Taxes for Foreign Missionaries: Ireland

I get emails —

Let’s say we raise $X a year and live in Ireland for about 330 days a year, what portion of that income do we pay Social Security on? What portion do we pay federal income tax on? What portion do we pay Alabama state income tax on?

We just want to be careful stewards of God’s money and we also believe that our witness must be consistent with how we obey our government.

Any help or insight you can give would be much appreciated.

I realize that not many of my readers are missionaries to Ireland, but most readers are part of a church with a missions program. And their missionaries need to comply with the tax laws of the US and the land where they work.

Very few congregations have any expertise in these things, and there’s a lot of bad advice circulating. I offer this as an example of how the obligations of the missionaries to pay taxes should be analyzed, even though the outcome will vary quite a lot from nation to nation.

Short answers:

• No Alabama income taxes.
• Only Irish income and Social Security taxes, assuming your only income is from missionary work in Ireland. Some US taxation (likely at zero or close to it) if you travel to a fixed base (UCC or other supporting church) on business.

Analysis:

First, the easy one: Alabama: You are not an Alabama resident and therefore owe no Alabama taxes. Your sponsoring church will pay you as an independent contractor and so will not need to withhold.

Second, Social Security is generally owed on your net income from services — with no reduction for the housing allowance or foreign earned income exclusion. You’ll owe self-employment taxes that you report via quarterly estimates at 15.3%.

However, Ireland is party to a “totalization agreement” with the US. (This is not the same as the “tax treaty” discussed below, dealing with income taxes. Most countries have no such agreement with the US.) Therefore, you will be covered by the Irish Social Security system and not the US system. This looks to be about a 4% tax for health benefits and plus 3% for pension benefits (class S).

You’d do well to speak with someone in Ireland about their system, as I don’t pretend to know what I’m talking about — but it’s certainly less expensive than the US — likely one reason Ireland is going broke.

Now, rates vary with income, and I don’t know how married people are affected, but it may work better to have your support split between the two of you so each one is in the lowest band of money owed.

Third, income taxes: You remain a US citizen and so ordinarily must pay US income taxes. But your housing allowance and foreign earned income exclusion would likely reduce your income to zero or close enough. You need to work with the sponsoring church to have your housing allowance declared before you go overseas.

I’m out of practice on the foreign earned income exclusion, but the link has the rules.

Be aware that the housing allowance for ministers of the gospel is under attack as being unconstitutional. A resolution of the question is likely about 3 years away.  You should have a job description or some formal document designating you as “ministers of the gospel” working on behalf of the church. This is especially true for a church planting team, where many team members don’t take on the typical pastor-like role of a traditional missionary.

HOWEVER, the ordinary US tax rules can be changed by the terms of a tax treaty.  The US and Ireland have an income tax treaty. The treaty overrides any other rules.

As you’ll see, I think you’ll be taxable solely in Ireland once you move, mooting the US tax concerns — but I’d still go through the housing allowance motions, just in case.

Article 4.3.a of the treaty seems to make you a resident of Ireland

he shall be deemed to be a resident of that State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests)

Article 14 seems to make your services as minister taxable to Ireland —

1. Income derived by a resident or a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State, unless he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities. If he has such a fixed base, the income may be taxed in the other State but only so much of it as is attributable to that fixed base.

2. The term “professional services” includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.

Whether you have a “fixed base” in the US depends on whether the sponsoring church and other contributing churches you have to visit to maintain support qualify. If your arrangement with the missions team requires travel to US and visits to a particular congregation, I suppose earnings attributable to that visit will be subject to US income tax only.

Your travel costs in the US would be deductible, and income would be low enough to be covered by standard deduction, and so it may be good to specify that you must come to your sponsoring church and perhaps others every other year.

Article 24 gives you a credit against US taxes for income taxes paid to Ireland.

Notice that income from sources other than missionary work may have a different treatment.

Irish income taxes

Now, being taxed by Ireland for income tax purposes is unfortunate, because US income taxes would be essentially zero, whereas Irish individual taxes are higher.

You’ll likely save money to have your pay split equally between the two of you, as this increases a credit against your taxes under Irish law.

The normal rate is 20%, but there are credits allowed.  See also http://www.regreencpa.com/files/TAX_GUIDE_2009.pdf

You should also look into the impact our your need for health insurance coverage as the Irish system will evidently provide some level of socialized health care — but I have no idea how that works.

Summary

No Alabama income taxes because you have no plans to necessarily return to the US or Alabama. The answer could be different for a short-term missionary.

Only Irish income and Social Security taxes, assuming your only income is from missionary work in Ireland. Some US taxation (likely at zero or close to it) if you travel to a fixed base (a supporting church) on business.

You’ll need to make filings with IRS to notify them you are under the Irish Social Security system (See links above).  Also you’ll have to file a Form 8833 with your US income tax return to claim exemption under the treaty.

You need a CPA to help you with this, and he needs to see this post and perhaps discuss this with me. The rules are extremely complicated, and most CPAs and tax lawyers don’t know them. I only know what I just typed and I’m not that sure of even this. I’d love to get a second opinion from a CPA.

As to Irish taxation, you need to seek guidance from friends over there. The information I have is greatly simplified and you may qualify for exemptions or exceptions I can’t find with my limited resources.

Finally, you really need to read the links.

Note to readers

The taxation of foreign missionaries is complicated. Every tax treaty is different, and the US has one with most other countries.  Some countries have totalization agreements (dealing with Social Security) but most do not. They are not all the same. Every country’s tax regime is different.

Do your homework.

All legal discussions are informational only, do not create a lawyer-client relationship, and may not be relied on. Unless expressly stated otherwise on this website, (1) nothing contained in this website was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended; (2) any written statement contained on this website relating to any federal tax transaction or matter may not be used by any person to support the promotion or marketing or to recommend any federal tax transaction or matter; and (3) any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter contained in this website. No one, without our express written permission, may use any part of this website in promoting, marketing or recommending an arrangement relating to any federal tax matter to one or more taxpayers.