Clergy Taxes

Ministers have a dual-status tax treatment. For Social Security purposes, ministers are considered to be self-employed. But for income tax purposes, they are viewed as employees.

The church, as employer, is responsible to report the minister’s taxable income correctly. This includes determining whether the minister is an employee or an independent contractor. It is the employer’s role, not the minister’s role, to determine which status applies; the IRS will hold the church accountable.

Since 1980, the Church of the United Brethren in Christ has asked churches to provide and file information returns for their ministers in compliance with dual-status tax treatment. Here are some things to keep in mind:

A minister’s taxable income is reported on the W2 (not the Form 1099 used by independent contractors).
All money or property paid or given to an employee is taxable, unless the IRS code excludes it. Taxable income includes such things as Christmas bonuses and reimbursements not covered by an accountable reimbursement plan.
Generally, ministers won’t be taxed on qualified fringe benefits, parsonage allowance, or reimbursements made according to an accountable reimbursement plan.
Employees are entitled to tax-free fringe benefits, such as health insurance, 403(b) tax-deferred annuities, and term life insurance. The cost of such premiums paid on behalf of independent contractors must be included on the 1099 as income subject to Social Security and income taxes.
When it comes to Social Security, clergy fall under the SECA wage base used with independent contractors (as opposed to the FICA plan used with employees). Ministers use Schedule SE of the 1040 tax return to report earnings which are subject to Social Security tax, and are responsible to pay their Social Security taxes (without any matching amount from the church) on a quarterly basis.
Employers are responsible for paying unemployment taxes, which provide temporary income for people who lose their jobs. Nothing is deducted from paychecks to cover this cost. However, your church (it varies from state to state) may not need to pay unemployment taxes for ministers, or for employees in tax-exempt elementary or secondary schools which are operated primarily for religious purposes. (Churches are generally exempt from paying unemployment taxes. Check with your state.)