Earnings for Clergy
For income tax purposes, a licensed, commissioned, or ordained minister is generally treated as a common law employee of his or her church, denomination, or sect. There are, however, some exceptions such as traveling evangelists who may be treated as independent contractors. If you are a minister performing ministerial services, you are taxed on wages, offerings, and fees you receive for performing marriages, baptisms, funerals, etc.
For employment tax (social security and Medicare taxes) purposes, the services you perform in the exercise of your ministry are generally subject to self-employment tax. See Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, for limited exceptions from self-employment tax.
Depending on all the facts and circumstances, under common-law rules you are considered either an employee or a self employed-person. Generally, you are an employee if the church or organization has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. For more information about the common-law rules, see Publication 15-A (PDF), Employer’s Supplemental Tax Guide. If you are employed by a congregation for a salary, you are generally a common-law employee and income from the exercise of your ministry is considered wages for income tax purposes. However, the salary you receive from the congregation for services as an employee is subject to self-employment tax. Moreover, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are considered self-employment income.
If you itemize your deductions, you may be able to deduct certain unreimbursed business expenses related to your services as a common-law employee on Form 1040, Schedule A (PDF), Itemized Deductions. You may need to fill out Form 2106 (PDF), Employee Business Expenses, and attach it to your Form 1040 (PDF), U. S. Individual Income Tax Return. Refer to Topic 514 for information on Employee Business Expenses, and Topic 508 for information on the 2% of adjusted gross income limitation. For your self-employment income (the offerings or fees you receive for performing marriages, baptisms, funerals, etc.), use Form 1040, Schedule C (PDF), Profit or Loss From Business, or Form 1040, Schedule C-EZ (PDF), Net Profit From Business, to report these earnings and related expenses.
The gross income of a licensed, commissioned or ordained minister does not include the fair rental value of a home (a parsonage provided), or a housing allowance paid, as part of the minister’s compensation for services performed that are ordinarily the duties of the minister.
A minister who is furnished a parsonage may exclude from income the fair rental value of the parsonage, including utilities. However, the amount excluded cannot be more than the reasonable pay for the minister’s services.
If you own your home, you may still claim deductions for mortgage interest and real property taxes. If your housing allowance exceeds the lesser of your reasonable salary, the fair rental value of the home, or your actual expenses, you must include the amount of the excess as other income.
A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. Generally, those expenses include rent, mortgage interest, utilities, repairs, and other expenses directly relating to providing a home. The amount excluded cannot be more than the reasonable pay for the minister’s services.
The minister’s employing organization must officially designate the allowance as a housing allowance before paying it to the minister.
The fair rental value of a parsonage or the housing allowance is excludable from income only for income tax purposes. No exclusion applies for self-employment tax purposes.
For employment tax purposes, a duly ordained, licensed or commissioned minister is self-employed. This means that your salary on Form W-2, the net profit on Schedule C or C-EZ, and your housing allowance, less your employee business expenses are subject to self-employment tax on Form 1040, Schedule SE (PDF), Self-Employment Tax.
However, you can request an exemption from self-employment tax, if you are conscientiously opposed to public insurance for religious reasons. You cannot request exemption solely for economic reasons. To request the exemption, file Form 4361 (PDF), Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, with the IRS. You must file it by the due date of your income tax return (including extensions) for the second tax year in which you have net earnings from self-employment of at least $400.00. This rule applies if any part of your net earnings from each of the two years came from the performance of ministerial services. The two years do not have to be consecutive tax years.
For more information, refer to Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.
Source: Internal Revenue Service
Last reviewed: September 20, 2013