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 status under the federal law definition. Having “minister” in the title or ministerial duties in a job description is not enough. The IRS uses the five criteria listed below to determine if one is a minister.
- Ordained, Licensed, or Commissioned
- Administers Ordinances or Sacraments
- Conducts Worship
- Performs services in the “control, conduct, or maintenance of a religious organization”
- Considered to be a spiritual leader by the related religious body Being ordained, licensed or commissioned is required.
The application of the other four criteria has varied based on various tax court cases and IRS guidance. Generally, an individual will be considered a minister for tax purposes if ordained, licensed, or commissioned as a minister, and the duties for which they were employed are those of a minister. Once a determination is made that someone qualifies as a minister, it is critical that their treatment as a minister be consistent for all tax and payroll issues.
The responsibility and duties performed by the individual are important to the initial determination whether he or she is a duly ordained, commissioned, or licensed minister. Because religious disciplines vary in their formal procedures for these designations, whether an individual is “duly ordained, commissioned, or licensed” depends on these facts and circumstances.
Special Tax Treatments For Clergy:
- 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.
Although a minister is considered an employee under the common law rules, payments for services as a minister are considered income from self-employment pursuant to IRC §§ 1402(c ) and 3121(b)(8). A minister, unless exempt, pays social security and Medicare taxes under the Self-Employment Contributions Act (SECA) and is not subject to Federal Insurance Compensation Act (FICA) taxes or income tax withholding.
The following factors must be considered when defining “clergy status”
- Does the ministry (church/school) publicly consider this person a member of the clergy?
- Does the individual engage in ecclesiastical or religious activities and attend to the religious needs of the faithful as part of their primary job function?
- Did the individual complete a formal process such as ordination, licensure or certification or obtain a divinity degree in order to perform the position’s duties?
- Be clear about whom you consider to be a minister under this exemption and why:
- Is their job description clear?
- Do their primary duties as stated in the job description reflect their ministerial role?
- Does the employee meet the minimum requirements for their role, particularly as they relate to religious responsibilities and functions?
- Is the exempt/nonexempt job classification status clearly written in their job description?
- Are your church mission and all job-related responsibilities detailed in the job description?
- Does your employee know and understand your performance expectations as they relate to the church’s beliefs, mission and core values?
- Have they agreed to and signed their job description?
The “Clergy Status” has always applied to pastors, ministers, and other employees who are ordained, licensed, commissioned and function in a qualifying religious capacity. This can become challenging when applying these rules to positions not traditionally known as – or clearly associated with – ordained clergy.
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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