Minister Status and Compensation
Below are tips on paying your pastor or minister such as whether to issue a W-2 or 1099 and the legality of paying them a percentage of a church's income.
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Minister Dual Status:
The answer to whether to issue the pastor a W-2 or 1099 always lies in determining if the clergy is an employee of the church or considered self-employed.
Many years ago...all clergy were considered self-employed; however, in the mid 1980’s the IRS decided to declare ministers “employees” of the church.
Most pastors should be considered employees. They typically have a governing council they work with or for to determine to work to be performed (which is one of the criteria the IRS uses to determine the status of a person).
Exceptions to this would be supply pastors or missionaries who travel from church to church filling in or working for short periods. Read more potential exceptions in the Church Accounting: How to Guide.
Side Note: Misclassification of workers is a big issue with churches and the IRS, so be very certain you have properly classified your clergy and other workers such as musicians, nursery workers, and, custodians. See this article: Misclassification of Workers
Now remember...even though they are an “employee” of the church...the IRS considers ordained ministers to have a “dual status” . Which means clergy is considered an employee for federal income tax purposes and self-employed for Social Security and Medicare purposes.
That brings us to another frequently asked question: FICA or SECA?
Social security and Medicare taxes are collected under two systems. Under the Self-Employment Contributions Act (SECA), the self-employed person pays all the taxes. Under the Insurance Contributions Act (FICA), the employee and the employer each pay half of the taxes. No earnings are subject to both systems.
A church cannot withhold and match Social Security and Medicare taxes (FICA) from a clergy's wages. Clergy pay their Social Security and Medicare taxes under the SECA system.
The Compensating Ministers Package includes three ebooks on how to compensate and pay your ministers; what minister benefits could potentially hurt the minister and the church; how to set up a housing allowance and report it; and how to handle ministers' gifts/love offerings. Also includes an example of a W-2 for a minister.
Additionally there is a sample of a resolution you can use to to set up and approve a housing allowance for your ministers; an estimate worksheet for the minister to use to help the church determine the amount of the housing allowance; and an example of a notification letter the church can use to inform the minister on the amount of housing allowance payments paid during a calendar year.
All 3 ebooks are only $18.55 PLUS you can use the discount code: FCA for an additional 10% off!
Minister Compensation :
Figuring what is correct for a clergy's salary can be complicated especially when you are a start-up or small church.
Some weeks are good and some weeks are not so good. Which is one of the reasons why some churches base their pastor's salary on a percentage of the church’s revenue...but is this legal?
I have heard very different opinions on this issue. Many years ago, I attended a church tax conference. The speaker stated that paying a pastor a percentage of the church’s income would endanger the church’s tax exempt status and may also cause the IRS to impose excise taxes on the clergy because it would fall under the private inurement and private benefit regulations.
I cannot find anything to prove or disprove that statement. However, in the Church and Clergy Tax Guide, Richard Hammar, Attorney, CPA, and Author, states, “Churches are free to pay their clergy reasonable compensation for services rendered. Compensation packages based on a percentage of income are "reasonable" and appropriate so long as the amount of compensation paid to a clergy under such an arrangement is in fact reasonable in amount.”
So if your church decides to or is already paying your pastor a percentage of the church's income, you should do 3 very important things:
- Research the legality of paying the percentage. (Seek the advice of a qualified tax professional)
- Make sure it is considered reasonable compensation for your pastor in regards to the size of your church's income and location.
- Put a cap on the amount and that cap must be recorded in the minutes. Without a cap, any amount paid ...no matter how small would be considered private inurement and excessive benefit transactions which could threaten your church's tax exempt status. The IRS could also impose penalties on your pastor and church leaders.
Whether you pay a percentage of income or more commonly a set amount, the total compensation MUST be considered "reasonable"!
Another area that gets pastors in trouble is in the church paying their personal expenses. See this page on accountable reimbursement plans for more information.
Church Accounting Package
A set of 2 ebook packages that covers the following topics...
- Fund accounting examples and explanations
- Difference between unrestricted and restricted funds
- Best methods for tracking restrictive funds
- Explanations and examples of financial statements for churches and nonprofits
- Minister compensation and taxes
- Payroll accounting and its complexities
- Much more - Click here for details
Estimate Taxes or Volunteer Withholding?
