Licensed, commissioned, or ordained ministers generally are employees of the churches, denominations, or other organizations they serve. Churches hire pastors or ministers to perform ministerial duties, and those individuals are church employees if the church has the right to control what they do and how they do it. Pastors and ministers typically are church employees, even if they have wide discretion and freedom of action in their jobs.
However, these pastors or ministers have dual tax status under federal law. While these individuals are employees of the church for income tax purposes, they are self-employed for the purposes of Social Security.
Churches must generally withhold state and federal income taxes from most of their employees’ wages. However, while ministers must pay income taxes as employees, the church is not responsible for withholding those taxes as an employer. Of course, it may make sense for the church to take on this responsibility. If the church withholds the pastor’s income taxes, it eliminates the need for the pastor to make quarterly estimated tax payments, which may be a great administrative benefit to the pastor.
Pastors providing ministerial services as employees may be able to exclude the fair rental value of a home as part of their compensation or any housing allowance they receive if they use it to rent or otherwise provide a home. Alternatively, if the church chooses to provide the minister with a parsonage rather than giving him a housing allowance, the minister receives a benefit of great value. However, this benefit is not part of the minister’s taxable income.
Nonetheless, if pastors receive other payments directly from congregation members or others for performing services, those earnings are taxable as self-employment income. These earnings would include fees for performing baptisms, marriages, funerals, or other personal services. Pastors would claim this type of income on Schedule C as self-employment income. These fees also would be subject to self-employment taxes and are included as income for Social Security.
The dual tax status of pastors makes them responsible for paying both the employer and employee obligation for quarterly estimated self-employment tax payments (SECA). This obligation to pay SECA extends to their wages and any fees for performing personal services they receive. The tax obligation also includes the fair rental value of the parsonage or any housing allowance they receive. Typically, churches do not withhold and pay their pastor’s SECA. If the church were to pay Social Security taxes for the pastor as it would for a regular employee, then its payment would constitute a taxable fringe benefit that would require the pastor to pay additional taxes on that payment.
The Federal Insurance Contributions Act (FICA) requires churches to pay Social Security and Medicare taxes for their non-clergy employees. Generally, pastors must participate in public insurance programs such as Social Security. However, pastors who are “conscientiously opposed to, or because of religious principles,” are opposed to public insurance programs such as Social Security, may opt out of Social Security if they declare under penalty of perjury their objection to these programs. Pastors who elect to exercise this right must do so based on sincere principles of opposition to public insurance, or they are engaged in perjury.
Pastors who wish to claim this exemption can file Form 4361 with the IRS to exempt their ministerial earnings from self-employment taxes. They must file the appropriate form no later than the date their tax return is due for the second year in which they receive net earnings from self-employment of at least $400; the two years need not be consecutive. Once the IRS grants this exemption, it is generally irrevocable. As a result, once a pastor opts out of Social Security, they cannot opt back into the program later.
Don’t hesitate to contact an experienced lawyer at Church Law Center when you need assistance with legal issues related to your California church, religious organization, or nonprofit organization. You can reach our offices by calling (949) 892-1221 or contacting us online to learn more about how we can help. We offer a wealth of experience handling the unique legal issues that nonprofit and religious organizations routinely face.
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