Members of the clergy are in many ways treated like other taxpayers, but there are special tax treatments that recognize their position as employees of a church. For tax purposes, members of the clergy may be treated as either employees or independent contractors.
Generally, you are an employee if the church or organization has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action.
If you are employed by a congregation for a salary, you are generally a common-law employee, and income from the exercise of your ministry is considered wages for income tax purposes. However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are considered self-employment income.
In either case, with approval from the IRS, members of the clergy have an opportunity to bow out of the Social Security system and not pay this tax. To request an exemption from self-employment tax, you must file Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, with the IRS. This exemption stops the requirement for paying self-employment tax, but it will also prevent you from receiving benefits during the period of exemption.
If you are treated as an employee:
- You will receive a Form W-2 statement of income from your employer (church) organization.
- Your employer should not withhold Social Security tax, because a minister is always considered self-employed when it comes to Social Security.
- Your federal income tax withholding is voluntary, but if income tax is not withheld, you must make quarterly estimated tax payments.
- Your housing allowance is generally exempt from income tax as long as it is spent for housing related expenses.
- If you are treated as an independent contractor:
- You will receive a Form 1099 MISC from the organizations receiving your services.
- You must file a self-employed tax return using Schedule C or C-EZ.
- There will be no withholdings for Social Security and federal income tax.
- Any housing allowance received is not included in income.
Even though, for Social Security tax and Medicare tax purposes, you are considered a self-employed individual in performing your ministerial services, you may be considered an employee for income tax or retirement plan purposes. For income tax or retirement plan purposes, some of your income may be considered self-employment income and other income may be considered wages.
If you are a minister performing ministerial services, you must include in income offerings and fees received for marriages, baptisms, funerals, etc., in addition to salary. If the offering is made to the religious institution, however, it is not taxable.
Since members of the clergy are considered self-employed for the purposes of Social Security and Medicare taxes, the church does not withhold Social Security and Medicare taxes from a pastor's salary the way it does for lay employees. Likewise, the church does not have to pay the employer's share of Social Security and Medicare taxes for the pastor as it does for lay employees. Clergy are not subject to mandatory federal tax withholding, however, the pastor may elect to voluntarily have the church withhold these taxes in lieu of filing quarterly personal estimated taxes. Pastors are required to file Schedule SE with their Form 1040. This form is used to calculate the pastor's self-employment taxes for Social Security and Medicare.
A minister's housing allowance, sometimes called a parsonage allowance or a rental allowance, is excludable from gross income for income tax purposes, but not for self-employment tax purposes. The Housing Exclusion Allowance amounts, however, are subject to Social Security and Medicare taxes, and must be added to taxable salary by the pastor for calculating taxes due on Schedule SE.
If you own your home, however, you may still claim deductions for mortgage interest and real property taxes. If your housing allowance exceeds the lesser of your reasonable salary, the fair rental value of the home, or your actual expenses, you must include the amount of the excess as other income.
Note, however, that the fair rental value of a parsonage or the housing allowance is excludable from income only for income tax purposes. No exclusion applies for self-employment tax purposes. For Social Security and Medicare tax purposes, a duly ordained, licensed or commissioned minister is considered self-employed, therefore you will pay SE tax on both your wages and self-employment income. This means that your salary on Form W-2, the net profit on Schedule C or C-EZ, and your housing allowance, less your employee business expenses, are subject to self-employment tax on Schedule SE.