Another area that many churches are not aware of is that a minister is "exempt" from withholding income taxes from their paycheck. Now that does not mean they are exempt from paying income tax! They are subject to income taxes on their taxable ministerial compensation.
However, they are exempt from their employer (the church) automatically withholding federal and state income taxes like they must do with non-minister employees.
So how does ministers remit their income and even self employment taxes mentioned in this article?
There are 2 different ways.
The first and easiest way is to ask for "voluntary" withholding from their employer. To do this they simply fill out a W-4 and submit it to the church. They can even add an additional amount to help cover their self-employment taxes which the church is not allowed to withhold and match in Step 4 line C of that W-4. Those amounts will be reported in Box 2 of their W-2 (Federal income tax withholding); however the "extra" will be used to cover any additional taxes owed such as the self employment tax on their personal tax return.
NOTE that "extra" amount will be withheld from each payroll, so only write in what extra per paycheck you want withheld! For example, if your tax accountant tells you that you need to "withhold and remit" $400 a month to help cover your SE tax and you get paid twice a month...make sure you write or type $200 in that line =)
If a minister would rather remit their own taxes, they will need to remit estimated tax payments in quarterly installments.
The Policies and Procedures Package includes an ebook on Receipts and Reimbursements that explores the management of receipts and supporting documents.
Additionally, it provides insights on establishing and managing an efficient accountable reimbursement policy.
Includes a sample of a resolution you can use to present to the board to set up and approve an accountable reimbursement plan.
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This ebook is included in the Policies and Procedures Package. However, you can purchase it by itself for only $7.95 by clicking the ADD TO CART button below!
The Receipts and Reimbursements ebook is also part of a larger "Policies and Procedures" Package" that is packed full of valuable information and for a limited time you can purchase all 5 ebooks and 8 policy templates for only $32.80
See more on minister’s compensation issues:
The Church Accounting: How To Guide devotes a whole section of the book to payroll for churches. It covers payroll terminology and forms and then takes you through the steps necessary to set up a payroll, calculate and file the necessary taxes and forms, and even details how to handle the minister's payroll. It also includes sections on filling out IRS forms: 1099-Misc, 1099-NEC, and 1096.
If you have QuickBooks or are considering using it in the future, go ahead and purchase the QuickBooks for Churches and the How To Guide combo for a complete package on setting up and administering a payroll using QuickBooks.
References:
flumc.org:Employee or Independent Contractor
Richard Hammar's Church & Clergy Tax Guide
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Questions and Comments on Ministers Employment Status
Do you have a question or comment about minister or pastor employment status? Share it!
Archive of Minister Employee Questions (& Answers)
The following comments, tips, and Q/A were provided by FreeChurchAccounting's generous readers:
1099 or W-2 for working minister
If a minister is employed full-time with another job and receives a $500 housing allowance from the church, he pastors, would he receive a 1099 and or …
We have a minister who we pay $250 for each time he speaks at our church, so he is not an employee.
We have a minister who we pay $250 for each time he speaks at our church, so he is not an employee?
He has asked that instead of making the check out …
Gift of Parsonage to Preacher
The church gave the preacher the parsonage via a Gift Deed.
Value of the house/property is about $215K.
At year end, do we need to provide a …
Part Time Youth Minister - Full Time Secular Job
Our youth minister is part time. We have been treating him as an employee withholding SS, State tax, and Fed Tax.
He has a full time secular job where …
Ordained Minister part of the year
I work for a church we have a pastor that was ordained part way through 2018 does he have to pay SE taxes of the full amount of his pay? Or pay SE only …
W-2 or 1099
I am a church secretary and also a member of the church. Should I receive a 1099 or a W-2?
Is not having an EIN legal and how does the Church Staff then report their info for tax time.
Our church does not have an EIN ( not registered with the IRS ) which appears to be legal according to the IRS 501 (c)(3) document.
However, what do …
Define "reasonable" for a Pastor's salary.
What is considered by the IRS "reasonable" compensation for a pastors salary? Or can "reasonable" be whatever a church memer/pastor petsonally feels is …
Can a pastor file schedule c to reduce his earnings for self employment tax purposes?
Should a Pastor file schedule c to reduce his self-employment income by any deductions since he is considered self-employed for social security tax purposes? …
Salary reduction to make church contributions
I want to make substantial donation to my church. Can I effect that donation by not taking the salary budgeted by the church? Can my W-2 income be only …
Non calendar fiscal year
We are on a July 1 to June 30 fiscal year. How do we handle the housing allowance?
Vickey's Reply: Housing allowance payments are totaled and reported …
Love offerings
We live in a rural area and pastor a church of about 100. My husband has a secular full time job.
The church a few years ago decided to take up a …
Founding Pastors compensation
My husband and I are the founding pastors of a small church that has been in existence for about 14 years.
Before 2013, we did not receive any compensation …
Part time minister corporate chaplain
I have a part time minister who works as a corporate chaplain.
He only works a few hours a week and we pay him about $200 per week.
All of his …
Part-Time Interim Pastor
We are in the process of searching for a part-time interim pastor.
He would have no authority in the governance of the church but would preach on …
How does dual status not violate the separation clause or fourteenth amendment of the U.S. Constitution?
It would seem to me that by considering ministers as "dual status" as opposed to considering them as "singular status" that it would have the effect of …
Licensed Minister - not paid by church
I will become a "licensed minister" with my church next year. There is no compensation for this. It is volunteer.
As a "licensed minister" I would …
Reasonable Percentage
So, What is considered a reasonable percentage of total income to pay a pastor?
Zero Compensation Pastor
I am starting a new church, I am a disabled veteran receiving Social Security. I have informed the members that I will not take a salary, this has been …
Pastor Compensation appointed by the Bishop
Our Pastor is appointed by the CME Bishop for a period of time and he has most of the Church control.
For tax purposes, since is appointed and not …
What is taxable compensation for a pastor?
Our pastor does not receive a salary and does not work a job outside of the church. The church does give him love gifts throughout the year for birthdays, …
Unpaid pastor and parsonage
I am an unpaid pastor. I do live in the parsonage of the church free. I am disabled and do not file taxes. Because I do not file any federal or state …
Teacher at a Christian School
My wife is teaching at a Christian school. They hired her and she was ordained by them as a minister and filled out whatever IRS form was necessary and …
Clergy Wages & Church quarterly 941 reporting
Should the church include wages paid to clergy on the quarterly 941 form?
If not, how does the w-2 reconcile at the end of the year with the 941 payments. …
Guest speaker later hired as pastor
Our church had a minister speaking for a couple of months and was paid as a guest speaker.
He has now been voted in as full time pastor.
Is it advisable …
Church pays for pastors health insurance - is this considered income?
Our church has agreed to pay the pastors health insurance premiums. He does not get any salary. He is listed as an 'employee' of the church in order …
taxable income
I pastor a small church. I receive no salary. they do however rent an apartment for me to live in. Is this rent considered taxable when paid directly to …
interim pastor
We are searching for a pastor. We are thinking about having a preacher that is not licensed or ordained to fill in during this time. Do we cut and match …
love offering for the pastor or payroll?
every month the pastor of our small church receives $200 as a love offering. the pastor does not receive a w2 from the church nor is on any type of payroll. …
office in home deduction for pastor
if a pastor is considered an employee and received a w2 from the church, with deductions of Medicare and social security can he still claim a deduction …
Cleaning done by student- not a business
Our small church pays a student member to clean. He doesn't own a business. Should he get a 1099misc and have to report it as nonemployee compensation? …
When is income taxed if it is back pay that is owed a pastor?
Our pastor elected to not be paid during some lean months our church had, and we are now in the process of paying him the salary he is owed for those months. …
MINISTER SOCIAL SECURITY ISSUE
A CHURCH HAS BEEN WITHHOLDING SOCIAL SECURITY TAX FROM THEIR PASTOR'S WAGES. THEY HAVE NOT BEEN TURNING IN THIS SOCIAL SECURITY ON THE 941s. THEY HAVE …
Paying a pastor a love offering, not on payroll
501(3)c Non profit organization (not a church). Can I pay a pastor who is not on payroll a love offering gift? He receives a housing allowance and claims …
Both spouses employed by church
My husband is the senior pastor and I just came on staff as the ministey pastor. He already gets full housing beneft and pays his own FICA. Is there any …
minister with another job at the church
I am a youth and children's minister - part-time and receive no other benefits. I am an employee of the church. I am also a director of a choir and I …
Not salaried minister but has housing allowance
We have Associate Pastor (Ordained and License) which conducts Sunday worship service and do bible studies. He serves as Administrative assistant of Senior …
Interim Pastor's Salary
We have an interim pastor who is now employed by one of the members of the congregation, as their corporate Chaplain. Is this ok? It seems like a conflict …
Independent contractor vs employee
Some members of our church want to begin their own church but use our facilities until they can afford to move to their own facilities.
