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.
Services that a duly ordained, commissioned, or licensed minister performs in the exercise of his or her ministry are generally covered under the Self-Employment Contributions Act (SECA). This means the minister is exempt from payroll withholdings for social security and Medicare taxes (FICA), but the minister is responsible for paying self-employment tax on his or her net earnings from self-employment on their tax 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.
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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