own, Texas 770 99

0 11-0 0 -222 2

John E. Michaels10 40 Main St .Homet own, Texas 770 99

3400.00

3400.00

3400.00

272.00

210 .80

49.30

00 -02468 10

First Unit ed Church10 42 Main St .Homet own, Texas 770 99

3100 0.00

Parsonage Allowance --9600 .00Ut ilit ies Allowance --

120 0 .0 0

0 11-0 0 -222 2

John E. Michaels10 40 Main St .Homet own, Texas 770 99

Page 11


12/20

John E.

Susan R.

Michaels

10 40 Main St reet

Homet own, TX 77099

0 11 0 0 2222

0 11 0 0 1111

X

Robert Michaels 111 0 0 1113 son 12

2

1

3

34,400

3,813

240Excess ut ilit y allowance

38,453

3,141

3,141

35,3 12

Michaels

X

X

X

X


1040 U.S. Individual Income Tax ReturnOMB No. 1545-0074For the year Jan. 1Dec. 31, 1997, or other tax year beginning , 1997, ending , 19

Last nameYour first name and initial Your social security number

(Seeinstructionson page 10.)

LABEL

HERE

Last name SpousessocialsecuritynumberIf a joint return, spouses first name and initial

Use the IRSlabel.Otherwise,please print

or type.

Home address (number and street). If you have a P.O. box, see page 10. Apt. no.For help in finding lineinstructions, see pages2 and 3 in the booklet.City, town or post office, state, and ZIP code. If you have a foreign address, see page 10.

PresidentialElection Campaign(See page 10.)

Note: CheckingYes will notchange your tax orreduce your refund.

NoYes

Do you want $3 to go to this fund?

If a joint return, does your spouse want $3 to go to this fund?

1 SingleFiling Status 2 Married filing joint return (even if only one had income)

3

Check onlyone box.

4

Qualifying widow(er) with dependent child (year spouse died 19 ). (See page 10.)5

6a Yourself. If your parent (or someone else) can claim you as a dependent on his or her tax

return, do not check box 6aExemptionsSpouseb

(4) No. of months

lived in yourhome in 1997

Dependents:c (2) Dependents

social security number

(3) Dependents

relationship toyou(1) First name Last name

If more than sixdependents,see page 10.

d Total number of exemptions claimed

7Wages, salaries, tips, etc. Attach Form(s) W-27

8a8a Taxable interest. Attach Schedule B if requiredIncome8bb Tax-exempt interest. DO NOT include on line 8aAttach

Copy B of yourForms W-2,W-2G, and1099-R here.

99 Dividends. Attach Schedule B if required

1010 Taxable refunds, credits, or offsets of state and local income taxes (see page 12)

1111 Alimony received1212 Business income or (loss). Attach Schedule C or C-EZ

Enclose but donot attach anypayment. Also,please useForm 1040-V.

1313 Capital gain or (loss). Attach Schedule D

1414 Other gains or (losses). Attach Form 4797

15a 15bTotal IRA distributions b Taxable amount (see page 13)15a

16b16aTotal pensions and annuities b Taxable amount (see page 13)16a

1717 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E

1818 Farm income or (loss). Attach Schedule F

1919 Unemployment compensation

20b20a b Taxable amount (see page 14)20a Social security benefits

21

21

22 Add the amounts in the far right column for lines 7 through 21. This is your total income 22

23IRA deduction (see page 16)23Medical savings account deduction. Attach Form 8853

2525

One-half of self-employment tax. Attach Schedule SE 26

Self-employed health insurance deduction (see page 17)

26

2727

Keogh and self-employed SEP and SIMPLE plans 2828

Penalty on early withdrawal of savings 2929

Alimony paid b Recipients SSN

31Add lines 23 through 30a

30a

Subtract line 31 from line 22. This is your adjusted gross income 31

AdjustedGrossIncome

32

If you did notget a W-2,see page 12.

Form

Married filing separate return. Enter spouses social security no. above and full name here.

Cat. No. 11320B

Label

Form 1040 (1997)

IRS Use OnlyDo not write or staple in this space.

Head of household (with qualifying person). (See page 10.) If the qualifying person is a child but not your dependent ,

enter this childs name here.

Other income. List type and amountsee page 15

Moving expenses. Attach Form 3903 or 3903-F

24 24

(99)

For Privacy Act and Paperwork Reduction Act Notice, see page 38.

If line 32 is under$29,290 (under$9,770 if a childdid not live withyou), see EIC inst.on page 21.

No. of boxeschecked on6a and 6b

No. of yourchildren on 6c

who:

Dependents on 6cnot entered above

Add numbersentered onlines above

lived with you

did not live withyou due to divorceor separation(see page 11)

97

32

30a

Page 12


13/20

35,312

13,50 3

21,80 9

7,950

13,58 9

2,038

2,0386,281

8 ,319

272

8,400

8,672

353

353

John E. Michaels 2/14/98 Minist er

Susan R. Michaels 2/14/98 Housewife

Add lines 54, 55, 56a, 57, 58, and 59. These are your total payments

Page 2Form 1040 (1997)

Amount from line 32 (adjusted gross income)33 33

Check if:34aTaxCompu-tation

34aAdd the number of boxes checked above and enter the total here

If you wantthe IRS tofigure yourtax, seepage 18.

