Comprehensive Example
Rev. John Michaels is the minister of the First United Church. He is married and has one child. The child is considered a qualifying child for the child tax credit. Mrs. Michaels is not employed outside the home. Rev. Michaels is a common-law employee of the church, and he has not applied for an exemption from SE tax.
The church paid Rev. Michaels a salary of $31,000. In addition, as a self-employed person, he earned $4,000 during the year for weddings, baptisms, and honoraria. He made estimated tax payments during the year totaling $8,400. He taught a course at the local community college, for which he was paid $3,400.
Rev. Michaels owns a home next to the church. He makes an $800 per month mortgage payment of principal and interest only. The church paid him $800 per month as his parsonage allowance (excluding utilities). The home's fair rental value is $900 per month. The utility bills for the year totaled $960. The church paid him $100 per month designated as an allowance for utility costs.
The parts of Rev. and Mrs. Michaels' income tax return are explained in the order they are completed. They are illustrated in the order that the Rev. Michaels will assemble the return to send it to the IRS.
Form W-2 From Church
The church completed its Form W-2 for Rev. Michaels as follows:
Box 1. The church entered Rev. Michaels' $31,000 salary.
Box 2. The church left this box blank because Rev. Michaels did not request federal income tax withholding.
Boxes 3 through 6. Rev. Michaels is considered a self-employed person for purposes of social security and Medicare tax withholding, so the church left these boxes blank.
Box 14. The church entered Rev. Michaels' total parsonage and utilities allowance for the year and identified them.
Form W-2 From College
The community college gave Rev. Michaels a Form W-2 that showed the following.
Box 1. The college entered Rev. Michaels' $3,400 salary.
Box 2. The college withheld $272 in federal income tax on Rev. Michaels' behalf.
Boxes 3 and 5. As an employee of the college, Rev. Michaels is subject to social security and Medicare withholding on his full salary from the college.
Box 4. The college withheld $210.80 in social security taxes.
Box 6. The college withheld $49.30 in Medicare taxes.
Schedule C-EZ (Form 1040)
Some of Rev. Michaels' entries on Schedule C-EZ are explained here.
Line 1. Rev. Michaels reports the $4,000 from weddings, baptisms, and honoraria.
Line 2. Rev. Michaels reports his expenses related to the line 1 amount. The total consisted of $87 for marriage and family booklets and $174 for 477 miles of business use of his car, mainly in connection with honoraria. Rev. Michaels used the standard mileage rate to figure his car expense. He multiplied the standard mileage rate of 36.5 cents by 477 miles to get $174.
These expenses total $261 ($174 + $87). However, he cannot deduct the part of his expenses allocable to his tax-free parsonage allowance. He attaches the required statement, Attachment 1 (shown later) to his return showing that 23% (or $60) of his business expenses are not deductible because they are allocable to that allowance. He subtracts the $60 from the $261 and enters the $201 difference on line 2.
Line 3. He enters his net profit of $3,799 both on line 3 and on Form 1040, line 12.
Lines 4 through 8b. Rev. Michaels fills out these lines to report information about his car.
Form 2106-EZ
Rev. Michaels fills out Form 2106-EZ to report the unreimbursed business expenses he had as a common-law employee of First United Church.
Line 1. Before completing line 1, Rev. Michaels fills out Part II because he used his car for church business. His records show that he drove 2,708 business miles, which he reports in Part II. On line 1, he multiplies 2,708 miles by the mileage rate of 36.5 cents for the year. The result is $988.
Line 4. He enters $219 for his professional publications and booklets.
Line 6. Before entering the total expenses on line 6, Rev. Michaels must reduce them by the amount allocable to his tax-free parsonage allowance. On the required Attachment 1 (shown later), he shows that 23% (or $278) of his employee business expenses are not deductible because they are allocable to the tax-free parsonage allowance. He subtracts $278 from $1,207 and enters the result, $929, on line 6. He also enters $929 on line 20 of Schedule A (Form 1040).
Schedule A (Form 1040)
Rev. Michaels fills out Schedule A as explained here.
Line 6. Rev. Michaels deducts $1,750 in real estate taxes.
Line 10. He deducts $6,810 of home mortgage interest.
Line 15. Rev. and Mrs. Michaels contributed $4,800 in cash during the year to various qualifying charities. Each individual contribution was less than $250.
Line 20. Rev. Michaels enters his unreimbursed employee business expenses from Form 2106-EZ, line 6.
Lines 24, 25, and 26. He can deduct only the part of his employee business expenses that exceeds 2% of his adjusted gross income. He fills out these lines to figure the amount he can deduct.
Line 28. The total of all the Michaels' itemized deductions is $13,583, which they enter on line 28 and on Form 1040, line 38.
