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:

Housing Allowance Tax Benefit

The minister’s housing exclusion provides one of the most significant tax benefits for those who qualify as “ministers of the gospel” under the tax law. This exclusion from income tax is available to ministers who own their own homes and to those who live in church-provided housing. These concepts apply to all “church” organizations that employ ministers, including ministries that may not be a traditional “steeple” church but meet the tax law qualifications to be recognized by the IRS as a church (examples include integral agencies of a church, conventions, or associations of churches). References to “church” or “churches” throughout this resource are intended to include all of these organizations employing ministers who may qualify for the minister’s housing exclusion

Housing Allowance was challenged in federal court as unconstitutional preference for religion. In 2019, a federal appeals court rejected the challenged and affirmed the constitutionality of the housing allowance.

The most important tax benefit available to ministers who own or rent their homes is the housing allowance exclusion. It is non-reportable income for federal tax purposes.

The minister’s housing exclusion is an exemption from federal income tax only—not social security tax. Under the U.S. social security tax framework, all ministers are considered self-employed (even though they are considered employees for income tax purposes). 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).

The IRS does not place a percentage limitation on how much of a minister’s compensation may be designated as a housing allowance by the employer. In a few instances, such as with bi-vocational ministers, 100% of cash compensation may be justified as a housing designation and exclusion. It is often best for the church to over-designate a minister’s housing allowance by a reasonable amount (e.g. 10% of anticipated costs), subject to the fair rental value limitation, to allow for unexpected housing expenses and increases in utility costs. However, the minister may only exclude the amounts actually paid within the year for housing-related expenses. In addition to these limits, the housing exclusion may only apply to one residence at a time.

Construction costs qualify as housing expenses. However, since the housing exclusion only applies to one home at a time, excluding construction costs expended while living in another home is problematic. It is inappropriate for a church to directly reimburse expenses related to minister-owned housing because the expenses are not the responsibility of the church. Instead, these expenses are eligible for inclusion under a cash housing allowance paid by the church

 Housing Allowance if you Own or Pay Rent

Ministers who own or rent their home do not pay federal income taxes on the amount of their compensation that their employing church designates in advance as housing allowance to the extent that

• the allowance represents compensation for ministerial services,
• is used to pay housing expenses, and
• does not exceed the fair rental value of the home (furnished plus utilities)

The housing allowance amount designation must be part of the minister’s salary and be used exclusively for providing a home. It can cover the following costs: 

• Rent 
• Mortgage payments 
• Real estate taxes 
• Home Insurance 
• Utilities such as electricity, water, pest control, security system
• Furniture 
• Repairs and Maintenance
• Landscaping expenses

This allowance can be excluded on a minister’s tax return, but it should not exceed the fair rental value of the home, including furniture and utilities. If the amount does exceed the fair value, the extra portion is taxable.

Housing Allowance if the Church Provides a Parsonage

Ministers can exclude from their income a rental allowance or the fair rental value of a parsonage that is provided to them as pay for their services. This exemption applies only for income tax purposes. The exclusion does not apply to self-employment taxes.

For a payment to qualify for the income tax exclusion, the church must officially designate it as a housing or rental allowance before it is actually paid. A definite amount must be designated. The amount of the allowance cannot be determined at a later date.

If you receive a rental allowance, you can exclude it from your gross income if the amount is used to provide or rent a home, and it does not constitute excessive pay for your services or exceed the fair rental value of the home, including furnishings, plus the cost of utilities.

If the church provides a residence, you can exclude from gross income the fair rental value of the house, including utilities, furnished to you as part of your earnings. But just like a rental allowance, the exclusion cannot be more than the reasonable pay for your services. If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost.

Example: Rev. Joan Carlton is a full-time minister. The church allows her to use a parsonage that has an annual fair rental value of $24,000. The church pays her an annual salary of $60,000, of which $7,500 is designated for utility costs. Her actual utility costs during the year were $7,000. For income tax purposes, Rev. Carlton excludes $31,000 from gross income ($24,000 fair rental value of the house plus $7,000 from the allowance for utility costs).

She will report on her 1040 as income $53,000 ($52,500 net salary plus the $500 of unused utility allowance). However, her income for self-employment tax purposes is $84,000 ($60,000 gross salary plus the $24,000 fair rental value of the home).

