The U.S. income and Social Security tax system is complex beyond imagining. It’s especially complex for U.S. citizens serving oversees as missionaries. Most accountants and lawyers are unfamiliar with these rules, less so for how they work together with the rules for ministers of the gospel.
I’ve earlier posted an outline laying out the tax rules for ministers here. This post is supplemented here. This is an effort to supplement that information as it applies to U.S. citizens who are missionaries in other countries.
Some, but not all, of the critical rules for US citizens working abroad are summarized at IRS Publication 54. The rules for ministers of the gospel may be found in IRS Publication 517. These two publications are well written and useful.
The following is just an introduction. You’ll need to study these publications as well before trying to fill out a tax return. And you’ll need a tax professional’s help for many of these issues.
U.S. citizens living abroad are subject to the same rules as U.S. citizens living in the U.S.—plus additional rules. They still have to file tax returns, estimates, and such just as though living in the U.S. However, the nation in which the missionary lives may also tax them and require them to file returns.
Missionaries are eligible for the same benefits that ministers receive when working on U.S. soil, such as the housing allowance exclusion from income. This assumes that they are “ministers of the gospel” as explained in IRS Publication 517. Short-term, volunteer missionaries, for example, would not meet this standard.
Missionaries who a ministers of the gospel are allowed to elect out of Social Security, as may any other minister of the gospel. However, I don’t think Church of Christ ministers can truthfully take the required oath. See this post. My view is none too popular, but no one has offered me a counter-argument yet.
A missionary may be considered an employee or independent contractor for income tax purposes. He is always self-employed for FICA/SECA purposes if he is a minister of the gospel. (Employees pay FICA to fund their Social Security. Those who are self-employed pay SECA.) This is one of the most misunderstood rules in the tax code (which is saying a lot!) The law is inconsistent and makes no sense. Most tax professionals get this wrong. Most university professors advising students get this wrong.
A preacher is required to pay estimated Social Security taxes as a self-employed person. Located preachers working at their home congregations are almost always employees for all other purposes.
However, a missionary might be treated either way for non-Social Security purposes. Many churches consider them employees and file Forms W-2. Others consider them independent contractors and issue Forms 1099. In theory, the distinction would depend on who controls the missionary’s daily activities. But it also depends on other factors, such as the custom in that denomination, the terms of the contract, and the degree of control exercised by the sponsoring congregation.
If the missionary is subject to a local eldership or congregational leadership in his foreign country, he may actually be an employee of the foreign church.
In any event, the sponsoring church needs to carefully consider how it will treat this missionary and document that decision in a contract or letter of understanding. The missionary needs to know so he can plan accordingly. The decision affects many things, such as—
· The extent to which health insurance premiums are deductible
· Whether the missionary can (or must) participate in the sponsoring church’s health insurance or retirement plans
· Whether workers compensation laws or state unemployment insurance applies to the missionary.
· Whether the church is obligated to withhold income taxes.
· Independent contractors generally have no limit on their ability to deduct expenses, whereas employee-paid expenses are subject to the 2% of adjusted gross income limit (for employee business expenses) or the alternative minimum tax (which disallows itemized deductions).
There are a few countries that have tax treaties (binational Social Security agreements or totalization agreements) with the U.S. that make U.S. citizens subject solely to foreign social security taxes. These countries are listed in Publication 54. Generally, under these agreements, you will only be subject to social security taxes in the country where you are working. However, if you are temporarily sent to work in a foreign country, you generally can remain covered only by U.S. Social Security.
Of course, if the minister has opted out of Social Security, he remains opted out even in these countries. But the opt out is likely ineffective with respect to foreign taxation. Hence, a missionary may well still have to pay into a foreign social security system.
Notice that U.S. and foreign taxation often depend on national residence. This is typically governed by a tax treaty between the U.S. and the foreign nation. All tax treaties are available on the IRS web site. As a rule, living in a foreign country more than 6 months makes you a resident of that country for tax purposes, but check the treaty.
State taxes. Whether a minister is subject to state income taxation generally depends on residence. Hence, temporary visits to a foreign nation does not prevent the minister’s home state from taxing his income. A permanent change in residence normally will. Obviously, whether a mission trip involves a change in residence is very fact specific.
Ministers who are employees are often subject to income tax withholdings. Again, the rules are inconsistent and confusing. At the federal level, the church is never obligated to withhold unless the minister voluntarily opts for withholding (by completing a Form W-4 and filing with his employing church). However, many states, including Alabama, require income tax withholding. It’s entirely possible that the minister may pay estimates at the federal level and be subject to withholding at the state level.
I always recommend that the church require the minister elect to have income taxes withheld at the federal level, as this keeps preachers from having to borrow on April 15 and puts them on a better budgeting process. In fact, they should over-withhold enough money to also cover their SECA obligations, thereby avoiding the need to file estimates.
Missionaries who are independent contractors for income tax purposes, of course, are not subject to withholding and must pay estimates.
Exchange rate issues. Missionaries generally get paid in U.S. dollars and spend money in local currency. However, local love offerings or support from a foreign church may be paid in foreign currency. This is all income and must be reported at the U.S. dollar equivalent.
Many sponsoring congregations forget that shifts in the exchange rate can be devastating to the missionaries they support, and they should be sensitive to the need to make appropriate adjustments when currency values fluctuate.
Missionaries married to nonresident aliens. If a U.S.-citizen missionary marries a nonresident alien, he’ll surely want to file a joint income tax return (lower tax rates). Publication 54 explains how to do this. It requires that the foreign spouse have a U.S. taxpayer number, which may require some effort to get.
