Dual Tax Status: What it Means When Reporting a Pastor’s Wages
Under federal law, most ministers have dual tax status. Dual tax status means a minister is an employee of the church for federal income tax purposes and self-employed for Social Security and Medicare taxes.
According to the Internal Revenue Service, ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Ministers have the authority to conduct religious worship, perform pastoral functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. If a minister performs ministerial services, all earnings are subject to income tax. This includes wages, offerings, and fees received. A minister for tax purposes:
- Is eligible for a housing allowance.
- Is always self-employed for Social Security and Medicare purposes for ministerial income.
- Is exempt from automatic federal income tax withholding.
Remember that the criteria to determine whether an employee is a “minister for tax purposes” are different from those that determine whether an employee qualifies for the “ministerial exception” to the Fair Labor Standards Act. This FLSA Risk Assessment Chart helps you determine if an employee qualifies.
Why is Paying a Pastor So Complicated?
For ministers, wages are reported two different ways:
- Federal Income Tax = Employee Status. Workers who meet the IRS definition of a minister are considered employees of the church for federal income tax purposes.
- Ministers are required to pay federal income taxes, although they are exempt from automatic federal income tax withholding from their paychecks.
- To cover any tax liability, the ministry can set up voluntary income tax withholding at the minister’s request.
- All voluntary withholdings should be reported by the ministry in Box 2 of Form W-2 and forwarded to the U.S. Treasury.
It is possible, but much less common, for ministers to be designated as self-employed for federal income tax purposes. Before doing this, seek the advice of a local attorney or tax professional. These returns are more likely to be audited by the IRS because, often, they’re not in compliance.
- Social Security and Medicare Tax = Self-Employed Status. For Social Security and Medicare tax reporting purposes, the majority of ministers should be classified as self-employed with respect to income for pastoral duties. This means they are generally subject to the Self-Employment Contributions Act (SECA) tax. When this is the case:
- The church should not withhold Social Security and Medicare taxes from the minister’s wages.
- The church should not make this payment for the minister.
- The minister is responsible for paying into the Social Security/Medicare system through SECA tax payments. Amounts are reported quarterly on Form 1040-ES.
- The minister is voluntarily allowed to withhold sufficient federal income taxes to cover any self-employment tax liability.
What’s at Stake?
It’s important to correct a withholding error. A minister is at risk for losing his or her dual tax status or housing allowance if it’s discovered that the ministry was withholding Social Security and Medicare taxes. If your church has withheld these taxes:
- Consult with a local attorney or tax consultant for advice concerning how far back corrections need to go.
- Correct quarterly Form 941s and issue a corrected Form W-2 to the minister.
- The minister should file an amended Form 1040 for each year a corrected Form W-2 was received.
Want to read four more tips? Read, Payroll and the Church: 5 Things That Ministries Get Wrong from MinistryWorks.
The information provided in this document is intended to be helpful, but it does not constitute legal advice and is not a substitute for the advice from a licensed attorney in your area. Please consult your attorney when creating, reviewing, or revising policies and procedures.