Compensation paid to a minister or clergy member typically is reported to them on Form W-2 (if the minister is an employee of the church), or Form 1099-MISC (if the minister performed services such as weddings and baptisms). Most ministers are treated as dual-status taxpayers.
Pastors fall under the clergy rules.They are considered a common law employee of the church so although they do receive a W2, their income is reported in different ways. The salary from the W2 is reported on the form 1040.
Regardless of whether you're a minister performing ministerial services as an employee or a self-employed person, all of your earnings, including wages, offerings, and fees you receive for performing marriages, baptisms, funerals, etc., are subject to income tax.
For services in the exercise of the ministry, members of the clergy receive a Form W-2 but do not have social security or Medicare taxes withheld. They must pay social security and Medicare by filing Schedule SE (Form 1040), Self-Employment Tax.
Exemption for the self-employment tax for certain ministersYou must file Form 4361 by the due date of your tax return for the second tax year in which you earned at least $400 of self-employment earnings as a minister. Once you claim the exemption, you cannot revoke the election.
National estimates for Clergy:
| Percentile | 10% | 50% (Median) |
|---|
| Hourly Wage | $ 13.66 | $ 24.97 |
| Annual Wage (2) | $ 28,410 | $ 51,940 |
When it comes to Social Security and Medicare taxes, also known as payroll taxes, you are always considered self-employed. Pastors are always self-employed for Social Security taxes and pay under the SECA system. You have no choice in the matter and there is no debate.
Ordained ministers are able to take advantage of tax benefits that are not available to taxpayers outside the clergy. The tax benefits were originally instituted to help members of the clergy, who were often poorly paid.
Workers who are considered self-employed include sole proprietors, freelancers, and independent contractors who carry on a trade or business. Self-employed people who earn less than $400 a year (or less than $108.28 from a church) don't have to pay the tax.
Perks of being ordained
- Guilt trip.
- Perform weddings.
- You can buy a clergy parking pass that allows you rockstar parking.
- You're in good company.
- It's free.
- Counsel couples who are about to get married.
- Chaplain work.
- You have access to buying some sweet ministry supplies.
Purpose of form. File Form 4361 to apply for an exemption from self-employment tax if you have ministerial earnings (defined later) and are: An ordained, commissioned, or licensed minister of a church; A member of a religious order who has not taken a vow of poverty; or • A Christian Science practitioner.
A minister's housing allowance (sometimes called a parsonage allowance or a rental allowance) is excludable from gross income for income tax purposes but not for self-employment tax purposes.
According to the IRS, you are self-employed if you act as a sole proprietor or independent contractor, or if you own an unincorporated business. This means you are self-employed if your business is one of the following business structures: Sole proprietorship.
Generally, you are self-employed if any of the following apply to you.
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including a part-time business)
The general rule is that you will be:
- An employee if you work for someone and do not have the risks of running a business.
- Self-employed if you run your own business on your own account and are responsible for the success or failure of that business.
3 Types of documents that can be used as proof of income
- Annual tax returns. Your federal tax return is solid proof of what you've made over the course of a year.
- Bank statements. Your bank statements should show all your incoming payments from clients or sales.
- Profit and loss statements.
Since you earned more than $400 at babysitting, you are considered to be self-employed as far as the IRS is concerned, for all income earned in that business. If that babysitting income is more than $400, only then will you also pay the additional Self-Employment tax.
Business owners, independent contractors, accountants, financial advisers, insurance agents, among many other professionals are commonly self-employed.
Ministers are self-employed for Social Security tax purposes with respect to their ministerial services, even though most are treated as employees for federal income tax purposes. Self-employment tax is assessed on taxable compensation and nontaxable housing allowance/parsonage.
Catholic priests do not receive any stipend or salary. Their remuneration traditionally arises from the congregation collection. Also, there is no employer/employee relationship with the Catholic Church. They are therefore regarded as self-employed earners for NICs purposes.
Pastors, priests, and ministers have a gratifying career filled with love, but when it comes to buying a home or refinancing, the clergy is not feeling the love. This comes from a beneficial, nontaxable form of income called pastoral housing allowance.