Missionaries will usually qualify for the foreign earned income exclusion and housing exclusion or deduction. The foreign earned income exclusion is $82,400 (for 2006), which is quite a nice benefit on a missionary’s salary! To qualify, the missionary must have a foreign tax home, that is, he must not be a U.S. resident (check the tax treaty). He must have foreign earned income. And he must be either —
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A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
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A U.S citizen who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
Most missionaries meet one of these standards.
Notice that the exclusion or deduction is not available for SECA purposes. It will be very common that a missionary owes no US income taxes but owes substantial SECA taxes.
If both spouses qualify for the exclusion, the earned income exclusion is doubled. A married couple could exclude a full $164,800 if both spouses are U.S. citizens, but they must separately qualify for the exclusion.
Notice that being a resident of a foreign country does not depend on actually being present every day. Rather, tax residence is where you work. The main distinction is whether you have permanently relocated or temporarily relocated. To some extent, the question is one of your state of mind, but this is tested based on objective behaviors, such as where you maintain a residence, where your wife and children live, and such. Most fulltime missionaries easily qualify under this test, even though they may spend some time in the U.S. to make reports, raise funds, and visit family.
Income is “foreign earned income” if it’s earned for services performed outside the U.S. even if the money is paid by a U.S. church.
It may be helpful for the missionary’s contract with his sponsoring church to specify how much of his income is earned for foreign mission work and how much for U.S. work. For example, it’s common for a church to ask its missionaries to spend time in the U.S. making reports to the congregation, perhaps even working on staff. Sometimes, the missionary is on vacation, and so his pay is still for work done in the foreign country. Or the missionary may be providing valuable services while in the U.S. Obviously, you want to avoid unnecessarily characterizing mission support as U.S.-based income to maximize the exclusion.
It’s important that the missionary not tell the foreign tax authorities that he’s a U.S. resident. You can’t have it both ways. An effort to avoid foreign taxes by claiming U.S. residence will defeat eligibility for the exclusion. Voting in the U.S. by absentee ballot is not a problem, as voting is based on citizenship, not residence — unless the missionary votes in a state election. Many states base voting rights on residence.
The exclusion applies only to earned income. Pensions from U.S.-based employment, Social Security benefits, gambling winnings, dividends, interest, and rent do not qualify.
Missionaries may also qualify for a foreign housing exclusion. However, as the missionary will also qualify for the housing allowance for ministers, the point is largely moot. You can exclude the same income only once.
Less clear is whether the missionary may claim the deduction for foreign housing, available for self-employed (for income tax purposes) workers outside the U.S. The housing allowance for ministers does not prevent the deduction for home mortgage interest and property taxes, despite the double benefit that results. I can find no authority either way regarding the foreign housing deduction. Publications 517 and 54 do not address the potential double benefit. However, for most missionaries, the point is moot as the foreign earned income exclusion will usually exceed their income without regard to this benefit.
The IRS has just (1-6-2009) released a summary of the foreign housing exclusion.
Foreign property taxes are deductible. Other foreign taxes, such as a VAT, are not deductible. But the taxes are not deductible against SECA, which may be the only US tax the missionary owes, anyway.
Tax treaties may provide other benefits. The U.S. has tax treaties with many, but not all, other countries. These often define whether the foreign country may tax you and what credits you may take. Treaties override the Internal Revenue Code when inconsistent. All the treaties are available at the IRS web site.
Let’s take the Romanian tax treaty for example.
Article 3(2) defines “fiscal residence” based on an individual’s “permanent home.” Clearly, a tourist or short-term missionary remains a U.S. fiscal resident. However, a missionary who buys a house or is a long-time resident of Romania will be a Romanian fiscal resident.
Article 14 deals with income from independent personal services. The first question is one of residence. If the missionary is a resident of Romania, Romania may tax his income earned in Romania and in the U.S. The U.S. may only tax U.S. based services if the missionary is physically present in the U.S. for more than 183 days or maintains a permanent establishment in the U.S. from which the income is generated. If the missionary opens a coffee shop in the U.S. for 10 days, he owes U.S. taxes on the income. However, he should be exempt if he’s only visiting his sponsoring church to give a report.
However, if the missionary is an employee of his sponsoring church, Article 15 applies. For an employee of U.S. church, services performed in the U.S. for that church will likely be taxable to the U.S. (and not subject to the foreign earned income exclusion).
Notice that tax treaties typically deal with income taxation and not self-employment tax or FICA. See below regarding totalization agreements.
Rev. Rul. 62-113. A church may rely on Rev. Rul. 62-113, which treats housing, travel, and food costs as tax free to the missionary if he is otherwise working for free. However, if the missionary has any income derived from services as a missionary, this exclusion likely does not work.
A short-term missionary, visiting the Bahamas for two weeks to do mission work, may well volunteer services and yet receive a few thousand dollars of support to pay for the trip. To the extent these funds are used to pay out-of-pocket expenses, the support is tax free to the missionary. However, this should be governed by an “accountable plan,” that is, the sponsoring church should require receipts and such to demonstrate that the money actually went to legitimate expenses.
This assumes a volunteer missionary. If the missionary is getting paid for his work, then the rules for independent contractors or employees kick in. At this point, donations made to his effort will be treated as income.
Gift vs. income. As suggested earlier, it can sometimes be tricky to distinguish a gift from income. If an individual writes a check to a missionary to help support his work, it’s income, unless limited to paying for expenses and the use of the money is accounted for. If the missionary is required to use the money to buy Bibles to give to potential converts, then the money is a gift to the potential converts. If the missionary may use the money in any way he sees fit, including keeping it for himself, it’s income.
If the missionary’s car breaks and the church buys him a car to allow him to continue in the mission field, the car is income unless it’s owned by the church. In that case, the missionary has income to the extent he uses the car for personal use, just the same as if a bank let’s its president have a company car for mixed business and personal use.
Fortunately, the foreign earned income exclusion covers a lot of tax grayness, and often avoids any need to sort these metaphysical issues out. Just be careful to stay within the $82,400 limit, taking into account all benefits provided—housing, cars, and such.
