When a church hires an employee, one of the initial decisions that must be made is whether to treat the worker as clergy, non-clergy employee or contractor. This decision may seem insignificant, but it has huge implications when it comes to payroll.
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.
Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes.
It is important for the employing organization (clergy are not in a position to decide whether or not they qualify for the special tax treatments) to decide whether or not the services of clergy qualify for special tax treatment. The special tax treatments
- Exclusion for income tax purposes of the housing allowance and the fair rental value of a congregation-owned parsonage provided rent-free to clergy.
- Exemption of clergy from self-employment tax, under very limited circumstances.
- Treatment of clergy who do not elect Social Security exemption as self-employed for Social Security tax purposes for income from ministerial services.
- Exemption of clergy compensation from mandatory income tax withholding.
- Eligibility for a voluntary income tax withholding arrangement between the minister-employee and a congregation.
- Potential double deduction of mortgage interest and real estate taxes as itemized deductions and excluded as housing expenses for housing allowance purposes.
The employing congregation, denomination, integral agency of a denomination or a church or religious organization is responsible to determine whether an individual qualifies as clergy under the federal law definition. If clergy who qualify under federal law are not afforded these special tax treatments, this can create a significant financial impairment for clergy. If clergy who do not qualify are provided the special tax treatments, the employing organization may inadvertently assist clergy in violating the tax law by affording tax-beneficial treatment for otherwise taxable dollars.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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