What Does Dual Tax Status Mean for the Reporting of a Pastor’s Wages?
Under federal law, most pastors have a "dual tax status." Under dual tax status, a pastor is an employee of the church for federal income tax purposes and self-employed for Social Security purposes. The way the church should report the pastor’s wages will differ based on whether the pastor is an employee or self-employed.
Federal Income Taxes = Employee Status
The majority of ordained, licensed, or commissioned clergy members are classified as employees for income tax reporting purposes under tests applied by the IRS.
Pastors who meet the IRS definition of a minister are not required to have federal income taxes withheld from their paycheck, which is a rule unique to clergy members. However, this does not mean they are exempt from paying taxes. To cover any other tax liability, the church can set up voluntary income tax withholding at the pastor’s request. All withholdings should be reported by the church in box two of Form W-2 and forwarded to the U.S. Treasury.
The rare exception to the rule
It is possible, but much less common, for pastors to be designated as self-employed for income tax purposes. For example, if a pastor travels to a number of churches in the same year to work, that person may be treated as self-employed and issued a 1099 instead of a W-2. Before doing this, churches should seek the advice of a local attorney or tax professional. These returns are more likely to be audited by the IRS because they’re often incompliant. Improper reporting can result in back taxes and penalties.
Social Security Taxes = Self-Employed Status
For Social Security and Medicare Federal Insurance Contributions Act (FICA) reporting purposes, the majority of pastors should be classified as self-employed with respect to income for pastoral duties.
FICA taxes should not be withheld by the church from the pastor’s compensation. The pastor is responsible for paying into the Social Security/Medicare system through self-employment tax which should be reported quarterly on Form 1040-ES.
Voluntary withholding cannot be elected from FICA, but the pastor is allowed to withhold sufficient federal income taxes to cover any self-employment tax liability.
Example of Dual Tax Status
Pastor John is a full-time, ordained minister that serves a local church in Anytown, USA. The church issues him a W-2, so he is considered an employee for federal tax purposes. According to the tax code he is self-employed for Social Security. The church does not withhold federal or Social Security taxes from his check. To satisfy his federal and Social Security tax liability, Pastor John makes quarterly tax payments using Form 1040-ES. Even though the church does not withhold federal income tax, they are required to submit the W-2 and necessary payroll filings.