Conclusions. It seems that treating the missionary as self-employed has some significant advantages and likely should be the standard rule. For example—
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The missionary will rarely be subject to day-to-day oversight by his sponsoring congregation, and so this is likely the correct treatment.
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The tax treaty may protect some U.S. income from U.S. taxation.
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Expenses incurred in doing his work, such as travel, will be fully deductible without the 2% AGI limitation or AMT restrictions.
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The church is exempted from all withholding obligations.
The missionary can still claim a housing allowance and a foreign earned income exclusion, and should generally owe no U.S. income taxes. He may even avoid U.S. taxation for services in the U.S. giving reports and such if his housing interest, property taxes, and other itemized deductions are high enough. Of course, it would be wise to minimize U.S. services as income earned while in the US does not qualify for the exclusion.
He will still be subject to US SECA, absent working in a country with a US totalization agreement.
However, the missionary will unquestionably become a fiscal resident of his foreign mission base. He must be prepared to report and pay foreign taxes. Romans 13 is quite clear on this point. In the absence of a totalization treaty, he may owe foreign social security taxes as well as US SECA. This would be particularly a risk if he were employed by a foreign congregation under foreign tax law.
He should likely receive his funds directly from the US sponsoring church or parachurch organization to reduce this risk — certainly not from the foreign congregation.
Several years ago, a number of U.S. citizen missionaries in Europe were caught by European authorities for not paying European taxes. They owed several years of back taxes, penalties, and interest. Of course, they couldn’t afford to pay the tax bill, and so their sponsoring churches had to cough up the money (which was income to missionaries, compounding the problem!) Sponsoring churches should make certain their missionaries are complying with local tax laws.
One alternative is to treat the missionary as on temporary assignment in the foreign country. If he avoids becoming a resident of the foreign country, the rules become quite different. He can likely deduct his travel and food costs as travel expenses if he is in the foreign country for less than 1 year. He may avoid foreign taxation. But he won’t qualify for the foreign earned income exclusion.
Before embarking on such a strategy, there are two areas to watch very closely. First, the tax treaty for that nation must be carefully studied. Merely being present in that country for over half a year may be enough to subject the missionary to foreign taxation. This will usually be the case. The missionary will have to spend more than half the year in the U.S. (or perhaps in another foreign nation).
Second, residency is a subtle, ephemeral concept and the IRS often litigates this question. There are quite a few published cases. Careful planning and thought would be required to avoid establishing foreign fiscal or tax residence for a long-term missionary. Even if he travels among three or more countries to avoid spending too much time in any one place, he’ll have to be a resident somewhere.
Remember that an IRS residency determination is presumed correct by the courts and the taxpayer has the burden of disproving the IRS’s position. Moreover, if you get too cute, you may be unable to disprove a residency assertion by a foreign taxing authority. The missionary could actually be found to be resident in multiple locations. If you leave the facts ambiguous, different courts may reach different results.
The scriptures are very clear that Christians are to pay their taxes. However, there is no sin in carefully planning to minimize the taxes owed. Be careful, however, as if a missionary goes several years without paying taxes owed to one or another country, the amount owed could be enormous.
Don’t let your missionary (or his widow) become a burden on the church. Missionaries may escape U.S. Social Security taxes, and so they will still need to save for retirement and have insurance against premature death and perhaps disability.
Social Security may be too expensive for what you get, but it never seems too expensive to a disabled employee or widow! Make sure the missionary takes care of his retirement and carries appropriate insurance. Of course, if the missionary declares himself a resident of his foreign land, he may well qualify under their social services network. Local laws vary greatly, however, so this needs to be carefully thought through.
Expatriation. Finally, a missionary with no plans to return to the US may want to consider expatriation — that is, surrendering his US citizenship to become a citizen of his new country. For most Americans, the idea of giving up US citizenship is, well, unAmerican, but it can be nearly essential for a missionary finding himself obligated for both US SECA and foreign social security taxes. And he may wish to become a citizen of his new homeland to qualify for government healthcare and retirement benefits there.
The rules are complex. Loss of citizenship is generally irreversible. An introduction to the rules is here.
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Have you found anywhere that US missionaries working overseas are required to prove US residency for Social Security purposes by returning to the US for 6 months, every 5 years? This seems to be what the Soc Sec is telling our mission.
Thanks for the really wonderful summary!
One question:
Have been a missionary in Africa and S.America for 20+ during which I prepared my own returns the majority of years. I was surprised to read "He may even avoid U.S. taxation for services in the U.S. giving reports and such." I take a home assignment for 8 weeks every two years — the vast majority of the time is spent reporting to our donors about the charitable water projects that they have supported. In spite of this, I have treated these 8 weeks as US income, NOT foreign income. Can you further support your comment or offer IRS examples in publications that would bolster this work in the US doing "reporting work" while on home assignment as foreign earned?
Any comments would be greatly, greatly appreciated. We have 1000 missionaries in our faith mission who would be very keen to use this method when appropriate to minimize our US fed taxes for a portion of our home assignment work.
Thanks!
Owen
Owen,
I'm not an expert. Anyone should consult with a CPA as the questions tend to be very fact specific and answers can vary from country to country.
That being said, I don't think the foreign earned income exclusion is available for income earned in the US. Page 16 of IRS Publication 54 is quite clear, I think.
When I wrote this, I believe I was thinking of the impact of the housing allowance.
To calculate how much of your income has a foreign source, you generally prorate by days worked in the US and in a foreign country. I think you subtract the housing allowance first, and so you will be left with some US source income, which can't qualify for the credit.
But you'd still be able to deduct your home interest and taxes, which could be enough to reduce your US income to zero, because, as itemized deductions, they come after the proration.