Schedule SE (Form 1040)
After Rev. Michaels prepares Schedule C-EZ and Form 2106-EZ, he fills out Schedule SE (Form 1040). He reads the chart on page 1 of the schedule which tells him he can use Section A - Short Schedule SE to figure his self-employment tax. Rev. Michaels is a minister, so his salary from the church is not considered church employee income. Thus, he does not have to use Section B - Long Schedule SE. He fills out the following lines in Section A.
Line 2. Rev. Michaels attaches a statement (see Attachment 2, later) that explains how he figures the amount ($44,332) to enter.
Line 4. He multiplies $44,332 by .9235 to get his net earnings from self-employment ($40,941).
Line 5. The amount on line 4 is less than $84,900, so Rev. Michaels multiplies the amount on line 4 ($40,941) by .153 to get his self-employment tax of $6,264. He enters that amount here and on Form 1040, line 56.
Line 6. Rev. Michaels multiplies the amount on line 5 by .5 to get his deduction for one-half of self-employment tax of $3,132. He enters that amount here and on Form 1040, line 29.
Form 1040
After Rev. Michaels prepares Form 2106-EZ and the other schedules, he fills out Form 1040. He files a joint return with his wife. First he fills out the address area and completes the appropriate lines for his filing status and exemptions. Then, he fills out the rest of the form as follows:
Line 7. Rev. Michaels reports $34,640. This amount is the total of his $31,000 church salary, $3,400 college salary, and $240, the excess of his utility allowance over his utility costs. The two salaries were reported to him in box 1 of the Forms W-2 he received.
Line 12. He reports his net profit of $3,799 from Schedule C-EZ, line 3.
Line 29. He enters $3,132, half his SE tax from Schedule SE, line 6.
Line 38. He enters the total itemized deductions from Schedule A, line 28.
Line 50. The Michaels can take the child tax credit for their daughter, Jennifer. Rev. Michaels figures the credit by completing the Child Tax Credit Worksheet (not shown) in the instructions for Form 1040. He enters the $600 credit on line 50.
Line 56. He enters the self-employment tax from Schedule SE, line 5.
Line 62. He enters the federal income tax shown in box 2 of his Form W-2 from the college.
Line 63. He enters the $8,400 estimated tax payments he made for the year.
Forms W–2, (2) for John E. Michaels
Form 1040, page 1 for John E. and Susan R. Michaels
Form 1040, page 2
Schedule A (Form 1040)
Schedule C–EZ (Form 1040)
Schedule SE (Form 1040)
Form 2106–EZ
Attachment 1. Computation of expenses, allocable to tax-free ministerial income, that are nondeductible
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Taxable
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Tax-Free
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Total
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Salary as a minister
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$ 31,000
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$ 31,000
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Parsonage allowance-Mortgage ($800 x 12)
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|
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$ 9,600
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9,600
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|
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Utilities ($100 x 12)
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$ 1,200
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Minus actual costs
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- 960
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960
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960
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Excess utilities
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$ 240
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240
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240
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Gross income from weddings, baptisms, and honoraria
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|
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4,000
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4,000
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Ministerial income
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$ 35,240
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$ 10,560
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$ 45,800
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Percentage of nondeductible expenses: $10,560 ÷ $45,800 = 23%
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Schedule C-EZ Deduction Computation
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Marriage and family booklets
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$
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87
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Business use of car: (477 miles x 36.5¢) |
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174
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Unadjusted Schedule C-EZ expense
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$
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261
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Minus: Nondeductible part of Schedule C-EZ expenses (23% x $261)
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- 60
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Schedule C-EZ deductions (line 2)
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$
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201
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Form 2106-EZ - Employee Business Expense Deduction Computation
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|
Car expenses for church business: (2,708 miles x 36.5¢) |
$
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988
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Publications and booklets
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219
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Unadjusted Form 2106-EZ expenses (line 1 plus line 4)
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$
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1,207
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Minus: Nondeductible part of Form 2106-EZ expenses (23% x 1,207)
|
|
- 278
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Employee business expense deduction - Form 2106-EZ line 6
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$
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929
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None of the other deductions claimed in the return are allocable to tax-free income.
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Attachment 2. Attachment to Schedule SE (Form 1040)
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Church wages
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$ 31,000
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Personage allowance-Mortgage
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9,600
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|
|
|
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Utilities
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1,200
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10,800
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|
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Net profit from Schedule C-EZ
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3,799
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|
|
|
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$ 45,599
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Less:
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Schedule C-EZ expenses allocable to tax-free income
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$ 60
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|
|
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Ministerial employee business expenses (unadjusted Form 2106-EZ expenses (line 1 plus line 4)
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1,207
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1,267
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Net Self-Employment Income Schedule SE, Section A, line 2
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$ 44,332
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