Clergy Tax Facts

Overview

Boxes 3, 4, 5, & 6 on a clergy W-2 should always be empty. If there are numbers in these boxes, the taxpayer may be paying more tax than they need to. Social Security/Medicare is calculated on their tax return.

Clergy Dual Status

Employment Status for Other Tax Purposes

Even though for social security tax purposes, you are considered a self-employed individual in performing your ministerial services, you may be considered an employee for income tax or retirement plan purposes. For income tax or retirement plan purposes, some of your income may be considered self-employment income and other income may be considered wages.

Common-law employee. Under common law rules, you are considered either an employee or a self-employed person depending on all the facts and circumstances. Generally, you are an employee if your employer has the legal
right to control both what you do and how you do it, even if you have considerable discretion and freedom of action.

If you are employed by a congregation for a salary, you are generally a common-law employee and income from the exercise of your ministry is considered wages for income tax purposes. However, amounts received directly from members of
the congregation, such as fees for performing marriages, baptisms, or other personal services, are considered self-employment income.

Example.
A church hires and pays you a salary to perform ministerial services subject to its control. Under the common-law rules, you are an employee of the church while performing those services.

Employee
For services provided to hiring entity (Church, Conferences, etc.)

Self-Employed
For services provided to other than the hiring entity (i.e. weddings, funerals, baptisms)

So why not make everyone independent contractor? If the church is going to designate clergy or other secular worker as independent you have to treat them as independent.  Typically, independent contractors can make their own hours and have control over where, when, and how work is completed with no benefits. If the IRS determines that the church incorrectly designated an employee as independent, the church may be subject to penalties.

Using the wrong classification can lead to some big tax bills and leave you vulnerable to huge penalties and interest for the unpaid payroll taxes. So do the right thing for your church and make sure you properly classify your staff, and then follow through with the proper tax obligations. When it comes to the IRS, doing it right the first time is the key to fewer tax headaches.

       
 
Handbook
Church
 
2012-2013 Compensation
Handbook for Church Staff

James E. Cobble - Richard Hammar
Essential Guide to Church Finances
Richard Vargo - Vonna Laue
       
 
Get a better understanding of
U.S. tax laws as they relate to
pastors and churches with the
Church & Clergy Tax Guide
Every church and its employees
want to feel confident that
their compensation plan is
reasonable and fair.
To accomplish your church's mission
and vision for ministry you need to
effectively manage your church's finances
       
 

 

Clergy should not view this information as a substitute for professional advice. This information is subject to change, due to administrative rulings or interpretations and or technical corrections by the IRS. If legal advice or other expert assistance is required, the services of a competent clergy tax professional person should be sought.