I've amended the post to make my thinking more clear.
Owen,
This is all some really great information, but I still feel like I want to scream HELP!!! I have been trying to find some place on the internet that does taxes for missionaries. Got any ideas or directions on that let me know.
Thanks,
Adam
Adam,
Although there are internet site that figure taxes for people, I'd be surprised if any are sophisticated enough to handle the tough issues a missionary has to face in figuring his taxes. I think you need a CPA.
Great Article!!
My family and I spent ten months overseas in one country supported by ind and our church last year. We were under the authority of our church. Do any of the things stated in your article in your opinion apply to our taxes for last year. I am not an ordained minister.
Any help would be great!
Michael
Michael,
Whether you are a minister of the gospel for housing allowance and FICA purposes usually does depend on ordination — depending on the denomination. Some denominations, such as the Churches of Christ, don't ordain at all. The biggest question is whether you are authorized to baptize and dispense communion.
My husband is going on a missionary trip to Armenia and Isreal in April 2009 for 16 days. He is part of the Baptist Singing Churchmen of Oklahoma. He has to pay all his own expenses. They will be singing and spreading God's word. Can any of this expense be submitted on next years taxes and if so what records do we need to keep.
Roberta Martin
Roberta,
You need to get with a CPA on the records rules — but you're right that meticulous records need to be kept.
The critical issue is whether you're donating money indirectly to a recognized charity. The expenses aren't deductible just because they're for a good work.
It's a little too complicated to handle via the internet, but a CPA should be able to coach you through it.
Thank you for the excellent primer on missionary tax issues.
Have you come across any tax softwares that accurately account for the issue of being self-employed only for the purpose of Social Security?
I can really relate with that being the most mis-understood part of tax law. I had to explain it to the IRS a couple times last year before getting my taxes handled properly. Some understood, but not the ones that were able to make the proper changes. It was a mess, and partially because I used tax software that didn't take this into account. I didn't realize it until after filing so it was my error. I hope others can avoid that headache through your explanation. 🙂
Josiah,
I'm sorry. I don't do tax returns — not even my own. So I have no idea what off-the-shelf software would do the trick. But there are lots of ministers who read this blog — and at least one retired IRS auditor. Maybe one of them can make a suggestion.
Hello, My husband and I are traveling to Ecuador to live as Missionaries. We are not being sent by any organization or church. We depend soley on God and support donations. Does the advice given still apply to us also, or do you know other avenues we need to take
Casting seeds,
For donations to your ministry to be tax deductible to the donor, you have to be working with a 501(c)(3) organization. Donations to individuals unaffiliated with a church or a recognized charity won't be deductible.
Moreover, you may not qualify as a "minister of the gospel" eligible for the housing allowance if you're not associated with a church or denomination.
I strongly recommend that you find a church organization to work with. In fact, there are many great organizations that know a lot about doing missions that you could affiliate with and that would provide support and accountability that would surely benefit your work for the Lord. I really think mission work is best done with the benefit of an overseeing body — and the tax results are better that way, too.
May God bless your work in his kingdom.
Which contributions to missionaries are considered gifts, and therefore not taxable and which are considered income?
I highly recommend Steve Richardson and Co. CPAs. They are experts in ministry related taxation. They do a great job with complicated tax situations that ministers and missionaries have to deal with and have missionary clients in many countries. Check out the website at http://www.srcocpa.com
Hi,
Read your article with interest, and thought it was quite well put. As part of our tent-making work here in the Philippines, I consult and prepare returns for American expats- primarily other missionaries, and have seen many of the things you mention. Organizational home offices, it seems, are anything but uniform in their reporting, and well prepared tax returns, whether by the taxpayers or preparers in the U.S., generally seem to miss a lot (per diem and lodging while on short term assignments are prime examples). One of the quandries I run into is allocation of expenses for someone who receives a W2, but legitimately should be considered self-employed for his or her ministry (and sometimes has non-W2 income). Sometimes the allocation (between a 2106 or Sch C) is SECA tax neutral, but in other cases it would be far more beneficial to simply declare the W2 income, but deduct ministry expenses on a Schedule C (or 2, for husband-wife teams). Any thoughts?
Randy,
Those are hard questions and very fact specific. My first thought is that most missionaries should be 1099 independent contractors, other than an employee on temporary assignment as a short-term missionary. I mean, it'd be unusual (possible, but unusual) for a US church to have day to day control of a missionary. A missionary working for a nonprofit may be different, too.
If the missionary is a minister of the gospel — as will often be the case — his income will be SE income whether he receives a W-2 or not, and that moots the allocation problems insofar as SET is concerned.
Beyond that, it really depends on the facts. As we lawyers like to say, sometimes the facts matter.
Thanks, Jay, for the quick response. I have found that expat missionary tax returns are far more complicated than typical expat returns. I'm more and more inclined to take the approach that, although W2 income is received (as some organizations seem to prefer that for various reasons) and reported, for purposes of their missionary work, unless they are, as you mentioned, location and specific role bound (office staff, for example), then they meet the general IRS rules as independent contractors, and Schedule C's are entirely appropriate. Obviously, there is no "profit motive," but that point seems to be moot for ministers and missionaries.
Thanks again- I appreciate the input and discourse.
Hi friends of missionaries,
I'll try to keep this as simply as possible and to the point (it might be complicated). My wife and I have been (were) overseas missionaries since 1995, and although members of a sending agency, we receive no 1099 nor W2, but are "contractors" , or "an approved project". We personally seek out and raise funds from multiple churches and individuals who give to the agency, which then disburses the funds (100%) to us.
Up until last year we filed 1040 (I am SE exempt), used Schedule C for all business related expenses and used 2555 as well for foreign income exclusion. We never used Foreign housing exclusion because we never owed tax anyway.
