Social Security Tax Paid by the Church
All pastors are considered self-employed for social security purposes and therefore will pay a self-employment
tax of 15.3%. Thus, it is recommended that the church give a social security allowance, even though it is taxable, to their pastor(s) to pay at least half (7.65%) of his/her self-employment tax as they do for the other employees of the church when they pay the employer’s share of the FICA tax. To determine half of the tax, multiply the pastor’s salary (including housing allowance or the fair rental value of the parsonage) by .0765. This allowance is included on the
pastor’s W2 as taxable income.
Social security benefits are financed through two tax systems. Employers and employees each pay the “FICA” tax, which for 2010 amounts to 7.65% of an employee’s taxable wages (a total tax of 15.3%). Self-employed persons pay the “self-employment tax,” which for 2007 is 15.3% of net self-employment earnings. Clergy are always considered to be self-employed for social security purposes with respect to service performed in the exercise of ministry. This means that clergy never pay FICA taxes with respect to such services. Rather, they pay the self-employment tax (15.3%).
Because a minister pays a much higher social security tax than is required of employees, many churches agree to pay their minister an additional sum to cover a portion (i.e., one-half) of the minister’s self-employment tax liability. This is perfectly appropriate. However, note that any amount paid to a minister to help him or her pay the higher self-employment tax must be reported as additional compensation on the minister’s W-2 or 1099 form, and again on the minister’s Form 1040. The amount paid by the church must be reported as compensation for social security purposes as well. Revenue Ruling 68-507.