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Tax rules regarding ministers and religious congregations in the United States are even more convoluted than they are for everyone else. Tax laws change frequently and their interpretation is often as much an art as a science. Since the staff of the Office of Church Staff Finances (OCSF) are not qualified tax experts, Unitarian Universalist (UU) organizations are urged to consult and rely upon their own tax advisors in compensation, pension and tax matters.
The following guides on church tax issues have been found helpful:
- Church and Clergy Tax Guide by Richard Hammar is published annually by Church Laws & Tax Report, (800) 222-1840. This is the most comprehensive guide to the subject for non-experts. The same author also publishes Church Law & Tax Report, a bimonthly journal reporting on legal and tax developments affecting ministers and churches.
- Worth’s Income Tax Guide for Ministers by B.J. Worth is also published annually by Evangel Publishing House (800) 253-9315, and provides step by step instructions in the preparation of ministerial tax returns. Clearly presented and easily understood.
Minister: Employee or Self-Employed?
The most basic and perhaps most confusing question about ministers and the tax law is whether ministers are self-employed or employees. The answer is that U.S. ministers have dual tax status in the eyes of the IRS.
- In the U.S., ordained ministers are considered to be self-employed for Social Security tax (SECA) purposes. This means they must pay their own Social Security taxes on salary, clergy housing allowance and other earnings on a quarterly basis using the Declaration of Estimated Tax for Individuals, Form 1040-ES. The current SECA is 15.3% of taxable earnings, but is partially offset by the provision making one-half the amount paid in SECA in the previous year deductible from income in the current year. Income taxes paid to the states must also be paid by ministers, usually quarterly.
- Ministers are considered to be employees for income tax purposes, with the employer reporting annual earnings on IRS Form W-2. The basic test of employee status is the extent to which the employer controls the terms of service, provides an office, pays benefits, etc. Except in rare instances, ministers who serve congregations in parish ministry are considered to be employees in regard to income tax.
However, religious bodies are not required to withhold income tax for “ordained, licensed, or commissioned clergy,” although they must withhold income tax on the earnings of their nonordained employees.
Ministers may opt to have their employer-congregation withhold and pay income tax and SECA for them, as is done for other employees on form 941. There is no tax benefit to this arrangement other than alleviating the minister from the quarterly paperwork of self-reporting.
Reporting Income on the W2
The minister’s annual salary is reported in box #1 on the W-2 under “wages.” In box #2 for “tax withheld,” write the word “minister” unless tax has been withheld as for other employees.
The clergy housing allowance is not reported on form W-2, but must be reported by the minister on Schedule SE as part of the annual return Form 1040. The clergy housing allowance amount should be documented by the church Treasurer in a separate letter for the minister to attach to his or her return. The pension plan box may be checked.
Read complete instructions on how to complete W-2's (PDF) for all church staff.
Components of Clergy Compensation
Ministerial Compensation can be divided into five categories. The OCSF has separate handouts describing Professional Expenses, Clergy Housing Allowance, and the Unitarian Universalist Association (UUA) Retirement Plan.
- Employment Benefits normally include health and dental insurance, group term life insurance, and long-term disability insurance. The UUA offers health, dental, life, and LTD plans for employees of UU congregations. In the event of a claim, LTD benefits may be exempt from income tax if the premiums have been paid by the employee rather than the employer.
- Professional Expenses include costs such as automobile expenses, travel, books, periodicals, conferences, denominational meetings, hospitality related to ministerial responsibilities, supplies, continuing education, etc. A total for these should be listed in the church budget, with the minister advancing the expenses as needed and then reimbursed on a monthly basis through an Accountable Reimbursement Plan, with receipts provided for expenses more than $75.
- Clergy Housing Allowance: U.S. and Canadian tax law provide for that portion of salary used by an ordained minister to provide a residence in conjunction with his or her ministerial duties to be excluded from taxable earnings, but it is subject to SECA in the United States. If the church provides a parsonage, the imputed annual rental value is listed as the housing allowance and the minister pays SECA on that amount.
If the minister rents or owns a home, the housing allowance is limited to the lesser of the fair market rental value plus all expenses, the actual rent or mortgage plus all expenses, or the amount designated in advance by the governing board of the church. The housing allowance must be designated in advance by the church’s governing body, and may not be increased retroactively.
- Contributions into the UU Organizations Retirement Plan are urged for all employees who are age 18, who have worked 1,000 hours, and have served for one year. Ministers may be enrolled from the beginning of their settlement since they have served a year of internship as part of their ministerial preparation. The UUA fair compensation guidelines call for a contribution by the employer of 10% of taxable earnings for all eligible employees.
- Salary. Congregations should consult the UUA’s Salary Recommendations for help in determining a fair amount. To avoid confusion, the minister should be issued separate checks for the clergy housing allowance and salary.