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When it comes to payroll taxes, the Internal Revenue Service generally treats churches as just another employer, particularly with respect to lay employees who handle a church’s secular affairs such as building upkeep or bookkeeping. But there are a couple of unique tax wrinkles when applying payroll taxes on the clergy.
In general, churches must withhold income tax and Social Security and Medicare taxes from full- or part-time employees other than their clergy, and provide a Form W-2 at the end of the year giving total compensation and taxes withheld. Churches must provide a Form 1099-MISC to self-employed persons who performed work for the church. A church’s lay employees and self-employed workers must file tax returns. They are not exempt from taxes just because their wages are paid by a church.
Fringe benefits such as health insurance, group life insurance or disability coverage a church provides to its employees are nontaxable to the employees. This is the same tax treatment generally accorded to fringe benefits provided to workers by non-church employers. The nontaxable status of fringe benefits applies to all church employees, whether clergy or lay employee.
The tax situation for the clergy is more complicated. Ministers have a dual tax status. Ministers are considered employees who must pay income taxes on their salary, but they are exempt from mandatory income tax withholding. A minister can elect voluntary withholding or make quarterly estimated income tax payments. Any minister housing allowance is subtracted from his pay for income tax purposes.
While ministers are employees for income tax purposes, they are considered self-employed for purposes of Social Security and Medicare taxes. That means a church does not withhold these taxes from the minister’s salary. But the minister must pay self-employment tax in lieu of Social Security and Medicare taxes. The minister’s housing allowance is added back to his pay when figuring his self-employment tax.
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