Ministerial Compensation 101
Last revised: July 2019
- Nearly all congregational ministers are employees, not independent contractors.
- There are 3 important tax provisions for ministers – dual tax status, housing allowance, and optional tax withholding.
- Benefits recommended for all staff, including ministers, are described in detail in our Compensation Guidelines. The “in lieu of FICA" payment, or self-employment tax offset, is a benefit unique to ministers (because of their dual tax status).
Is our minister an employee or an independent contractor?
Almost all ministers (and others who work in congregations) are classified as employees, not as independent contractors.
- The congregation should issue a W-2 form to the minister. Our W-2 Form Instructions provide guidance for each box of the W-2, for ministers and for other staff.
- Although ministers are employees for income tax and other purposes, they are treated as self-employed with regard to Social Security/Medicare taxes. See "Payment in Lieu of FICA," below. Remember that the minister is still an employee.
- A 1099 should only be issued in rare circumstances – for example, to a minister who leads worship in a congregation occasionally (once a month or less) and has no ongoing leadership responsibilities. A minister whose name appears on your website or in your newsletter as the minister of your congregation is an employee.
- Independent contractors are ineligible for employee benefits. In general, it is against the law to provide employee-related benefits to non-employees. Independent contractors must secure insurance and retirement benefits on their own.
- The IRS is cracking down on employers who inappropriately classify employees as independent contractors, as it is seen as a way to avoid paying federal Social Security taxes or offering benefits. For more information, see our Employee or Independent Contractor resource page.
Special Tax Provisions
Who Is Considered a Minister for Tax Purposes?
Clergy tax provisions apply to ministers who are fellowshipped (have completed the UUA’s ministerial credentialing process) and/or ordained.
Payment in Lieu of FICA (Self-Employment Tax Offset)
Even though they are employees, ministers are treated as self-employed for the purpose of Social Security/Medicare payments. This is referred to as “dual tax status.”
- Ordinarily, the Social Security/Medicare tax (currently 15.3% of salary) is shared between employer and employee in the form of the FICA (Federal Insurance Contributions Act) tax. But self-employed individuals bear this entire cost and remit the tax themselves, as they have no employer. This is called the SECA (Self-Employment Contributions Act) tax.
- Because the minister is considered self-employed for Social Security/Medicare purposes, they pay the full amount of the Social Security/Medicare tax themselves through the SECA tax (currently 15.3% of salary and housing), rather than sharing the cost with their congregation. This means that a minister loses 7.65% of their salary (and housing) to this tax, relative to a non-ministerial employee earning the same salary. Note that the minister pays their SECA tax directly; the congregation is prohibited from withholding or remitting Social Security/Medicare taxes for the minister. (See "Optional Tax Withholding," below.)
- To make up for the higher tax paid by the minister, UUA Compensation Guidelines (and those of a number of other denominations) include an “in lieu of FICA” – or Self-Employment Tax Offset – payment for ministers. This payment is in lieu of the employer share of FICA and goes directly to the minister (which they use to pay part of their self-employment tax). The amount is currently 7.65% of salary and housing. The offset is equal to what the congregation would have paid in FICA tax for a non-ministerial employee earning the same salary.
- This self-employment tax offset payment is not a basis for UUA insurance benefits; do not include it in the insurance benefit or premium calculations.
- The offset payment is included in the UUA Retirement Plan calculation unless the congregation has specifically opted to exclude it on their Employer Participation Agreement.
Our Ministerial Tax Status FAQ has more information.
Optional Tax Withholding
Withholding federal and state income tax is optional for ministers.
- Whether or not they choose to have taxes withheld, they need to make quarterly tax payments sufficient to cover their income and self-employment tax (SECA) obligations.
- At the request of the minister, a congregation can withhold federal and state income taxes and remit them along with the withholdings of other employees. Congregations may not directly withhold or remit any Social Security/Medicare taxes for ministers. Some ministers choose to intentionally “over-withhold” on their income taxes in order to cover their self-employment tax. (The shift from extra income tax to SECA obligation is taken care of through the minister’s quarterly payments.)
- All congregational ministers (and some community ministers) are entitled to a housing allowance.This allowance exempts a part of the minister’s salary from federal income taxes – and state income taxes in most states. (Pennsylvania is one known exception, where housing allowance is taxable at the state level.)
- The amount of salary that a minister can claim as housing allowance is the lowest of the following:
- actual expenses (mortgage/rent, taxes, utilities, and furnishings),
- the fair rental value of the residence including utilities, taxes, and furnishings, or
- the amount designated by the congregation.
- Since the amount of the housing allowance is not considered taxable income, it is not reported as compensation in Box 1 of the minister’s W-2 form. For the minister’s convenience, it may be listed in Box 14.
- Federal law requires the housing allowance be set in advance by one’s Governing Board. The governing board of the congregation/organization needs to adopt an annual motion specifying the amount of the minister's housing allowance, either in December or in the month preceding the start of a new fiscal year. (As a safeguard, it is prudent to include a sentence in the motion saying that this amount will continue indefinitely until changed. This doesn’t negate the need for an annual board motion.)
- The OCSF recommends that the housing allowance be paid separately, or itemized out if only one check is issued. Our Housing Allowance Page and Housing Allowance Calculation Form provide additional information.
- Ministers pay self-employment taxes (currently 15.3%) on both salary (Box 1 income) and the housing allowance.
The UUA Office of Church Staff Finances assists congregations in setting appropriate salaries for ministers and other staff by providing salary recommendations based on wage surveys from religious denominations and non-profits. Recommendations are geographically-based and vary by membership size. UUA Salary Recommendations for Congregational Staff are updated annually.
Subject to each plan’s eligibility requirements, ministers and other employees of UU congregations and UUA-related organizations are expected to receive:
- Retirement Plan contributions
- Health insurance
- Dental insurance
- Long-Term Disability insurance
- Life insurance
- Professional expense allowance (for professional staff)
- Ministers only: Self-employment tax offset, as explained above
Benefits offered by the UUA
Resources for Administering UUA Benefits
- UUA Compensation Guidelines: Purpose of each benefit and recommended levels
- Benefits Tune-up Workbook: Protocol for benefit plan administration and compliance
- Benefits Summary Chart: Eligibility and enrollment info at a glance
The UUA, together with the UU Ministers Association, provides a comprehensive model agreement that includes provisions such as sick/disability/parental leave. We recommend using this language to provide clarity, especially if problems arise. Model agreements are available on the Ministerial Transitions page for full-time senior/lead/solo ministries and interim ministries; we plan to add templates for part-time and second ministers.
Additional Information and Support
Employee compensation is a complicated area of church administration – all the more so with respect to ministers. The Office of Church Staff Finances (OCSF) welcomes questions from congregational staff and lay leaders. See the main OCSF page for information about our office, including a staff listing. We also suggest the following resources:
- Your regional compensation consultant
- An accountant familiar with ministerial tax provisions
- IRS Publication 517
- The Church and Clergy Tax Guide, by Richard Hammar, published annually by the Church Law and Tax Store
The staff of the UUA Office of Church Staff Finances are are not certified tax or legal professionals. While we understand the above information to be correct, we encourage congregations to seek the services of their own experts in dealing with individual circumstances and unusual cases.