While pastors can no longer deduct unreimbursed business expenses on Schedule A, they can subtract them from their taxable income on Schedule SE.

 

We all know that most churches don’t have a lot of extra money floating around. As such, many pastors cover small (and not so small) expenses without being reimbursed by the church. It’s a very common practice.

 

Deducting Unreimbursed Business Expenses

Under the old laws, you could deduct those when itemizing deductions on Schedule A. However, that’s no longer an option. If you look at the 2018 Schedule A, there’s no line for unreimbursed business expenses. And all the pastors let out a collective groan.

 

At least now there’s a higher standard deduction, right?

 

Unreimbursed Business Expenses And Social Security

So, we know that you can’t take a deduction for your unreimbursed business expenses, but how does it affect your Social Security taxes? Will they be included or excluded from the computation of payroll taxes?

 

This is what the instructions for Schedule SE (where you calculate your self-employment taxes) say:

 

“If you were a duly ordained minister who was an employee of a church and you must pay SE tax, the unreimbursed business expenses that you incurred as a church employee are not deductible as an itemized deduction for income tax purposes. However, when figuring SE tax, subtract on line 2 the allowable expenses from your self-employment earnings and attach an explanation.”

 

That means that you don’t have to pay Social Security taxes on those unreimbursed business expenses. You can subtract the amount from your ministerial income and use the lower number to calculate your taxes.

 

How To Exclude Business Expenses On Schedule SE

You can’t just subtract the expenses and leave it at that, though. Then the IRS will think you didn’t enter the right number and they will send you a bill for the difference in taxes. With interest.

 

You have to include an explanation so that the IRS understands why the number is lower than expected. The explanation can simply be a sheet of paper with your name, Social Security number, tax year, and a title like Schedule SE Line 2 Explanation on the top. Then underneath, list out your unreimbursed business expenses and do the math to show how you arrived at the number on Line 2.

 

Then you won’t get a bill from the IRS and have to wait on hold for an hour to talk to them about it and then write letters back and forth until it all gets cleared up six months later. You hope.

 

When it comes to the IRS, it’s easiest to just do it right the first time.

 

While pastors can no longer deduct unreimbursed business expenses, at least they will not count against you when calculating your 15.3% Social Security taxes. And if you file Schedule C, you may be able to take another deduction, which you can read about here.