Two years ago, due to health issues, we returned to the states and settled into our US home, but continue to receive the same donations, through the same means, and I continue to work on the same overseas project from stateside (Bible translation in the language of the foreign country), and am traveling there once or twice annually for a few weeks at a time to do on-sight checking and testing of the translations (temporary vs permanent????).
Last year we revoked the 2555 (maybe I should not have done so), since we were almost exclusively in the USA and have no plans to return full time overseas at any point in the near future (until this project is completed). We continue to fund (pay for) out of our donor support many of the activities, overseas facilities maintenance, and our national co-workers in the foreign country.
My questions are- under these circumstances, because our income and expenses seem to be quite substantial, ranging between 50-70,000 yearly for the past number of years, before expenses:
1- In order to help reduce our tax burden; CAN WE claim a deduction for housing allowance here in the USA (we do have line for "housing" as a part of our annual approved budget)? Or does the fact that our income is STILL for services we provide for the overseas project negate this possibility? Or should we have NOT revoked 2555?
2- If the answer is YES we can; then do we have to apply the IRS code from Pub, 517 page 9 for "Expenses Allocable to Tax Free Income". Some things I read indicate that since we are as independent contractors (or something!- no W2 or 1099) all our business related expenses from Schedule C are deductible.
3- And finally, where do I show the "deduction" for housing allowance on my Schedule C?
1. The housing allowance depends on whether you are being paid as a minister of the gospel.
2. The allocation rule applies.
3. Beats me. I don't do tax returns. Check out http://www.irs.gov. Search under "housing allowance." There's an IRS publication that should give the answer.
Hello. I've just read through your posts with great interest and I was wondering if you could answer a couple of questions for me. I've been working as a missionary in Africa for the last 19 years. I've been filing federal income tax (using the 2555 exclusion forms) for all that time. Throughout the years I've asked various people whether or not I need to file State income tax and was always told no. I maintain a US drivers license and now have a car registered and stored for use during home service. Do I need to file a State income tax return? If so, would I be a non resident or a part year resident? Would this interfere with my "bona fide residency" for my federal income tax?
If you have any wisdom. I sure would appreciate it.
Thanks much.
Evy
Alabama has a rule that excludes income earned by missionaries if they've been in a foreign country for 24 months. Other states may have similar rules. http://www.ador.state.al.us/incometax/1webreghold…
The same citation has a section describing how Alabama determines whether you are domiciled in Alabama. If you aren't domiciled in any state, then you don't owe any state income tax — but then if you're domiciled in a foreign country, you may owe foreign taxes.
It's complicated.
Hello,
I have been searching for some sort of help with a tax issue that we are having. We are missionaries in Italy. We most likely need representation for failing to report our foreign accounts on our 1040 (an oversight) and failure to file the FBAR. We are trying to understand the ramifications and what we ought to do being that the deadline to file past due FBAR reports was in 2009 and we just learned about it. Could you please contact us asap.
Sincerely,
Nicole
Nicole,
Here's what the IRS says on the subject: http://www.irs.gov/businesses/small/article/0,,id…. Notice especially —
Yes, you need professional help to make sure this is handled properly. I'll forward a recommendation to you by private email.
Readers,
US citizens with accounts totalling more than $10,000 in a foreign country have to file this by June 30 of each year. The penalties are severe but forgivable.
There is a tax firm in Tennessee called Steele Martin Jones & Company that has a partner (Gary) who specializes in taxation for ministers. The firm website is http://www.steelemartin.com. Gary is an elder within the Churches of Christ, as well. The firm can also be reached at 731-668-9183.
Brandon,
I appreciate the referral. Here's the deal: I need all the help I can get fielding tax questions from missionaries. It's complicated and I need a second opinion now and again. Can you get Gary to help with tax advice here?
Hello, I am very glad to have found this blog. My husband and I are getting ready to go to Israel as volunteer missionaries for a minimum of 2 years. We will not receive any monies there, but they will provide an apartment, bus pass, health insurance and lunch. We will be responsible for property taxes (renters pay, not owners), utilities, phone/internet/etc, food, travel to/from Israel, and personal needs. We will rely on donations from the US. I have a few tax questions to help do this correctly from the start.
The ministry we have accepted an invitation from has an office in the US (501-c3) that can receive donations for their volunteers. The giver of the donation receives their tax deductible receipt from the US office. The volunteer gets a 1099 from the US office.
My husband and I are going as a missionary team. We do not have an ordination. The congregation that will be our "host church" plans to send any donations they receive for us to the US office of the ministry we are serving. We are planning to have friends, family, etc send their donations directly to the US office of the ministry as well. This would make everything clean with one 1099.
Here are my questions:
1 – Given the above information, does this look like the best way to go about this?
2 – Since we are not ordained ministers (but certainly going to serve as "ministers of the Gospel") how can we qualify for the exemption mentioned ($164,800 for couples)? The congregation that is our host church is a non-denominational church. My husband has participated in assisting the Pastor in baptisms as you stated above, and would certainly be allowed to participate in the giving of communion as well.
3 – If we can qualify for the above exemption, how and when do we apply?
4 – We will be receiving our first donations this year, and thinking this could be a large amount since we are first getting started. Will this be an issue since we will only be in Israel for a short period of time during this tax year? If so, any suggestions?
5 – We will not be having a physical residence in the US, but are required to keep a residence according to the laws in Israel for volunteers, so we will have a PO Box address. How will this effect our state taxes?
6 – I don't really understand how the SECA / SS tax will be for us…..
7 – I know we will need a CPA to do our taxes and help us get off on the right foot, can you recommend anyone?
I can't tell you how much I appreciate finding this blog and look forward to hearing back. When I found out we would receive a 1099 for all the donations people made, I was dumbfounded to find out we would have to pay taxes on gifts given to us to support our mission to serve others. I am hoping to keep this to a minimum as much as possible.