If you are married filing separately and your spouse itemizes deductions oryou were a dual-status alien, see page 18 and check here

b34b

Single$4,150 Married filing jointly or Qualifying widow(er)$6,900

35 Enterthelargerofyour:

35

36Subtract line 35 from line 3336

37If line 33 is $90,900 or less, multiply $2,650 by the total number of exemptions claimed on

line 6d. If line 33 is over $90,900, see the worksheet on page 19 for the amount to enter

37

38Taxable income. Subtract line 37 from line 36. If line 37 is more than line 36, enter -0-38

39 39

4040 Credit for child and dependent care expenses. Attach Form 2441

42

Credit for the elderly or the disabled. Attach Schedule RCredits

43Foreign tax credit. Attach Form 1116

42

Other. Check if from

44

45

43

46

Add lines 40 through 44

44

47Subtract line 45 from line 39. If line 45 is more than line 39, enter -0-

45

48

Self-employment tax. Attach Schedule SE46

OtherTaxes

49

Alternative minimum tax. Attach Form 6251

47

61

48

Social security and Medicare tax on tip income not reported to employer. Attach Form 4137

51

Tax on qualified retirement plans (including IRAs) and MSAs. Attach Form 5329 if required50

52

Add lines 46 through 52. This is your total tax 53 53

Federal income tax withheld from Forms W-2 and 109954 54

551997 estimated tax payments and amount applied from 1996 return55Payments

56a

56a

57Amount paid with Form 4868 (request for extension)57AttachForms W-2,

W-2G, and1099-R onthe front.

58Excess social security and RRTA tax withheld (see page 27)58

60

Other payments. Check if from59

62a62a

63 63

If line 60 is more than line 53, subtract line 53 from line 60. This is the amount you OVERPAID

64

64

Amount of line 61 you want REFUNDED TO YOU Refund

65

Amount of line 61 you want APPLIED TO YOUR 1998 ESTIMATED TAX

Estimated tax penalty. Also include on line 64

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge andbelief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

Standard deduction shown below for your filing status. But seepage 18 if you checked any box on line 34a or 34b or someonecan claim you as a dependent.

Itemized deductions from Schedule A, line 28, OR

Head of household$6,050 Married filing separately$3,450

65

You were 65 or older, Blind; Spouse was 65 or older, Blind.

a Form 3800 b Form 8396

c Form 8801 d Form (specify)

a Form 2439 b Form 4136

Earned income credit. Attach Schedule EIC if you have a qualifying

child b Nontaxable earned income: amount

and type

51

Household employment taxes. Attach Schedule H 52

59

Printed on recycled paper

AmountYou Owe

SignHere DateYour signatureKeep a copyof this returnfor yourrecords.

DateSpouses signature. If a joint return, BOTH must sign.

Preparers social security no.DatePreparerssignature

Check ifself-employed

PaidPreparersUse Only

Firms name (or yoursif self-employed) andaddress

EIN

ZIP code

Your occupation

Spouses occupation

Tax. See page 19. Check if any tax from

If line 53 is more than line 60, subtract line 60 from line 53. This is the AMOUNT YOU OWE.

For details on how to pay, see page 27

b

Have itdirectlydeposited!See page 27and fill in 62b,62c, and 62d.

Routing number

Account number

c Checking SavingsType:

a Form(s) 8814 Form 4972

b

d

60

4141

Adoption credit. Attach Form 8839

49

50

Advance earned income credit payments from Form(s) W-2

61

Page 13


14/20

John E. Michaels and Susan R. Michaels 0 11 0 0 2222

1,750

1,750

6 ,810

6 ,810

4,800

4,800

8 49

8 49

70635,3 12

143

13,50 3

OMB No. 1545-0074SCHEDULES A&B Schedule AItemized Deduct ions(Form 1040)

(Schedule B is on back)Department of the TreasuryInternal Revenue Service Attach to Form 1040. See Instructions for Schedules A and B (Form 1040).

AttachmentSequence No. 07

Name(s) shown on Form 1040 Your social security number

Caution: Do not include expenses reimbursed or paid by others.MedicalandDental

Expenses

1Medical and dental expenses (see page A-1)122

3Multiply line 2 above by 7.5% (.075)3 Subtract line 3 from line 1. If line 3 is more than line 1, enter -0-4 4

5State and local income taxes5Taxes YouPaid 6Real estate taxes (see page A-2)6

Other taxes. List type and amount 8(Seepage A-2.)

8

Add lines 5 through 89 9

Home mortgage interest and points reported to you on Form 109810InterestYou Paid

10

Home mortgage interest not reported to you on Form 1098. If paidto the person from whom you bought the home, see page A-3

and show that persons name, identifying no., and address

11

(Seepage A-2.)