How to designate the Housing Allowance

Housing allowances require action by the church. A cash housing allowance is only excludable under the following rules:

• The allowance must be officially designated by the church. The designation should be stated in writing, preferably by resolution of the board (or a committee of the board) in an employment contract. If the only reference to the housing allowance is in the church budget, the budget should be formally approved by the board.
• Tax law does not specifically say that an oral designation of the housing allowance is unacceptable. Still, the use of a written designation is highly recommended. The lack of a written designation significantly weakens the defense for the housing exclusion upon audit.
• The housing allowance must be designated prospectively (in advance) by the church. Cash housing allowance payments made prior to a designation of the housing allowance are fully taxable for income tax purposes. Carefully word the resolution so that it will remain in effect until a subsequent resolution is adopted.
• Only actual expenses can be excluded from income. The source of funds used to pay for a minister’s housing expenses must be compensation earned by the minister in the exercise of ministry in the current year.
• Only an annual (not month-by-month or paycheck-by-paycheck) comparison by a minister of housing expenses to the housing allowance is required. Example: A church designates a housing allowance in December, effective for the following year, of $30,000 for a minister. The comparison of the $30,000 allowance with actual housing expenses is only required at the end of the year by the minister

If you need help in preparing the housing exclusion document that must be prepared by the minister or the Housing Allowance Declaration Applicable to Minister-Provided Housing prepared by the Church, please send us a message with your contact information below and we will be happy to assist you and your church.

Adopt and follow an accountable expense reimbursement plan

Many ministers personally spend hundreds or thousands of dollars each year on churchrelated business expenses. For example, a minister might pay for gas while traveling on church business, registration fees for a ministry-related conference, or pick up supplies on the way to a church dinner.

An accountable expense reimbursement plan, in which expenses with appropriate substantiation are fully reimbursed to the minister by the church, is the best form of stewardship.

To qualify for reimbursement, an expense must be both ordinary and necessary. An “ordinary” expense is one that is common and accepted in someone’s profession, while a “necessary” expense is one that is helpful and appropriate in the context of a person’s work. So, while a minister could certainly be reimbursed for the cost of ordering books on theology to research a sermon, he or she would not, for instance, be entitled to reimbursement for buying a detective novel to read on a plane.

Because reimbursements are essentially the church paying money owed to the minister, they should not be considered part of a minister’s taxable salary. Rather, reimbursements are part of a church’s operating expenses, which in this case were initially paid by the minister. When a church lists reimbursements as part of a minister’s compensation package, it gives a distorted picture of what the minister is actually receiving in return for his or her work.

By the same token, it is important that a congregation NOT treat expenses that are really part of a minister’s compensation as church-related expenses. For instance, while a church could reimburse a minister’s restaurant bill from leading a breakfast Bible study group, meal expense would not be reimbursable if the minister were simply getting something to eat on a lunch break or having a purely social meal with members of the congregation.

Even if the church reimburses a minister for a personal expense, that does not suddenly make it a “business expense” in the eyes of the IRS. Business expenses are business expenses whether or not they are reimbursed, while personal expenses are always nondeductible and non-reimbursable. If a personal expense is inadvertently reimbursed by the church, then the minister should immediately refund the money. Otherwise, the church should include the amount of the reimbursement in the minister’s taxable wages on Form W-2.

In the end, there are only two valid ways to deal with ministry-related expenses. The first is for the minister to try to take a federal income tax deduction for unreimbursed expenses 8 Essentials of Compensating Ministers 9 from personal income at tax time. The second is for the minister to provide the church with an accounting of the expenses and for the church to reimburse the minister. Reimbursement is almost always the better option in terms of saving on taxes.

For reimbursements to be excluded from taxes, the minister must provide a detailed accounting. As far as the IRS is concerned, reimbursements paid without proper accounting are simply additional taxable income. To avoid taxes on expense reimbursements, the IRS requires three basic elements:

(1) a business purpose for the expenses,

(2) substantiation of expenses such as a receipt, and

(3) the five W’s noted on the back of the credit card slip or other receipt:

– Why (noting the business purpose),

– What (description, including itemized accounting of cost – which is standard on most receipts),

– When (date),

– Where (location), and

– Who (names of those for whom the expense was incurred).

Failure to keep adequate records of expenses can be problematic should the church or minister ever find themselves audited. Whatever the specifics of the church’s policy, providing ministers with full reimbursement for all reasonable ministry-related expenses should be the goal. Anything less is poor stewardship on the part of the church. Establishing an accountable reimbursement plan is the best option.