Disclaimer: This post is for informational purposes only and isn’t intended to be a substitute for tax advice from a certified professional.
This article was an interesting one to write because the more questions I tried to answer, the more I realized I had. And the more fundamental they became, the more I realized that in Benjamin Franklin’s famous saying “In this world nothing can be said to be certain, except death and taxes (source),” the “and” should be substituted with a “from.”
Before I delve into the great mystery surrounding a clergyman’s tax status, it’s important I lay the foundation before we construct our house of verity. Since this is part of my “Eighteen-Year-Old Me Was Painfully Ignorant” blog series, I’m going to target the least knowledgeable of my readers and start the first brick there. (Here’s another article we wrote on dual tax status—today’s post is for the sake of reiteration).
So, most people know that whenever you receive a paycheck as an employee, you pay for income tax and for FICA tax. Income tax can be anywhere from 10-40% of your paycheck, depending on how much you make, and it’s money the government takes from you so that they can afford to do all the things they do. It’s called a Federal Tax Withholding, or a FTW.
Then there’s the FICA tax—completely separate from income tax—which stands for Federal Insurance Contributions Act, and it’s a tax that takes 7.65% out of your paycheck. 1.45% of that goes to Medicare and 6.2% of that goes to Social Security.
Even though you’re paying 7.65% of your paycheck in a FICA tax, your employer is actually matching that amount and sending another 7.65% to Social Security and Medicare every time they give you a paycheck. This comes to a total of 15.3% that is sent to Social Security/Medicare (source).
On the other side, if you are self-employed, Social Security/Medicare still wants that 15.3% from your income, but because you don’t have an employer to pay half of that 15.3% tax, you’ll be paying what’s called a SECA (Self-Employment Contributions Act) tax. The money from the SECA and FICA tax goes to the same place, but when you’re self-employed, you’re expected to pay the full 15.3%. While the self-employed person is paying more, the upside is that they can claim on their tax return that extra 7.65% an employer typically pays, so they’ll be able to get some of that money back through their tax return.
There’s an important distinction I need to make at this juncture. You can be considered “self-employed” for tax purposes, but not be literally self-employed. This means that you’re employed by your church, aka not self-employed, but still pay the SECA tax. In what scenario would this occur? Well, it’s the reason I’m writing this article: It’s for ministers.
As mentioned in my previous article addressing housing allowances, most ministers have dual tax status, but what did I mean when I said that? Remember that there are two taxes that go to two different places—income tax goes to the government so they can afford to do the things that they do, and FICA or SECA goes to the Social Security/Medicare programs. For ministers who have dual tax status, it means that in the eyes of the government, they pay income tax like a regular employee does (they’ll file a W-2 just like their friend at Starbucks). However, they pay the same rate towards Social Security/Medicare self-employed people pay. This is because churches are exempt from paying the FICA tax, but the IRS still wants that full 15.3%, so they take that 7.65% from the ministers instead.
Now, there is a form ministers can fill out (Form 4361) to get exemption from the SECA tax. It means you get to keep that 15.3% the IRS would have taken, forever and always. However, since you won’t be paying into Social Security, you may be potentially shooting yourself in the foot when you retire.
Not just any minister can be approved for the Form 4361—you’ll only be approved if you show you religiously object to the SECA tax. If you’re submitting the form because you want a little extra dough, or you want to invest the money for your retirement instead of paying Social Security, then you won’t get approved.
The above information only applies to the salary a minister receives from their church. What about ministerial services like weddings, funerals, speaking engagements, etc.—aka events a minister works where they get paid in addition to their regular salary? The only difference is that regarding income tax for these extra services, you’ll be filing a 1099—the same form a self-employed independent contractor would file.
Here is the above information condensed into four points:
- For your regular salary, you pay the SECA tax rate of the self-employed.
- For the extra ministerial services you provide, you pay the SECA tax rate of the self-employed.
- When filing for a return on your income tax for your salary, you file a W-2 provided to you by your church.
- When filing for a return on your income tax for extra ministerial services, you file a 1099 provided to you by your client.
Hope this helps. It’s confusing at first, and much of the material out there addressing the issue wasn’t as clear as it should be (here’s a great article addressing the same topic). As always, if you have any questions or need further clarification, feel free to leave a comment below or contact us here at Aplos. And if you’re wondering how your housing allowance fits in with filing, check out my article on the very subject.