While churches don’t pay taxes, that doesn’t mean employees get a free ride from Uncle Sam. Whether you’re a pastor, choir director, youth minister or any other paid church employee, you’re subject to the same taxes as any employee in the secular world. Keep in mind that the IRS uses the term “church” generically, as in house of worship. The same laws apply to employee of synagogues, mosques and worship spaces of other faiths.
FICA or SECA
Social Security and Medicare are collected under two different systems. Most people are familiar with the Federal Insurance Contributions Act, and most non-ministerial church workers are subject to FICA tax and have such contributions deducted from their paychecks. However, ministers and certain other religious practitioners are subject to the Self-Employment Contributions Act. The IRS considers services performed as a minister, required duties of a religious order or a Christian Science practitioner as those subject to SECA.
There are exceptions to these self-employment earnings, and these include:
- Member of an order who has taken a vow of poverty
- Ministers subject to the social security laws of a foreign country
- Earnings from work not directly related to ministry per se, such as performing weddings or funerals.
Ministers may request an exemption from the IRS for SECA if they are “opposed to certain public insurance for religious or conscientious reasons,” according to the IRS. There’s no exemption for economic purposes. When it comes to Social Security and Medicare, the fair market rental value of the parsonage or the housing allowance is considered.
Ministers and Taxes
The tax situation for ministers, or the equivalent position of other religions, is a bit more complicated than other church employees. While they must pay taxes on their salaries, they aren’t subject to mandatory withholding. A minister may voluntarily chose to have taxes withheld, or he or she may make quarterly income tax payments.
If the church provides the minister with living accommodations in a parsonage or gives them a rental allowance as part of their pay, the clergy person may exclude the fair rental value of the parsonage, including the utilities, or the rental allowance from their income. Any housing allowance requires official designation by the employing church as such, and such allowances must be reasonable. If the minister owns their own home, the mortgage interest and property taxes are deductible, though taxes are subject to the current $10,000 limit. If the housing allowance is greater than the actual expenses of the home (either in rent or mortgage and qualified property tax payments), then the IRS considers the excess as income for tax purposes. For example, if the minister’s housing allowance is $1,500 per month but his monthly rent is just $1,000, then that excess $5,000 is taxed as ordinary income.
According to the Evangelical Council for Financial Responsibility, one of the most frequently asked questions is whether churches can pay workers, such as secretaries and custodians, as independent contractors rather than employees. The answer is generally no if the church controls the services performed by the worker. For example, a part-time janitor is considered an employee if the church directs how the work is done. If the work is performed by a janitorial service that works for various organizations, and no employee/employer relationships exists between the church and the worker, then the worker is an independent contractor. If the independent contractor is not incorporated and is paid more than $600 annually by the church, the IRS still wants to know about the payment, which is reported on Form 1099-MISC. Filing transmittal Form 1096 is also required if the filing is done via paper rather than electronically.
- Evangelical Council for Financial Accountability: Independent Contractor or Employee
- Church Law & Tax: How to Prepare W-2s for Church Employees, Including Ministers
- IRS: Social Security and Other Information for Members of the Clergy and Religious Workers
- IRS: Topic Number 417 - Earnings for Clergy
- IRS: 501(c)3 Tax Guide for Churches & Religious Organizations
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