Pastors are considered “dual-status” employees for tax purposes, which means they are treated as employees for federal income tax purposes but as self-employed for Social Security and Medicare purposes. Here’s a detailed breakdown of how clergy compensation is handled, including important caveats for proper reporting on W-2 forms and Form 941:
1. Housing Allowance
•Not Included in Box 1 Wages: A minister’s housing allowance, whether designated for cash payment or housing expenses, is not taxable for federal income tax purposes and is not reported in Box 1 of the W-2.
•Optional Reporting in Box 14 or Separate Statement: Churches often list the housing allowance in Box 14 of the W-2 for informational purposes, but they may also provide a separate statement to the pastor.
•100% Salary Exclusion: Pastors may elect to have up to 100% of their salary designated as a housing allowance. In this case, nothing is reported on the W-2 regarding the housing allowance; it must be documented in a church resolution and detailed in a separate statement provided to the minister.
•Subject to Self-Employment Tax: The housing allowance is still subject to self-employment tax and must be included in the pastor’s calculation of SECA tax.
2. Accountable Reimbursement Plans
•Not Included in Box 1 Wages: Reimbursements made under an accountable plan (e.g., for ministry-related expenses such as mileage, travel, or supplies) are not taxable income. To qualify:
•The pastor must provide proper documentation, such as receipts, invoices, or mileage logs.
•Any unused advances must be returned to the church.
•Non-Accountable Reimbursements: Reimbursements made without accountability (no documentation or substantiation) are considered taxable income and must be included in Box 1 of the W-2.
3. Federal and State Withholding
•No Social Security/Medicare Withholding: Pastors’ wages are exempt from FICA (Social Security and Medicare withholding), and the W-2 should reflect:
•No amounts in Boxes 3, 4, 5, or 6 (Social Security/Medicare wages and taxes).
•Voluntary Withholding: Pastors can elect voluntary withholding for federal and state income taxes, which can also cover their self-employment tax liability. This is done by submitting Form W-4 to the church.
•Self-Employment Tax Reimbursements: If the church reimburses the pastor for half of their self-employment tax, this reimbursement is considered taxable income and must be included in Box 1 of the W-2.
4. Form 941 Reporting
•Mark Box 4 if All Employees Are Exempt: If the pastor is the only church employee, make sure to check Box 4 (“No wages subject to Social Security/Medicare tax”) on Form 941. This confirms that no employees are subject to FICA, including Social Security and Medicare taxes.
•No Social Security/Medicare Wages or Taxes: Ensure the pastor’s wages are excluded from Social Security/Medicare wage and tax calculations on Form 941.
5. Exemption from Self-Employment Tax
•Form 4361: Pastors can apply for an exemption from self-employment tax by filing Form 4361. However:
•The form must be filed within the first two years of receiving ministerial income.
•This exemption must be based on a religious objection to public insurance programs (such as Social Security), not simply a desire to avoid paying taxes. The pastor must certify that this objection is consistent with their denominational teachings and personal beliefs.
Resources for Further Guidance
•IRS Publication 517: Social Security and Other Information for Members of the Clergy and Religious Workers
•IRS Form 4361 Instructions: Application for Exemption From Self-Employment Tax
•Church & Clergy Tax Guide by Richard Hammar
•IRS Minister Audit Techniques Guide: Minister Audit Guide
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Tag: tax
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