When a church hires a worker, one of the initial decisions that must be made is whether to treat the worker as a minister, non-minister 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.
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.
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.
Who pays self-employment tax?
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.
How much is Self-Employment tax?
Self-employment tax is 15.3% on the first $128,400 you earn in 2018. If you earn more, the rate is 2.9% on income earned beyond $128,400.
Below is a breakdown of self-employment tax for 2018:
- 6.2% employee portion plus 6.2% employer portion = 12.4% Social Security tax paid by self-employed
- 1.45% employee portion plus 1.45% employer portion = 2.9% Medicare tax paid by self-employed
- 12.4% + 2.9% = 15.3% total self-employment tax
When you pay self-employment tax, you are paying the employer half of Social Security and Medicare and the employee half. The good news is you can deduct the employer portion as a business expense on your income tax return.
Rates for self-employment taxes can change year to year, so make sure to keep up-to-date with the latest tax rates!
The process for paying and accounting for self-employment tax is slightly different than if you were employed by a church.
Ministers are subject to estimated tax payments on a quarterly basis which include federal, social security and state taxes. For example, when you receive income in the first quarter of the year, the taxes are due at the end of that quarter. The year is divided into four payment periods, or due dates, for estimated tax purposes which are listed below. Ministers can also elect to have income taxes withheld from their compensation by means of voluntary withholding agreements which may simplify the budgeting.
Payment 1 – April 15th (January through March)
Payment 2 – June 15th (April through June)
Payment 3 – September 15th (July through September)
Payment 4 – January 15th (October through December)
You will make estimate payments using Form 1040 – ES .
Other important information
Self-employment taxes only cover Social Security and Medicare taxes. To comply with federal and state regulations you still must pay federal, state, and local income taxes.
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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