I know this is a lot of questions. We will need to speak to the Pastor of the host church this week about this because he has asked us to speak before the congregation this Sunday & to receive our first offering. I'd really like to know (for tax purposes) how we should funnel it. Thank you for your help!
Blessings,
Linda
Linda,
I've covered many of these questions in other posts. Take a look at the posts indexed at /index-under-construction/c…
Sort through the several posts on the subject and then email me privately if you have any remaining questions.
May God bless your ministry.
You you should make changes to the post name title
One In Jesus
» U.S. Income and Employment Taxes for Missionaries (corrected and expanded)
to more generic for your webpage you write. I loved the blog post even sononetheless.
Dear Jay:
Thank you for your return call today. As discussed, I am posting the gist of our conversation here.
I have an unpaid debt to Jesus due to some answered prayers surrounding a tennis ball size tumor in my son's soccer ball size head. That's right ANSWERED PRAYERS. My son is safe and off at school today!!!!
Consequently, I have a worldly skill I would like to use for my brothers and sisters in Christ to help repay some of this debt. Over the past 15 years I have worked in the Big 4 accounting firms and with my own firm http://www.GEMMS.us specializing in Expatriate and Inpatriate Tax and Consulting.
Since I already specialize in the expat/inpat tax returns, Missionary tax returns are an easy solution to repaying some of my debt.
Additionally, I also provide “Exit Interviews” which are one-half hour phone consultations designed to provide international travelers with a glimpse of the US tax issues they are about to incur. And I offer this service FREE of charge.
Finally, as I know Missionaries don't do what they do for the money, I provide all my services to all Missionaries at One-Half my normal rate which should be less than they are paying at a local shopping mall type tax firm.
Please read more about this offered service at http://www.gemms.us/NotForProfit
Yours in Christ,
Chuck Heyde, CPA
Global Executive ManageMent Solutions
(678) 625-7641
[email protected]
Hi Jay,
Randy Bradbury again. As I mentioned last year, our "tent-making" work as missionaries in the Philippines is tax preparation and financial consulting for American expatriates- primarily missionaries (http://www.MissionaryTaxandConsulting.com). I've recently run into an interesting situation, in that a missions organization changed their W-2 reporting for a missionary (perhaps all their missionaries) to "Statutory Employee," rather than simply issuing a 1099. As this goes back to 2008, it's creating some challenges with the amended returns, as Schedule C's for statutory employees do not flow to the SE tax (as "employers" are required to withhold FICA). In this particular situation, FICA income was not reported, and no taxes were withheld. Dilemma- treat it as a 1099misc? Treat it as a regular W-2 for clergy (in this case, the missionary is not "clergy"), or leave it as it stands, with no SECA for those years?
(I realize you can't give specific advice for a given situation, but some general thoughts would be helpful here… 🙂 .)
Blessings,
Randy Bradbury
Redeagle,
I'm just guessing, but it sounds as though the employing mission organization treats the missionaries as ministers of the gospel who are common law employees.
This is usually the correct result for preachers and other "located" ministers, working for a local congregation that pays their salary.
In such a case, the minister remains self-employed for self-employment tax (SET) purposes, because the SET statute mandates this result. Ministers of the gospel being paid for ministry are always exempt from FICA and subject to SET — as crazy as that seems.
It's less common for a missionary to be correctly classified as an employee, because few "employers" exercise day-to-day control over their activities, but this is sometimes the case.
Now, the ministers often elect out of SET, mooting the question. But where they've not elected out, they have to pay SET and file estimates each quarter.
To "simplify" things, the IRS allows the minister to also pay his income taxes through estimates, even though he's a W-2 employee. He can elect to have FIT withheld by filing a W-4 with his employer.
State law is often different. In Alabama, for example, a minister's employer has to withhold state income tax.
At my church, we require our ministers to elect withholding and we also remit their SET via withholdings — which create a credit against estimates. This makes certain they don't get in trouble on their tax obligations, per Rom 13.
See http://www.irs.gov/publications/p517/ar02.html#en….
If the missionary is not a minister of the gospel (not necessarily the same as "not clergy," but it varies with the denomination), he's an employee for SET purposes and the employer is obligated to withhold FIT and FICA and to match. And the missionary shouldn't have to put up the match out of pocket, because the law imposes that requirement on the employer.
Finally, there remain a very few nonprofits that are exempt from FICA by virtue of grandfathering under old law. You might check with the employer to see whether they are claiming a total FICA exemption. I'm not familiar with that law as it's so unusual.
[NOTE the Circular 230 disclaimer under About.]
Jay,
Thanks for your response. In the immediate situation, as the organization checked "Statutory Employee" on the W-2 form, my guess is that it did so in response to the missionary's request, rather than checking first as to legal requirements for such designation (as missionaries don't meet those requirements- at least none that I've met). Probably they should have switched to using 1099misc, as these folks definitely are not "employees," in any commonly understood sense of the term. (I run into this (but never the "statutory employee" thing) quite often, as every organization differs in the way it handles tax issues.) It seems that most do not meet the mandate to be "wise as serpents" in these matters. 🙂 (C'est la vie- provides more need for "tent-making"…)
Blessings,
Randy Bradbury
Redeagle,
You're quite right. They're definitely not statutory employees. http://www.irs.gov/businesses/small/article/0,,id….
In some denominations, they could be common law employees, but as you note, this would be unusual.
What a mess.
Jay,
This may be a similar issue to what you’ve already discussed, but I wanted to make sure. My sister is a Volunteer through YWAM in Australia and as a result had to raise support. The supporters were advised to send the money to YWAM in Texas to receive the tax deduction for their contribution. YWAM sent my sister a 1099-Misc at the end of the year in the amount of the donations. Does she really have to file as a SE and pay SE tax? Could these be considered gifts or her activities a hobby instead? If not, what type of expenses could she deduct against the “income” on the 1099 since she’s not really running a “for profit” business? Thanks for any light you can shed on this situation.
