Ministers & Other Members of the Clergy
A duly ordained, commissioned, or licensed minister of a church or a member of a religious order is engaged in carrying on a trade or business with respect to any service performed in the exercise of his/her ministry.
Income received by a minister for services rendered in his capacity as a minister are subject to the self-employment tax unless the taxpayer requests and receives an exemption from the IRS. A minister who is an employee of a church must treat wages for performance of services as a minister as wages for income tax purposes, but as self-employment income for self-employment tax purposes.
Ministers have what is commonly referred to as “dual tax status.” For federal income tax purposes, a minister is generally treated as a common law employee. For payments into Social Security, the minister is always self-employed. This is an IRS regulation and not an election.
Self-employment tax (SE tax) is the Social Security and Medicare tax paid by ministers abd self-employed individuals. It is similar to FICA which is the Social Security and Medicare taxes withheld from an employee’s paycheck.
The following is a summary of self-employment taxes:
When you’re self-employed, you are paid the full amount you earn. Nothing is deducted from your check for Social Security and Medicare taxes. Instead, you make estimated tax payments during the year to pay your SE tax and your income tax. If you don’t make estimated tax payments, then you pay these taxes when you file your return.
Many churches are unaware that section 3121(b)(8)(A) prohibits the church from withholding Social Security and Medicare tax on the wages earned by a minister. It is the responsibility of the minister to pay the self-employment tax on his/her salary and housing allowance unless he/she has applied for self-employment tax exemption.
Additionally, ministers are exempt from income tax withholding. It is important to note that this does not mean that ministers are exempt from having to pay income tax; rather, the church does not have to withhold income tax from his/her pay. However, according to IRS Publication 517, a minister can enter into a voluntary withholding agreement with the church to cover any income and self-employment tax that may be due.
Exemption from Self-Employment Tax for Conscientious Objectors
It’s simple; if you are classified as a minister and meet the IRS definition, you have to pay self-employment tax. Ministers can opt out of Social Security by meeting the strict IRS guidelines required for filing IRS Form 4361, Application for Exemption from Self-Employment Tax.
Ministers cannot opt out of Social Security because they think it’s a bad investment. When filing Form 4361, a minister makes some representations under penalty of perjury. A minister must certify opposition on the basis of religious principles to acceptance of public insurance.
Requirements for exemption: A minister may be eligible for an exemption from the self-employment tax based on conscientious objections. Code §1402(e).
To qualify for this exemption, a minister must file a statement with the IRS certifying that he is conscientiously opposed to, or because of religious principle is opposed to, the acceptance of any insurance that:
(a) makes payments in the event of death, disability, old age, or retirement; or
(b) makes payments toward the cost of, or provides services for, medical care (including the benefits of any insurance system established by the Social Security Act).
This exemption only applies to income from the taxpayer’s performance of ministerial services. Any payments received that are not for the exercise of the ministerial services are subject to self-employment tax.
A taxpayer who receives income from performing ministerial services and also from another trade or business will be deemed to have no income from performing the ministerial services if deductions that are attributable to those services exceed the income from them. Reg. §1.1402(e)-3A(c).
Ministerial services: For purposes of the exemption, ministerial services include the ministration of sacerdotal functions and the conduct of religious worship and the control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations) under the authority of a religious body constituting a church or church denomination. Reg. §1.1402(c)-5(b)(2).
Parsonage or Housing Allowances
Generally, a minister’s gross income does not include the fair rental value of a home (parsonage) provided, or a housing allowance paid, as part of the minister’s compensation for services performed that are ordinarily the duties of a minister.
Parsonage Allowance: A minister who is furnished a parsonage may exclude from income the fair rental value of the parsonage, including utilities. However, the amount excluded cannot be more than the reasonable pay for the minister’s services.
Housing Allowance: A minister who receives a housing allowance may exclude the allowance from gross income to the extent that it is used to pay expenses in providing a home. Generally, those expenses include rent, mortgage payments, utilities, repairs, and other expenses directly relating to providing a home.
If a minister owns a home, the amount excluded from the minister’s gross income as a housing allowance is limited to the least of the following:
(1) the amount actually used to provide a home;
(2) the amount officially designated as a housing allowance; or
(3) the fair rental value of the home.
The minister’s church or other qualified organization must designate the housing allowance pursuant to official action in advance of payment. If none of the minister’s salary has been officially designated as a housing allowance, the full salary must be included in gross income.