When a church hires an employee, one of the initial decisions that must be made is whether to treat the worker as clergy, non-clergy employee or contractor. This decision may seem insignificant, but it has huge implications when it comes to payroll.
Ministers have what is commonly referred to as “dual tax status.” For federal income tax purposes, a minister is generally treated as a common law employee. For Social Security, the minister is always self-employed. This is an IRS regulation and not an election.
Many churches are unaware that section 3121(b)(8)(A) prohibits the church from withholding Social Security and Medicare tax on the wages earned by a minister. It is the responsibility of the minister to pay the self-employment tax on his/her salary and housing allowance unless he/she has applied for self-employment tax exemption. Additionally, ministers are exempt from income tax withholding. It is important to note that this does not mean that ministers are exempt from having to pay income tax; rather, the church does not have to withhold income tax from his/her pay.
When starting a new call, it is important to understand whether you will be treated as clergy or non-clergy in regards to taxes. The decision is important because clergy qualify for numerous tax benefits and are treated very differently from non-clergy in regards to withholding.
Ministers also have access to the Housing Allowance exclusion, which allows them to exclude a portion of their wages from income tax. Non-clergy employees do not have the option to take a Housing Allowance.
To qualify for the minister status, IRS regulations state that an individual must be a “duly ordained, commissioned, or licensed minister of a church” and must perform services “in the exercise of Ministry”. As you can imagine, there have been many, many court cases over the years debating these conditions and which services do or do not apply.
If you are considering a new call and want to know the potential impact on your taxes, Clergy Financial can help.
Visit our website today at https://www.clergytaxnet.com/resources/proadvisor/ and schedule a Pro Advisor session to discuss the tax considerations of your new position.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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