How does Kansas treat a minister's self-employment tax deduction after the 2014 change?

Plain-English summary

Kansas Notice 14-02 (July 1, 2014) fixes an unintended double tax on ministers created by the 2012 Kansas income-tax overhaul.

Background. In 2012 Kansas exempted certain non-wage business income (income reported on federal Schedule C and line 12 of Form 1040). To prevent a "double exemption," the Legislature added an add-back for the federal self-employment (SE) tax deduction under K.S.A. 79-32,117, starting in tax year 2013.

The minister problem. For federal purposes a minister's pay is treated as wages (reported on a W-2) but as self-employment income for employment-tax purposes, so a minister pays both the employee and employer share of those taxes -- like a business owner. Unlike a business owner, though, a minister does not get the Kansas non-wage business income exemption for that W-2 wage income, yet was still required to add back the SE-tax deduction on it.

The change. 2014 Senate Bill 265 (Section 3) amended the addition modification in subsection (b)(xx) so the SE-tax add-back applies only "to the extent the deduction is attributable to income reported on schedule C, E or F and on line 12, 17 or 18" of the federal return. A minister's W-2 wage income is not on those schedules/lines, so the add-back no longer reaches it.

Effective date. SB 265 is effective July 1, 2014, but because it applies to all tax years beginning after December 31, 2012, it covers tax year 2013. A minister who added back SE tax on W-2 wage income for 2013 may file an amended return and claim a refund; amended returns are accepted immediately. (The same amendment to K.S.A. 79-32,117 was later carried in reconciliation House Bill 2143.)

What this means for you

Ministers and clergy

• If you added back your self-employment tax deduction on W-2 wage income for tax year 2013, you can amend your Kansas return for a refund.

Tax preparers

• When preparing a minister's Kansas return, do not add back the SE-tax deduction that is attributable to W-2 wage income; the add-back is limited to SE tax on Schedule C/E/F income (lines 12, 17, 18).

Common questions

Who does this affect? Ministers whose pay is reported on a W-2 but who pay self-employment tax on it.

What years does it cover? All tax years beginning after December 31, 2012 -- so tax year 2013 and later.

Can I get money back for 2013? Yes. File an amended 2013 Kansas return; refunds tied to this change are accepted immediately.

What statute changed? K.S.A. 79-32,117(b)(xx), amended by Section 3 of 2014 Senate Bill 265 (also carried in House Bill 2143).

Citations and references

• K.S.A. 79-32,117(b)(xx) -- addition modification for the federal self-employment tax deduction, amended to limit the add-back to Schedule C/E/F income (lines 12, 17, 18).
• IRC Section 164(f) -- the federal deduction for one-half of self-employment taxes.
• 2014 Senate Bill 265, Section 3 -- the amending legislation (also included in reconciliation House Bill 2143).

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 14-02

Original ruling text

Policy & Research Phone: 785-296-3081
915 SW Harrison St FAX: 785-296-7928
Topeka KS 66612-1588 www.ksrevenue.org
Nick Jordan, Secretary Department of Revenue Sam Brownback, Governor
Richard Cram, Director

                                     Notice 14-02

                     Self-Employment Tax Deduction For Ministers
                                   (July 1, 2014)

  During the 2012 Legislative Session there was a major change to Kansas law which

provides an exemption for certain non-wage business income, including income properly
reported on federal Schedule C and on line 12 of the federal 1040. To prevent a "double
exemption" for self-employment income, K.S.A. 79-32,117, the statute which provides for
addition and subtraction modifications, was amended to provide that, starting in tax year 2013,
there be an "add-back" requirement for self-employment taxes.

  Under federal tax law, the income a minister receives is considered wages in some respects

and self-employment income in others. It is reported on a W-2 and not a Schedule C but, for
employment tax purposes, it is treated as "self-employment" income. As a result a minister has
to pay both the employee and employer share of those taxes, just like a business owner. Unlike a
business owner, however, a minister does not get the benefit of the non-wage business income
exemption for wage income reported on a W-2.

 During the 2014 Legislative Session Senate Bill 265 was passed and signed into law.

Section 3 of the Bill amends K.S.A. 79-32,117 to address a minister's unique situation.
Subsection (b)(xx), which is an addition modification, is amended to read:

      (b) There shall be added to federal adjusted gross income:
      (xx) For all taxable years beginning after December 31, 2012, the amount of any
 deduction for self-employment taxes under section 164(f) of the federal internal
 revenue code as in effect on January 1, 2012, and amendments thereto, in determining
 the federal adjusted gross income of an individual taxpayer, to the extent the
 deduction is attributable to income reported on schedule C, E or F and on line 12, 17
 or 18 of the taxpayer's form 1040 federal income tax return.

  The amendment prevents ministers from being taxed on both their wage income and the

self-employment tax they paid on that income.

  Senate Bill 265 is effective July 1, 2014. However, because the amendment relates to all

tax years beginning after December 31, 2012, the amended provision does apply to tax year
2013. As a result, any minister who added back their self-employment taxes from wage income
reported on a W-2 on their 2013 income tax return can file an amended return and claim a
refund. Amended returns will be accepted immediately.

  Please note that the amendment to K.S.A. 79-32,117 found in Senate Bill 265 was later

included in House Bill 2143. This House Bill is a reconciliation bill. A reconciliation bill is
used when a statute is amended in two or more separate bills. K.S.A. 79-32,117 was included in
the reconciliation bill because it was amended by section 3 of Senate Bill 265 and by section 6 of
House Bill 2057.

                                 Taxpayer Assistance

Additional copies of this notice, forms or publications are available from our web site,
www.ksrevenue.org. If you have questions about this Notice, please contact:

                              Taxpayer Assistance Center
                             Kansas Department of Revenue
                             915 SW Harrison St., 1st Floor
                               Topeka, KS 66612-1588
                                 Phone: 785-368-8222
                                  Fax: 785-291-3614