For His Kingdom,
Tim
Tim,
She only has to pay SE tax on her net income. She can deduct the expenses of performing her missionary duties. If she made a profit, it's taxable income, even though she wasn't seeking a profit. The rules for what is deductible vary with how much time she spent in Australia. If she was there less than one year, the rules are fairly generous.
Hi Jay.
I have been all over the internet and hope you might be able to answer my question.
It is my understanding that the amount on a 1099 corresponds to the money received (by the recipient) in that calendar year. In the case of a missionary, I would understand this to mean "the last/final check your church gives YOU for at the end of the year." This is always the way it has been handled (with my donations) in the past and should there be a discrepancy between the monthly checks (received by the missionary) and what the church is reported.
Simplified: If the church decides to hold donations sent at the end of December and give you the money in mid- January is that still considered income YOU received in the prior year?
I am a missionary currently serving in Kenya. I did contact the IRS chat but they seemed to have no clue and directed me to the international tax desk. (Although mine is just a question regarding reporting proper 1099 amounts.)
Any right answer you could provide would be appreciated.
Thank you,
B~
Bonnee,
As a rule, the 1099 should equal cash paid during the year. However, there's a principle called "constructive receipt," meaning you are taxed on money available to you just for the asking.
Therefore, if the church holds the money pending nothing but your request, it's immediately taxable although not yet paid. If the church would not honor such a request until the following year, then it shouldn't be taxable until paid.
(Note legal disclaimers under Author/Policies tab.)
Thank you, Jay.
I have another question.
I went on the mission field Dec 2008 after being on furlough in the U.S. Jan – Nov. Since I did not work while searching for my next assignment, I had no W2 or 1099 income.
I did have quite a few expenses (mainly presentation and mission orientation expenses) but my overall support for 2008 was very little.
Here is my question… Can I just file a 1040 EZ (and post that income on line 1) or do I actually have to file a 1040 & Sch C (which I would rather not do)?
I am more than willing to forego all of those expenses for the sake of being able to do my 2008 tax return by Friday. (It's called "I am in a hurry.")
Sorry to be in such a hurry but I tried to ask this of the IRS chat reps but they could not (or would not) answer my question.
Thank you.
Bonnee,
As I read the 1040ez instructions, you must file a 1040 and schedule C because you have self-employment income
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Hi Mr. Guin,
I am the administrator at a church that supports a minister in Guatemala (and his church) who is not a US Citizen. Can you suggest how we should do that tax-wise?
I appreciate your advice,
Kevin
Kevin,
I think missionaries are generally independent contractors. Therefore, for a non-US citizen who is also not a US resident, his taxes are between him and the Guatemalan government. I have no knowledge of Guatamalan law, but they should have no jurisdiction to require you to report or withhold. However, he surely has a duty to file a return and pay whatever he owes on his own.
We will be working for private contractors for a 501c3. We served with this same organization overseas in 2011. Now we will be serving in the USA as private contractors doing development work for the organization. We are not ordained or licensed as ministers, and if we did get this license (or ordination), we are not truly doing the “work of the ministry”. This organization will pay us 2/3 salary, with 1/3 coming from individual donors through our church, who gives us a 1099MISC. The organization is also planning to give us a 1099MISC. Two questions:
1. If we get ordained or licensed (is there a difference?) but are not performing the duties of a minister or missionary, can we claim a housing allowance?
2. Should our organization be counting us as employees instead of private contractors, therefore withholding taxes and giving us a W-2 instead of a 1099MISC? (Are they shirking their duty as an organization by not doing this?)
Thanks so much for your help! Your website is very informative.
My husband and I are missionaries and served overseas for 8 months of 2011, my husband is also an ordained minister. Our wages earned as a missionary was reported on W2s. Can we claim our expenses such as travel and training as business expenses?
I have a simple question:
My wife and I (along with our baby boy) are just beginning careers as missionaries in Madagascar, working with YWAM. YWAM doesn’t manage or control any of our finances for us, and all of our support is going through our home church in Oklahoma (through whom both my wife and I are also ordained ministers). However, our home church merely receives the support for us and then deposits it once a month in our American bank account. They don’t list us as employees in any sense, nor as self-contractors – it’s a very small church so they actually only have 2 employees (both in Oklahoma) and both their incomes are so small, it’s only a housing allowance, so they only do whatever tax forms are required for that.
So, we’ve received no W2 or 1099 from them this year about the support we received through them last year. They did send a letter to the person doing our taxes for us this year, and it shows the amount of donations we’ve received through them. Where should that be listed on our US tax returns? Also, to be clear, last year we weren’t foreign residents (since we weren’t gone more than 6 months), but all years going forward we will be.
Any idea where to list our income on the tax form? And how to pay any social security taxes owed? (Since obviously nothing is being withhheld.) Please keep in mind that we’re living in one of the poorest countries in the world, working together with a local ministry (YWAM is essentially autonomous in each country) with mostly national workers, and so we’re also living at the local level… which is to say an income far below most missionaries and missions organizations. We don’t have the money to pay for any special tax lawyers or accountants to do any special forms or work for us, and as you said, most are unfamiliar with these areas of concern anyway. But of course, we want to pay the taxes we owe and not get behind and need to make up for it someday. Please let me know if you can help at all!
