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. The more I tried to answer whether pastors are self-employed, the more questions 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,” and should be substituted with from.
Delving 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. (We previously wrote an article on dual tax status, but today’s post is for the sake of reiteration.)
Income Tax, FICA, And SECA
Most people know you pay for income tax and for FICA tax whenever you receive a paycheck as an employee. Income tax can be anywhere from 10-40% of your paycheck, depending on how much you make. That’s money the government takes from you so 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. It’s a tax that takes 7.65% out of your paycheck, where 1.45% goes to Medicare and 6.2% 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 gets sent to Social Security/Medicare.
If you are self-employed, Social Security/Medicare still wants that 15.3% from your income. Since you don’t have an employer to pay half, you’ll pay what’s called a SECA (Self-Employment Contributions Act) tax. The money from the SECA and FICA tax goes to the same place. However, when you’re self-employed, you’re expected to pay the full 15.3%. While the self-employed person pays more, they can claim that extra 7.65% an employer typically pays on their tax return. Therefore, they can get some of that money back.
So are pastors self-employed or not? There’s an important distinction I need to make at this juncture. You can be considered “self-employed” for tax purposes, but not literally be self-employed. This means you’re employed by your church, a.k.a. 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.
Dual Tax Status
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, there are two taxes that go to two different places. Income tax goes to the government so they can afford to do the things they do. FICA and SECA go to the Social Security and 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. They’ll file a W-2 just like their friend at Starbucks. However, they pay the same rate toward Social Security/Medicare self-employed people pay. 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.
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 shooting yourself in the foot when you retire.
Not all ministers get 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, 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.—a.k.a. events where ministers 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 4 points:
- For their regular salary, pastors pay the SECA tax rate of the self-employed.
- For the extra ministerial services pastors provide, they pay the SECA tax rate of the self-employed.
- When filing for a return on their income tax for their salary, pastors file a W-2 provided by their church.
- When filing for a return on their income tax for extra ministerial services, pastors file a 1099 provided by their client.
Hope this helps. It’s confusing at first. Much of the material out there addressing the issue wasn’t as clear as it should be. (But 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. And if you’re wondering how your housing allowance fits in with filing, check out my article on the very subject.