We are currently …
DBA Ministry
I am a new pastor with a 15 member ministry. I receive no salary and have no employees.
We rent a community room in the State of MA. Do I have to file …
Part time youth minister, W2 or 1099
I am a part youth minister at a small congregation bringing home $833 per month. Obviously taxes are NOT removed from this amount, I receive no other benefits …
Intern to Minister
Our church is considering hiring a Seminary Student this summer as an intern to preach for us and attend to other church duties this summer. Once he graduates, …
I am seminary student serving as youth pastor in small church.
I am seminary student serving as youth pastor in small church. I have been approved by the church steering committee and the whole church body as youth …
Housing allowance only?
Can a minister elect to collect an $80,000 housing allowance and no salary and not pay any taxes whatsoever?
If this handled directly with the treasurer …
Home Equity in housing allowance
Is a home equity payment eligible to be included in the housing allowance?
Can a Minister Obtain Health Insurance as Self-Employed
If a minister is considered to have dual status of "employee" for federal income tax purposes and "self-employed" for Social Security and Medicare purposes, …
Ordained associate pastor
As treasurer and payroll administrator, do I withhold FICA, Federal and State taxes for an ordained associate pastor?
I voluntarily have my Social Security taken out.
I'm am a pastor. The church and I have agreed to have my Social Security taxes taken out voluntarily. I filled out the w-4 to have this done. On my w-2 …
how do you calculate what a pastor salary/his housing allowance
Please tell me if this is correct we calculate a pastor's monthly housing multiply it by 12 and that is what his total housing is yearly. If a pastor makes …
Housing allowance
Our pastor has been with us two years, received a 1099 for the previous tax year. This year he does not want a 1099 so that he can get a housing allowance. …
Pastor signed over payment for services as a musician
Our pastor also served as a minister of music and was issued payment for this through the church and not Paycheck (where is pastoral salary is paid). He …
Pastor (SECA or FICA)
Our Pastor is the pastor and founder of our church with complete control along with the Board of Directors.
We have been being treating our pastor as …
Independent Minister to Employed Minister
We had a youth minister try out last summer. He came twice to preach. The church paid a total of $500.00 for his service. A few months later, he decided …
W-2 or 1099 ?
Most tax professionals will tell you unless the pastor has full control over the church...they should be considered an employee of the church and be issued …
Unpaid pastor
I am an unpaid pastor of a church in RI, but I do live in the church parsonage, rent free and bill free. Must I claim this on my taxes, and also am I allowed …
Pastor FICA vs SECA
My Pastor has a full time job and pastor's part time. He does not have regular office hours at the church. He has been treat as an employee, issued a W-2 …
End of year
I have taken on the position as church secretary so I want to make sure I am doing things right. We have a cleaning lady that we pay once a month, will …
Quarterly Reports
The pastor at this small Presbyterian Church is a Commissioned Lay Pastor hired by the church Session. As the treasurer for this church, I prepare a W-2 …
Are Reimbursable Health Payments and SS Payments SE Taxable
We reimburse some of our pastor's health insurance expenses, make some pension payments and reimburse about half of his Self-Employment/Medicare payments. …
FICA Tax Paid by the Church. SECA Paid by the Pastor. Double up?
Church ministers and staff were employees of a leasing company to lower Workers' Compensation insurance. The leasing company calculated and remitted …
clergy preforming weddings only
I have recently received my license to preform marriages although I am solely on my own with no church or members, how do I file my taxes? Thank you. Robin …
Associate Pastors and Housing Allowance
We have an associate pastor who reports to the Pastor as his boss. Can the associate receive a housing allowance?
