Need help with Schedule SE for a church school employee.

The church school is treating your daughter in law as though she is clergy.  However, since they withheld all the taxes and placed them in Box 4, they have treated all of the social security and medicare taxes as part of her federal withholding instead of actually paying the tax to the IRS as required.  The W-2 clearly indicates your daughter in law is considered as being in a clergy position.  She will need to sort that out with the church school administration.

The solution is to complete the W-2 exactly the way it is.  As previously noted, you must go to the page 'Let's check for some uncommon situations'.  Scroll down and check the box that says 'Religious employment'. You must check 'Clergy' on the next screen, next do not enter anything in Parsonage or Housing or Qualifying expenses.

Next on the screen 'Now tell us about your clergy self employment taxes' check 'Pay self employment taxes on my wages'.

Regardless of the refund, the church said they withheld these taxes and they are included in Box 4. This is the confusing part for you and it should be unless your daughter in law actually is considered clergy by the church.  If she is not, then they should not be paying her using clergy rules. She is paying all of the taxes (employer and employee) by the church withholding it from her wages.

There is an option to pay only the employee share of the social security and medicare taxes ONLY if your daughter in law is not in a clergy position. I will show the information below.

• How do I fill out a substitute W-2?
  • This would require that only the employee share be paid and the IRS would go after the church school for the employer share of the taxes.  This may not be what the church school would want.

@jhshiff