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Publication 517

Self-Employment Tax:
Figuring Net Earnings(p7)

There are two methods for figuring your net earnings from self-employment as a member of the clergy or a religious worker.
You may find Worksheets 1 through 4 helpful in figuring your net earnings from self-employment. Blank worksheets are in the back of this publication, after the Comprehensive Example.

Regular Method(p7)

Most people use the regular method. Under this method, figure your net earnings from self-employment by totaling your gross income for services you performed as a minister, a member of a religious order who has not taken a vow of poverty, or a Christian Science practitioner or reader. Then, subtract your allowable business deductions and multiply the difference by 92.35% (.9235). Use Schedule SE (Form 1040) to figure your net earnings and SE tax.
If you are an employee of a church that elected to exclude you from FICA coverage, figure net earnings by multiplying your church wages shown on Form W-2 by 92.35% (.9235). Do not reduce your wages by any business deductions when making this computation. Use Schedule SE (Form 1040), Section B, to figure your net earnings and SE tax.
If you have an approved exemption, or you are automatically exempt, do not include the income or deductions from ministerial services in figuring your net earnings from self-employment.

Amounts included in gross income.(p7)

To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income:
  1. Salaries and fees for your ministerial services (discussed earlier),
  2. Offerings you receive for marriages, baptisms, funerals, masses, etc.,
  3. The value of meals and lodging provided to you, your spouse, and your dependents for your employer's convenience,
  4. The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you, and
  5. Any amount a church pays toward your income tax or SE tax, other than withholding the amount from your salary. This amount is also subject to income tax.
For the income tax treatment of items (2) and (4), see Income Tax: Income and Expenses, later.


Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. His church owns a parsonage that has a fair rental value of $12,000 per year. The church gives Pastor Adams the use of the parsonage. He is not exempt from SE tax. He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes.
The results would be the same if, instead of the use of the parsonage and receipt of the rental allowance for utilities, Pastor Adams had received an annual salary of $51,000 of which $17,000 ($5,000 plus $12,000) per year was designated as a rental allowance.
Overseas duty.(p8)
Your net earnings from self-employment are determined without any foreign earned income exclusion or the foreign housing exclusion or deduction if you are a U.S. citizen or resident alien serving abroad and living in a foreign country.
For information on excluding foreign earned income or the foreign housing amount, see Publication 54.


Diane Jones was the minister of a U.S. church in Mexico. She earned $35,000 in that position and was able to exclude it all for income tax purposes under the foreign earned income exclusion. The United States does not have a social security agreement with Mexico, so Mrs. Jones is subject to U.S. SE tax and must include $35,000 when figuring net earnings from self-employment.

Specified U.S. possessions.(p8)

The exclusion from gross income for amounts derived from American Samoa or Puerto Rico does not apply in computing net earnings from self-employment. Also see Residents of Puerto Rico, the U.S. Virgin Islands, Guam, the CNMI, and American Samoa, earlier, under U.S. Citizens and Resident and Nonresident Aliens.

Amounts not included in gross income.(p8)

Do not include the following amounts in gross income when figuring your net earnings from self-employment.

Allowable deductions.(p8)

When figuring your net earnings from self-employment, deduct all your expenses related to your ministerial services performed as a self-employed person. These are ministerial expenses you incurred while working other than as a common-law employee of the church. They include expenses incurred in performing marriages and baptisms, and in delivering speeches. Deduct these expenses on Schedule C or C-EZ (Form 1040), and carry the net amount to line 2 of Schedule SE (Form 1040), Section A or B.
Wages earned as a common-law employee (explained earlier) of a church are generally subject to self-employment tax unless an exemption is requested, as discussed earlier under Exemption From Self-Employment (SE) Tax. Subtract any allowable expenses (including unreimbursed employee business expenses) from those wages, include the net amount on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Do not complete Schedule C or C-EZ (Form 1040). However, for income tax purposes, the expenses are allowed only as an itemized deduction on Schedule A (Form 1040) to the extent they exceed 2% of adjusted gross income.

Employee reimbursement arrangements.(p8)

If you received an advance, allowance, or reimbursement for your employee expenses, how you report this amount and your employee expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. Ask your employer if you are not sure if it reimburses you using an accountable or a nonaccountable plan.
Accountable plans.(p8)
To be an accountable plan, your employer's reimbursement arrangement must include all three of the following rules.
The reimbursement is not reported on your Form W-2. Generally, if your expenses equal your reimbursement, you have no deduction. If your expenses are more than your reimbursement, you can deduct your excess expenses for SE tax and income tax purposes.
Nonaccountable plan.(p8)
A nonaccountable plan is a reimbursement arrangement that does not meet all three of the rules listed under Accountable plans above. In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan.
Your employer will combine any reimbursement paid to you under a nonaccountable plan with your wages, salary, or other compensation and report the combined total in box 1 of your Form W-2. Since reimbursements under a nonaccountable plan are included in your gross income, you can deduct your related expenses (for SE tax and income tax purposes) regardless of whether they are more than, less than, or equal to your reimbursement.
For more information on accountable and nonaccountable plans, see Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Married Couple
Missionary Team(p8)

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.
If the agreement is with one spouse only and the other spouse is not paid for any specific duties, amounts received for their services are included only in the self-employment income of the spouse having the agreement.

Earnings Subject
to SE Tax(p8)

For 2014, the maximum net earnings from self-employment subject to social security (old age, survivors, and disability insurance) tax is $117,000 minus any wages and tips you earned that were subject to social security tax. The tax rate for the social security part is 12.4%. In addition, all of your net earnings are subject to the Medicare (hospital insurance) part of the SE tax. This tax rate is 2.9%. The combined self-employment tax rate is 15.3%.

Additional Medicare Tax.(p8)

A 0.9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than:Medicare wages and self-employment income are combined to determine if income exceeds the threshold. A self-employment loss is not considered for purposes of this tax. RRTA compensation is separately compared to the threshold. For more information, see Form 8959, Additional Medicare Tax, and its separate instructions.

Nonfarm Optional Method(p9)

You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. In general, the nonfarm optional method is intended to permit continued coverage for social security and Medicare purposes when your income for the tax year is low.
You may use the nonfarm optional method if you meet all the following tests.
  1. You are self-employed on a regular basis. You meet this test if your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. The net earnings can be from either farm or nonfarm earnings or both.
  2. You have used this method less than 5 prior years. (There is a 5-year lifetime limit.) The years do not have to be consecutive.
  3. Your net nonfarm profits were:
    1. Less than $5,198 and
    2. Less than 72.189% of your gross nonfarm income.
If you meet all three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method.

Table 3. Figuring Nonfarm Net Earnings

IF your gross nonfarm income is ...THEN your net earnings are equal to ...
$7,200 or lessTwo-thirds of your gross nonfarm income.
More than $7,200 $4,800

Actual net earnings.(p9)

Multiply your total earnings subject to SE tax by 92.35% (.9235) to get actual net earnings. Actual net earnings are equivalent to net earnings under the "Regular Method."

More information.(p9)

For more information on the nonfarm optional method, see Publication 334, Tax Guide for Small Business, and the Schedule SE (Form 1040) instructions.