Currently we give a housing allowance …
1099-Misc and W-2
Can a pastor that is issued a W-2 for his/her church duties also be issued a 1099-Misc for special events like marriages if performing the special event …
Issued a 1099-MISC instead of W-2--what now?
I've been issued a 1099-MISC for my work as pastor of a church, but I'm reading here that I should have received a W-2. So how do I file my taxes, and …
SE Tax & Housing Allowance
I am the Associate Pastor at our church. Although I meet the five criteria of a "minister", our church has treated me as an employee rather than self-employed. …
Pastor's compensation is not even enough for his rent. Should he get a 1099?
We're a small church and could not even pay our pastor enough for his apartment rental. The church's compensation is his only source of income. Should …
Small Church Pastor Employee or Self Employed
If a small church has no employees other than the pastor, is the pastor considered Self Employed or an employee? The person who does taxes for our pastor …
Tax Status for corporate officer of a religious orginization
Under common law rules it states that the officer of a corporation is a employee. Is this true for a religious organization also? and if so, do you withhold …
1099-misc issued to a self employed minister
If a minister has full control of a church and is considered self employed, does the church issue him a 1099-misc?
Can I choose between w-2 or 1099
I am a youth pastor in Missouri and our church is switching from the "self employed 1099" stuff to w-2. I have debating whether or not to be ordained with …
Federal Taxes
I'm the Director of Student Ministry at a United Methodist Church and I'm not currently an ordained minister.
An older pastor I know mentioned that …
Employee or nonemployee
The church pay him weekly, but he does not considered as an employee of the church because he does not want the church to match his payroll tax, and he …
How do report half the SS tax paid by the church?
Where, on the 1040 form, should I report the half of the SS tax that the church paid on my behalf? Misc income?
Know the answer? Face the same …
Clergy request to withhold both employer and employee FICA
We are volunteer business managers for our church and as such have responsibility for preparation of W-2's and all other related aspects of the staff's …
Do I have to pay Social Security Quarterly?
I'm a new bi-vocational minister. My question(s) is(are) simply: do I have to pay social security and medicare taxes quarterly or can I pay it once a year? …
Self Employment Tax
I work for a church and I have the 15.3% withheld every check. I use turbo tax to file my taxes. Do I need to pay the self employment tax when filing my …
Half of Fica paid by the church in behalf of self employed clergy.
How do you file a tax return on behalf of self employed clergy for whom the church paid 50% of the total FICA taxes (thus 7.65% of income)?
1099 MISC vs W-2
My husband is a youth pastor at a church and for the last 3 years has received a 1099-MISC.
This past year we have a new financial secretary and she …
Medicare and Social Security withheld from wages.
I just realized that the church withheld Medicare and Social Security taxes all year for my husband (a new minister). The w-2 reflects this as well as …
FICA Taxes
I am the secretary for our small congregation. I did not know anything about taxes and learned as I went along. I have been confused about FICA(Med/Soc …
Self Employment Tax Matched
We withhold and match the amount of our pastor's and assistant pastor's SE tax. This is remitted on a quarterly basis. If the total due has been overpaid, …
Monthly stipend for a pastor
Does the church need to report to IRS the total stipend paid to the pastor. If the pastor is the incorporator and President of a church is he considered …
Church Withholding Social Security Tax
Question reagrding a church withholding a FICA tax from a minister's paycheck:
I have had a church ask me to print their W-2's from their information. …
Should a Pastor be Given a 1099 or a W-2?
I was wondering if a pastor's income should be reported on a 1099 or a W-2? He is the only "employee" of the church. All others are volunteers.
Thanks …
Children's Ministry Leader and Payroll Taxes?
Question regarding Children's Ministry leader and payroll taxes:
I am a bookkeeper for a small church and we are hiring a children's ministry director …
Clergy Social Security
Can the church or should the church pay directly to the clergy half of the social security tax?
Vickey's Reply
Yes you can...if the church …
Social Security Taxes - When to Pay?
When do you pay Social security taxes? Is it at the end of the year, or do you have to pay monthly/quarterly as a full-time minister/pastor?
Vickey's …
The comments above are for general information purposes only and do not constitute legal or other professional advice on any subject matter. See full disclaimer.
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