11

12Points not reported to you on Form 1098. See page A-3

for special rules12

13 Investment interest. Attach Form 4952 if required. (Seepage A-3.) 13

14 14Add lines 10 through 13

Gifts toCharity 15

15 Gifts by cash or check. If you made any gift of $250 or

more, see page A-3

16Other than by cash or check. If any gift of $250 or more,

see page A-3. You MUST attach Form 8283 if over $500

16

17Carryover from prior year1718 Add lines 15 through 17 18

Casualty or theft loss(es). Attach Form 4684. (See page A-4.)19

Casualty and

Theft Losses 19

Unreimbursed employee expensesjob travel, union

dues, job education, etc. You MUST attach Form 2106

or 2106-EZ if required. (See page A-4.)

20Job Expensesand MostOtherMiscellaneousDeductions

22 Other expensesinvestment, safe deposit box, etc. List

type and amount (Seepage A-5 forexpenses todeduct here.)

Add lines 20 through 2223

Enter amount from Form 1040, line 3324

Multiply line 24 above by 2% (.02)25

Subtract line 25 from line 23. If line 25 is more than line 23, enter -0-26 26Otherfrom list on page A-5. List type and amount 27Other

MiscellaneousDeductions 27

28TotalItemizedDeductions 28

Schedule A (Form 1040) 1997For Paperwork Reduction Act Notice, see Form 1040 instructions.

24

20

22

23

If you made agift and got abenefit for it,see page A-3.

25

Enter amount from Form 1040, line 33

NO. Your deduction is not limited. Add the amounts in the far right columnfor lines 4 through 27. Also, enter on Form 1040, line 35, the larger ofthis amount or your standard deduction.

YES. Your deduction may be limited. See page A-5 for the amount to enter.

Cat. No. 11330X

Note:Personalinterest isnotdeductible.

7Personal property taxes7

21Tax preparation fees21

Is Form 1040, line 33, over $121,200 (over $60,600 if married filing separately)?

(99)

97

Page 14


15/20

John E. Michaels 0 11 0 0 2222

8 7 7 1Minist er

10 42 Main St reet

Homet own, TX 77099

4,000

18 7

*

3,813

7 15 95

495 -0 - 7,30 9

X

* See At t ached St at ement

X

X

X

OMB No. 1545-0074SCHEDULE C-EZ(Form 1040)

Net Profit From Business(Sole Proprietorship)

Partnerships, joint ventures, etc., must file Form 1065.Department of the TreasuryInternal Revenue Service

AttachmentSequence No. 09A Attach to Form 1040 or Form 1041. See instructions on back.

Business name. If no separate business name, leave blank. D Employer ID number (EIN), if any

Business address (including suite or room no.). Address not required if same as on Form 1040, page 1.

C

E

Gross receipts. Caution: If this income was reported to you on Form W-2 and the Statutory

employee box on that form was checked, seeStatutory Employees in the instructions for

Schedule C, line 1, on page C-2 and check here 1

22 Total expenses. If more than $2,500, you must use Schedule C. See instructions

3

3 Net profit. Subtract line 2 from line 1. If less than zero, you must use Schedule C. Enter onForm 1040, line 12, and ALSO on Schedule SE, line 2. (Statutory employees do not report thisamount on Schedule SE, line 2. Estates and trusts, enter on Form 1041, line 3.)

Schedule C-EZ (Form 1040) 1997For Paperwork Reduction Act Notice, see Form 1040 instructions. Cat. No. 14374D

City, town or post office, state, and ZIP code

You May Use

This Schedule

Only If You: And You:

Use the cash method of accounting.

Had only one business as a soleproprietor.

Had business expenses of $2,500 orless. Are not required to file Form 4562,

Depreciation and Amortization, forthis business. See the instructionsfor Schedule C, line 13, on pageC-3 to find out if you must file.

Do not deduct expenses forbusiness use of your home.

Do not have prior year unallowedpassive activity losses from thisbusiness.

Name of proprietor Social security number (SSN)

General Information

A Principal business or profession, including product or service B Enter principal business code

(see page C-6)

Figure Your Net Profit

Part I

Part II

Did not have a net loss from yourbusiness.

Had no employees during the year.

1

Did not have an inventory at anytime during the year.

Yes NoDo you (or your spouse) have another vehicle available for personal use?6

Yes NoDo you have evidence to support your deduction?8a

Yes NoIf Yes, is the evidence written?

Yes NoWas your vehicle available for use during off-duty hours?7

Of the total number of miles you drove your vehicle during 1997, enter the number of miles you used your vehicle for:5

Business b Commuting c Other

When did you place your vehicle in service for business purposes? (month, day, year) / / .4

Information on Your Vehicle. Complete this part ONLY if you are claiming car or truck expenses on line 2.Part III

a

b

(99)

97

Page 15


16/20

John E. Michaels Minist er0 11 0 0 2222

8 8 4

219

8 49 *

7 15 95

2,806 -0 - 4,998

*See At t ached St at ement

X

X

X

X

OMB No. 1545-1441

Unreimbursed Employee Business Expenses2106-