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U.S. missionary tax guide

U.S. missionary tax guide

Who should use this guide?

We at TFX support global missionaries and other non-profits. We believe that whether you’re on a religious mission or in pursuit of other non-commercial ventures, U.S tax problems should be the least of your worries. We have worked with hundreds of ministers around the world and explain some of the U.S tax issues below.

Why use this guide?

To understand the pros and cons of the US tax regime for missionaries - how you can plan for your mission while staying on the right side of Uncle Sam.

How to use this guide?

Apply the considerations discussed below and take appropriate steps prior to leaving for your mission.

Step 1

What is the tax status of missionaries?

A Minister has a “dual tax status” as an:

Employee for federal income tax purposes
Self‐employed for payroll tax purposes cal

Importantly - Minister employee wages are not FICA wages – therefore no social security or medicare taxes are withheld from a minister’s pay, nor paid by the church. Minister employee wages are subject to SECA (Self‐Employment contributions act).

This means that ministers need to pay Self-employment tax equal to 15.3% of their minister employee wages.

Not all countries are equal - tax treatment differs if the country has a social security agreement with the U.S.

Step 2

If you have an employer, whether in the US or abroad, you are not required to pay self-employment taxes (Social security and Medicare); it is the responsibility of your employer to pay this for you. As discussed above, missionaries are considered self-employed for payroll tax purposes and liable for SECA (Self-employed contributions act) tax. Thus - your tax result may differ depending on where you do your mission.

Some countries have signed a ‘Totalization agreement’. If you reside in a country that has signed this agreement, and you pay to the resident country Social Security system you are exempt from SECA tax.

Social security agreement

Australia
Greece
South Korea
Austria
Ireland
Spain
Belgium
Italy (only Italian citizens)
Sweden
Canada
Japan
Switzerland
Chile
Luxembourg
UK
Czech Republic
Netherlands
Denmark
Norway
Finland
Poland
France
Portugal
Germany
Slovak Republic

Totalization agreements explained

International social security agreements, often called "Totalization agreements," have two main purposes.
First, they eliminate dual social security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings.
- Key note - if your return is filed properly, you will not pay self employment taxes in both countries and avoid double taxation.
Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country.
- Under a Totalization agreement, if a worker has some U.S. coverage but not enough to qualify for benefits, SSA will count periods of coverage that the worker has earned under the social security program of an agreement country.
- In the same way, a country party to an agreement with the United States will take into account a worker's coverage under the U.S. program if it is needed to qualify for that country's social security benefits.

Step 3

Rules for non‐minister missionaries (Laity)

Same income and payroll tax treatment by the church as other U.S.‐based employees.

Income tax withholding requirements may differ if the Church is required by foreign law to withhold foreign income.

Since missionary is eligible to exclude all or a portion of his/her wages under the foreign earned income or foreign housing exclusions, the missionary may request exemption from tax withholding indicating that they qualify for these exclusions.

U.S. citizens can use form 673. Green card holders should submit a letter to the employer explaining their right for the exclusion and requesting exemption from federal tax withholding.

Step 4

Exemption from self-employment (SE) tax

This is an often misunderstood aspect of missionary tax. Following through the process below to request an exemption from Self-employment tax will also mean that you voluntarily waive benefits from the social security system.

I waive all rights to any social security payment or benefit under Titles II and XVIII of the Social Security Act. I understand and agree that no benefits or other payments of any kind under Titles II and XVIII of the Social Security Act will be paid based on my wages and self-employment income to any other person. I certify that I have never received benefits or payments under the above titles, nor has anyone else received these benefits based on my earnings.

You can request an exemption from SE tax if you are a member of the clergy (minister, member of a religious order, or Christian science practitioner or reader) or a member of a recognized religious sect.

Who can't be exempt. You can't be exempt from SE tax if you made one of the following elections to be covered under social security. These elections are irrevocable.

You elected to be covered under social security by filing Form 2031, revocation of exemption from self-employment tax for use by ministers, members of religious orders, and Christian science practitioners, for your 1986, 1987, 2000, or 2001 tax year.
You elected before 1968 to be covered under social security for your ministerial services.

To request an exception, you must file form 4361 and meet all of the following conditions:

You are conscientiously opposed to public insurance because of your individual religious considerations (not because of your general conscience), or you are opposed because of the principles of your religious denomination.
You file for other than economic reasons.
You inform the ordaining, commissioning, or licensing body of your church or order that you are opposed to public insurance if you are a minister or a member of a religious order (other than a vow-of-poverty member). This requirement doesn't apply to Christian science practitioners or readers.
You establish that the organization that ordained, commissioned, or licensed you, or your religious order, is a tax-exempt religious organization.
You establish that the organization is a church or a convention or association of churches.
You didn't make an election discussed in the paragraph before.
You sign and return the statement the IRS mails to you to certify that you are requesting an exemption based on the grounds listed on the statement.

Application & process

	Members of the clergy	Members of recognized religious sects
How	File form 4361	File form 4029
When	File by the due date (including extensions) of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment, any of which came from ministerial services	File anytime
Approval	If approved, you will receive an approved copy of form 4361	If approved, you will receive an approved copy of form 4029
Effective date	For all tax years after 1967 in which you have at least $400 of net earnings from self-employment, any of which came from ministerial services.	For all tax years beginning with the first year you meet the eligibility requirementsdiscussed later.

Step 5

Rules affecting U.S. citizen or resident alien missionaries

The missionary may be eligible to exclude all or a portion of his/her wages under the foreign earned income or foreign housing exclusions. The missionary may also be subject to foreign jurisdiction taxes which may need to be withheld by the church.

Missionary may be subject to state income tax withholding - may need to be withheld by the church.

Step 6

Rules for a Married couple missionary team

If both spouses are duly ordained, commissioned, or licensed ministers of a church and have an agreement that each will perform specific services for which they are paid jointly or separately, they must divide the self-employment income according to the agreement.

Step 7

Housing allowances - excludable from income

If housing allowance is provided as compensation for ministerial services performed as an employee, or a home is furnished for a licensed, commissioned, or ordained minister - the recipient may be able to exclude from income the FMV(fair rental value) of a home (a parsonage) or a housing allowance. A minister who is furnished a parsonage may exclude from income the fair rental value of the parsonage, including utilities. However, the amount excluded can't be more than reasonable compensation for the minister's services.

The housing allowance may be excluded from gross income to the extent that it is used to pay expenses in providing a home. Generally, those expenses include rent, mortgage interest, utilities, repairs, and other expenses directly related to providing a home. The amount excluded can't be more than the reasonable compensation for the minister's services.
Homeowners may still claim deductions for mortgage interest and real property taxes. If your housing allowance exceeds the lesser of your reasonable compensation, the fair rental value of the home, or your actual expenses, you must include the amount of the excess in income.
Note - the minister's employing organization must officially designate the allowance as a housing allowance before paying it to the minister.
If housing allowance was excluded from gross income it cannot be excluded again under the foreign housing exclusion rules.

The fair rental value of a parsonage or the housing allowance is excludable only for income tax purposes. The minister must include the amount for self-employment tax purposes.

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