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Members of the clergy who need to reduce expenses on Schedule C and/or Form 2106 (due to a certain percentage of tax-free income received), will need to adjust their allowable expenses in the appropriate section of the Federal Q&A after calculating the allowable deductible amount on the worksheets in the program. Then, the remaining amount is used as an adjustment to self-employment tax.

On the screen titled Self-Employment Tax - Form 2106 Adjustments, within the Self-employment tax adjustments section of the Federal Q&A, are instructions for handling the adjustment for tax-free income received (ex. housing allowance or utilities allowance) for Schedule C or Form 2106. At this point, the TaxAct program will have already used your previous entries regarding the housing/utilities allowance to automatically calculate your percentage of tax-free income on Worksheet 1. You will then be referred to fill out Worksheet 2 (Schedule C) and/or Worksheet 3 (Form 2106) depending on where your expenses need to be reported.

To access and complete the worksheets:

TaxAct Online Users Forms Method:

  1. From within your TaxAct return (Online), click Tools to expand the category, then click Forms Assistant
  2. Expand the Federal Forms view, and then expand the Worksheets view 
  3. Scroll down and select Schedule SE - Adjustments - Clergy Worksheets
  4. Click Add to create a new copy of the fillable worksheet or click Review to review a worksheet already created
  5. Enter the information directly on the worksheet

TaxAct Desktop Users Forms Method:

  1. From within your TaxAct return (Desktop), click on the Forms button in the top left corner
  2. Expand the Federal view, and then expand the Worksheets view 
  3. Scroll down and click the '+' next to Schedule SE - Adjustments - Clergy Worksheets and then double-click Schedule SE - Adjustments - Clergy Worksheets
  4. Enter the information directly on the worksheet

Once the fillable worksheets are completed, they will then become a part of the return and will be electronically filed and/or printed with the return.

The amount of expenses not allowed should then be shown as an adjustment in figuring your self-employment tax. These amounts are allowed as a subtraction for self-employment income/tax purposes only; however, these amounts are not allowed as business expenses (deductible from taxable income) on either Form 2106 or Schedule C. The TaxAct program will automatically calculate this adjustment to self-employment earnings. You will see the following items on the Worksheet 4 titled Figuring Net Self-Employment Income for Schedule SE, Lines 5 and 6:

  • Schedule C Expenses Allocable to Tax-Free Income (from Worksheet 2, Line 6)
  • Total Unreimbursed Employee Expenses After the 50% Reduction for Meals and Entertainment (from Worksheet 3, Line 9)

Note: the deductible amounts from the worksheets must be manually entered elsewhere in the program as explained below.

The amount of unreimbursed business expenses from Form 2106 and/or business expenses included on Schedule C must be adjusted for the percentage of tax-free income received (ex. housing allowance or utilities allowance). Once the correct amount of allowable deductible expenses is calculated (from the worksheets mentioned above), return to the applicable section of the Federal Q&A to make this adjustment:

  • Go to the Business Income section of the Federal Q&A to adjust the expenses for the ministry reported on Schedule C. Enter the total deductible amount as an Other Expense (Schedule C, Line 27a).
  • Go to the Itemized or Standard Deductions section of the Federal Q&A and select Unreimbursed Employee Expenses - Subject to 2% of AGI limit to adjust the expenses for the ministry reported on Form 2106. You can either adjust each expense by the tax-free ratio, or you may enter the total deductible amount as an Other Expense (Form 2106, Line 4which flows to Line 10).

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