Employment Taxes For Pastors Explained
Updated August 2023
A career in ministry is a fulfilling job for giving back to the community, but you may be wondering: how do taxes work as a pastor?
TABLE OF CONTENTS
- Pastors have dual tax status, which makes them responsible for reporting self-employment taxes for Social Security purposes, while the church may consider them an employee and withhold state and federal income taxes from their wages.
- To be considered an employee of the church in the context of the tax court, individuals must be licensed, commissioned, or ordained, be recognized as a spiritual leader by a religious body, conduct religious worship, administer sacraments, and be involved in the control of a religious organization.
- Pastors are exempt from federal income tax withholding, so they are responsible for submitting quarterly estimated tax payments. Otherwise, they can avoid making quarterly tax payments if they request that their employer withholds taxes from their wages.
Do Pastors Pay Taxes?
Churches hire ministers and pastors as employees to perform ministerial duties, and while they have freedom and discretion in the approach they take to their service, there are still tax responsibilities for members of this profession.
Pastors have dual tax status under federal law, acting as church employees for income tax purposes, but self-employed in regard to FICA tax.
Who Is Considered An Employee Of The Church?
In the context of the tax court, these are the qualifications to be considered an employee of the court:
- Being licensed, commissioned, or ordained
- Being recognized as a spiritual leader by a religious body
- Conducting religious worship
- Administering sacraments
- Being involved in the control of a religious organization
Tax Rules For Clergy Members
State and Federal Income Taxes
Most pastors are considered employees of the church for state and federal income tax purposes, even though they must also pay self-employment taxes for Social Security tax purposes. As an employee of the church, pastors may receive Form W-2 to report their taxable income for state and federal taxes.
Pastors who earn income as an employee of the church from performing services such as weddings, funerals, baptisms, and other personal services must report their earnings as self-employment income. Money earned through tithing goes directly to the church and not the pastor, so these offerings will not be included in the taxable income of a pastor.
Pastors who are exempt from federal income tax withholding from their wages or salary are responsible for making quarterly estimated self-employment tax payments (SECA) for all of their compensation throughout the year, which can require a strategic spending budget. Any housing allowance received from the church or the fair rental value of the parsonage is also included in this tax obligation for pastors.
If pastors instead request that their employer withholds taxes from their payments, they do not have to make quarterly estimated tax payments.
The Federal Insurance Contributions Act (FICA) is a payroll tax in the United States that requires employees and employers to fund the Social Security and Medicare programs, and because churches typically do not withhold FICA taxes from their employee’s paychecks, pastors are responsible for paying these taxes.
However, pastors may be eligible to opt out of Social Security taxes if they declare under perjury that they are “conscientiously opposed to, or because of religious principles,” are opposed to Social Security public insurance programs. If approved for this tax exemption, they will generally be unable to opt back into this program in the future. If pastors wish to claim this exemption, they can file IRS Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners.
The tax rules for pastors can vary depending on the circumstances of the specific organization, the pastor’s responsibility within the church, and how the church manages its financial stewardship.
If you need help to understand your taxpayer responsibilities as someone with a vocation in the church, the tax professionals at Ideal Tax are here to help. Set up a free initial consultation at no cost to learn the costs and benefits of working alongside tax experts as you manage your taxes this year.