Ministers Taxes

Who is a Minister for IRS purposes?

According to the IRS,

1. Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination.
2. They are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the tenets and practices of that church or denomination.
3. Ministers perform services in the “control, conduct, or maintenance of a religious organization”, They have also been given authority to lead committees and church boards.
4. Ministers are individuals who are considered a spiritual leader of their church or organization, and are considered to be a spiritual leader by the related religious body

Most services you perform as a minister, priest, rabbi, etc., are ministerial services. These services include:

• Performing sacerdotal functions,
• Conducting religious worship, and
• Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination.

You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization’s activities. A religious organization is under the authority of a religious body that is a church or denomination if it’s organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith.

Tax Treatment for Ministers

Ministers are not exempt from paying federal income taxes. Generally, ministers are required to file a federal income tax return if they have earnings of $400 or more to report their self-employment tax. Different rules apply to ministers who are exempt from self-employment taxes.

Ministers according to the tax code, are treated as self-employed for Social Security purposes but as employees for income tax purposes

Ministers should keep all receipts, canceled checks, and other evidence to prove amounts they claim as deductions, exclusions or credits. Documentation should be maintained for six years from the time they file their tax return. Deadline for filing the federal income tax return is usually April 15 of every year.

Three federal taxes are paid on wages and self-employment income—income tax, social security tax, and Medicare tax. Social security and Medicare taxes are collected under one of two systems. Under the Self-Employment Contributions Act (SECA), the self-employed person pays all the taxes. Under the Federal Insurance Contributions Act (FICA), the employee and the employer each pay half of the social security and Medicare taxes. No earnings are subject to both systems.

SECA = Self Employment Contributions Act – This is a tax assessed to self-employed people who don’t have an employer to pay part of that tax liability

FICA = Federal Insurance Contributions Act (Social Security and Medicare) – This is a tax imposed on employers (6.2% Social Security and 1.45% Medicare) and employees (6.2% Social Security and 1.45% Medicare) so the combined tax contribution is (15.30%)

Ministers are unique in the sense that they carry a dual tax treatment. They are considered employees for income tax purposes, and they are considered self-employed for social security.

Therefore, ministers must pay the full amount of social security tax (without the benefit of the amount being matched by the employing church) on all forms of compensation up to the annual social security wage base—unless the minister has met the strict qualifications and has formally opted out of social security)

If you are a minister and need help in preparing your taxes, please fill out the contact information below

How to withhold taxes from the minister

Must withhold Federal Income Tax since minister is an employee

Must not withhold Social Security Taxes since the minister is self-employed

Ministers should prepay their SS self-employment taxes using the estimated tax vouchers (Form 1040ES) unless they enter a voluntary withholding with the church with respect to federal income tax.

So instead of sending estimated taxes, the minister can request to have more Federal Income Tax withheld using the W-4 Form.

Example: a minister earns $1,500 bi-weekly. His Federal Tax Withholding should be around 10% of his gross salary. He then can add voluntary withholding of $15% for his self-employment tax, so his net paycheck is $1,125.00

The excess in federal income tax withheld is a credit that is applied against the minister’s self-employment tax liability.

At the end of the year, the minister should receive a W-2 from the church and not a 1099-NE.

If you are a minister and need help in preparing your taxes, please fill out the contact information below: