There is an IRS publication just to deal with how clergy and other "religious workers" deal with Social Security and other tax matters. This reflects both the uniqueness of the clergy tax position and the confusion that surrounds it.
There are really only five main items that clergy, board members and other steward leaders of congregations need to pay attention to.
- The clergy tax benefits only apply to licensed, commissioned or ordained ministers performing ministerial duties. The "ministerial duties" must fit within the usual and customary understanding of what clergy do: which, while broad, does have limits.
- Clergy are considered Self-Employed for tax purposes, but typically considered employees under the law. Therefore, most clergy do not pay FICA (social security / medicare) taxes, where the employer withholds a portion and the employee withholds a portion. Instead, clergy pay the full Self-Employment tax themselves.
- Clergy may be granted an income-tax-free housing allowance or parsonage - that is not exempt from Self-Employment taxes - up to the fair rental value of the house, plus utilities. This must be declared in advance by the employing organization or church. While this has been challenged recently in court, it seems that this exemption will continue to hold. However, it still only applies to just one residence.
- Clergy are exempt from federal withholding, and instead make their own estimated tax payments, unless they formally elect to do otherwise. This exemption from withholding does not indicate an exemption from payment, nor does it necessarily extend to other taxing bodies, such as states and municipalities.
- The honoraria a minister receives for weddings, funerals, special speaking engagements, etc., that are not a formal part of the minister's compensation, must be reported as self-employment income.
Steward leaders who pay attention to these issues will assist both their ministers and their organizations to take full benefit from the tax code, as well as save their organizations time in paperwork and administrative issues. Even with these tax advantages, clergy typically are paid less than other professions with equivalent education and experience. Churches and church organizations should take these tax advantages as an opportunity to be generous to those who work for them, rather than stingy - for instance, using the tax advantages to justify lower salaries.
For help working through clergy tax issues, contact Design Group International at the link below. We'd love to help!