Why Estimated Taxes Exist

The U.S. tax system is a pay‑as‑you‑go system. The IRS expects taxes to be paid as income is earned, not all at once at year‑end.

For most employees:

• Income tax is withheld from each paycheck.
• Social Security and Medicare (FICA) are split between employee and employer.

For clergy, this system breaks down—intentionally—because of how the tax law treats ministerial income.

The Core Clergy Issue: No Automatic Withholding

Income Tax

• Churches are not required to withhold federal or state income tax for ministers.
• Many churches choose not to withhold at all.
• Even when withholding is done voluntarily, it is often insufficient.

Self‑Employment Tax

• Ministers are considered self‑employed for Social Security purposes, even though they are employees for income tax.
• This means:
  • No Social Security tax is withheld
  • No Medicare tax is withheld
  • The minister owes the full 15.3% SE tax personally

Because neither income tax nor SE tax is automatically withheld, the IRS requires ministers to self‑fund those taxes throughout the year via estimated tax payments.

Why Filing Once a Year Is Not Enough

If a minister waits until April to pay all owed tax:

• The IRS treats that as having underpaid tax throughout the year
• Penalties and interest can apply even if the full amount is paid with the return

The IRS is not penalizing “late filing”
They are penalizing late payment across the year

The Penalty Logic: How the IRS Decides You Owe Penalties

The IRS asks a simple question:

You generally avoid penalties if any one of these is true:

1. You paid 90% of the current year’s total tax, or
2. You paid 100% of last year’s total tax
   • 110% if prior‑year AGI exceeded $150,000

Clergy who make no estimated payments usually fail both tests.