After reading from a few sources online, including here, I feel concerned that our taxes might have not been filed this year properly. Our situation: We are US citizen and missionaries. 1/2 our income is received in the US from a church that handles donations for us. The other half is from my husband’s secular teaching job in our foreign country which doesn’t have a tax treaty with the US, and we pay income tax to the foreign country. Our tax preparer did the following: Filed for a foreign income tax exclusion for only my husband’s teaching job so we aren’t double taxed but did not exclude our US missionary income for which we pay SE and income tax. Then used our SE missionary donations as a basis for claiming the additional child tax credit (we have 2 children). Browsing the web, including your site, I get the impression that the SE missionary income from the US should not be considered earned income and cannot be the basis for claiming the ACTC, and that the SE earnings could or should fall under the foreign income tax exclusion (and then wouldn’t be able to be used for claiming the ACTC). Do you have any helpful information to clarify?
As foreign missionaries, how should we divide the income to be reported on our 1099s? What are the pros/cons of reporting it all on the husband’s 1099 vs. giving some (a %? half?) to the wife? We both have distinct roles on the field, but could the wife be considered an employee of the husband? Thanks!!
On Mission,
I’m sorry, but I can’t give this level of advice in a public forum. I will speak in generalities, but whether what I say applies to you I cannot say.
As a general rule, if you file a joint income tax return, how you split the income doesn’t matter from an income tax perspective. But there are rare exceptions to the rule.
If you contribute to an IRA, you likely maximize your contribution if you both make enough to contribute. Other retirement plans, 403(b) annuities, etc. might change the math.
If you’re subject to the self-employment tax of the Social Security Administration — if you’ve not elected out as a minister of the gospel and if you’re not subject to a totalization treaty — the more one spouse makes, the better, because Social Security benefits are based on the salary of the individual, not the couple. It’s complicated, but if the husband is the higher earner over his career (not always the case), it’s better if the husband has the highest permissible salary so the social security benefits are maximized. On his death, the widow receives a survivors benefit based on 1/2 his earnings or on her earnings, whichever is higher. And so there’s no benefit to splitting half and half. However, his salary must reflect actual value of services rendered and not be over-paid compared to market.
Again, I can’t give individualized advice, and missionary taxation is very complex. You should speak with a qualified CPA with the above in mind.
Hi Jay:
This article is very helpful. We have an interesting situation and really are baffled in how to proceed. I am with a Rescue Mission. We have a church that contribute and participates in volunteer work at the Mission. Recently they asked if we would be interested in having an individual, who has functioned as a pastor of youth at their church, be a missionary to our Mission. This is the tricky part. The church has agreed to send a $500 donation to us for the benefit of the Missionary they have to us. In addition, the missionary is raising contributions that will be sent to us for the benefit of the Missionary as a housing allowance. I am confused because I am not sure why or if we should be administering the funds. It is my experience that the sponsoring church or organization administers their missionaries funds. Can you please shed some light on this for me? In addition, if we are going to administer the funds, what we be the best way to do so? Thank you.
Jay,
My wife and I are both full time missionaries, pastors, in the Bahamas. We are both retired and both draw SS checks each month. We are employees of a 501 (c) sending agancy, not a church. Because we are both retired and receiving SS do we still have to pay into SS. Seems to me it is not going to effect what we receive each month and I doubt we will live long enough to get what we have already paid in out. Is there any rulling on this. I have not been able to find anything.
Lane,
If your only income is SS, then you don’t pay SS on SS. If you have wages from employment, it gets more complicated and depends on your age, year of birth, that sort of thing. But you can certainly be in a position of owing SS on wages even though you’re already receiving SS benefits. https://www.ssa.gov/pubs/EN-05-10077.pdf
Jay, I am a CPA and just found your excellent blog which I will pass on to the pastors and missionaries that I help. I am researching a question that has never been presented to me before. My client is an ordained pastor and this year will not meet the physical presence test so his organization is about ready to approve a housing allowance to help reduce his taxes. If he lives about five months in another country and does not have to pay their taxes, can he have a housing allowance (not a foreign housing allowance) if his house is in another country? This will reduce his income tax but he knows that it will not reduce his SE tax. Thanks.
Karen,
I’ve not looked at those rules since I wrote the post. But I don’t recall anything in the housing allowance rules that requires a domestic residence. But I’ve never had occasion to research the question.
I would like to know do you need to be certified to be a missionary in the United States of America
thank you for your informative post! I did not find the answer to my question after reading through all the comments. I am a US citizen and a missionary (for 11 years) in Chile. I am an employee with a US based sending agency (501c3). I receive a w2 for my salary. The rest of the amount I need for insurance, taxes and ministry/projects I am responsible to raise through church or individual donations which the agency forwards into a ministry account and the agency files their taxes including all of this.
My question comes in for payroll tax. My salary has an automatic deduction for SS tax. But I am also required to raise funds to pay for the employer portion of the payroll tax. Is this normal that the employee has to raise funds to pay for the employer tax? Also in the case that my funding doesn’t come in on time (or has suffered a reduction for a few months at a time) is it okay for the agency to reduce my salary? i appreciate your thoughts. I want to be informed and know if it’s necessary to approach the sending agency about this or not.
Thank you!
Hi Jay!
I work with YWAM in Belize. I lived here for most of 2016, but was overseas in different countries for some of the year as well… I raise my own support and it is donated through our YWAM organization so that it is tax deductible for my supporters.
I received a 1099-MISC form for last year (2016), and I am just wondering how I need to file. Do I need to file as self-employed and then enter expenses from here as itemized deductions? Also, how can I calculate my net income, rather than everything that I made from the whole year.
I use TaxAct’s website to help me file, but any tips on what steps to take would be very much appreciated.
Thank you so much!
Jay, our missionaries are allowed to submit bona-fide ministry expenses for reimbursement not subject to taxes or admin fee of our mission agency. Recently, we have had staff submit a request for a special camp for their kids that helps them adapt to the culture they are working in, is this a legitimate request?
For those that don’t know, Jay has passed away. People are just commenting and responding without a moderator, but the site is still active.