Churches and other religious organizations are typically exempt from federal income tax. However, the exemption doesn’t apply to the wages paid to church employees or the income of clergy members.
What you’ll learn
What you’ll learn
Key takeaways
- Churches are automatically exempt from federal income tax but their employees, like pastors and priests, pay taxes
- Pastors have a dual tax status. They pay income tax as church employees as well as Social Security and Medicare as self-employed individuals
- The IRS grants pastors a tax benefit in the form of a housing allowance exclusion when calculating income tax
- Pastors can request a self-employment tax exemption if they meet IRS requirements
Understanding how religious leaders like pastors are taxed and using that knowledge appropriately in your ministry can help organizations to stay compliant with the IRS.
Clergy tax obligations
For tax purposes, Uncle Sam puts church workers into different categories. Pastors are considered ministers. The federal tax agency defines ministers as “individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination.”
Keep in mind
“If a pastor doesn’t meet the IRS’s minister definition or isn’t doing the kind of work that qualifies as a ministerial service, they won’t be treated as a minister for tax purposes.”
— Peggy James, CPA and OnPay contributor
Under federal law, ministers have a dual tax status. Their income is subject to federal income tax, but the IRS considers them self-employed when it comes to Social Security and Medicare.
In a nutshell, here’s how preachers pay taxes:
Income taxes
Pastors pay income tax on all their ministerial earnings. These include:
- Wages
- Offerings
- Fees for performing marriages, funerals, baptisms, or any other ministerial services
Unlike typical employees, ministers are exempt from mandatory federal income tax withholding. Instead, they handle their own quarterly estimated taxes. However, they can ask the church to withhold federal income taxes on their behalf.
Social Security and Medicare: Self-employment (SE) taxes
Both pastors’ salaries and any additional income from ministerial services are subject to self-employment tax unless they apply for an exemption.
The self-employment tax rate is 15.3% of ministers’ net taxable earnings. So how do these numbers add up? This rate consists of two parts:
- 12.4% for Social Security (old-age, survivors, and disability insurance)
- 2.9% for Medicare (hospital insurance).
The IRS collects Social Security and Medicare under one of two systems:
- Federal Insurance Contributions Act (FICA): Employer and employee each pay half of Social Security and Medicare (7.65%)
- Self-Employment Contributions Act (SECA): A self-employed person pays the entire 15.3% since they are both the employee and the employer
Regular employees pay Social Security and Medicare under FICA, while pastors pay under SECA.
Self-employment tax considerations
The church is not required to withhold Social Security and Medicare taxes from pastors’ income. Ministers must determine their self-employment tax and pay it to the IRS. That said, they can agree with the church to withhold their SE taxes.
Pastors can apply for a self-employment tax exemption provided they meet all the following IRS requirements:
- File the self-employment tax exemption form
- Have religious reasons, not just general personal beliefs, for objecting to public insurance
- Apply for an exemption for religious, not financial, reasons
- Inform the ordaining, commissioning, or licensing body in the church that they are against public insurance
- Prove that their organization is a church or a part of a group of religious organizations
- Show that their religious organization is tax-exempt
Minister’s housing allowance (MHA)
A housing allowance (also called a parsonage allowance) is the part of a pastor’s pay that the church sets aside for housing. Ministers don’t include housing allowance when figuring out their federal income taxes. This lowers the amount they pay the IRS.
Also to note
The IRS allows pastors to exclude their housing allowance for federal income tax purposes only. The exclusion doesn’t extend to self-employment taxes.
— Peggy James, CPA
Your church must decide and document exactly how much of a pastor’s pay is for housing. If it doesn’t, ministers can’t exclude housing allowance in federal income tax calculations. Plus, the amount the church designates for MHA must be used only for housing expenses such as:
- Renting a place to live
- Paying mortgage interest
- Covering necessary home repairs
- Paying for utilities and furniture
Also, the designated MHA should not be more than a reasonable pay for pastoral services.
When ministers calculate their income tax, the housing allowance exclusion must meet IRS rules. They can’t exclude more than:
- The housing allowance designated by the church
- The actual housing expenses for the year
- The fair rental value of their home (the amount a property would rent for on the open market)
Employee vs. self-employed status
Generally, the IRS considers ordained ministers to be employees of the church. However, there are some exceptions, such as traveling evangelists, who are classified as independent contractors. Check the IRS’s description of an employee and an independent contractor to determine the right category.
Whether a pastor is an employee or an independent contractor affects:
- How they pay taxes: Pastors who are considered employees have a dual tax status. Independent contractors are only treated as self-employed.
- Whether they qualify for an IRS tax break and employee benefits: Only ministers (not independent contractors) employed by the church can exclude housing allowance from federal income taxes. Only employees can enjoy employer-provided benefits such as ERISA and SECURE Act retirement plans.
- How they report income: Churches issue employees a W-2. Independent contractors get a Form 1099.
Moving on, let’s take a look at the documents that you’ll need to know the details about.
Tax forms and compliance
Key tax forms pastors may need to file include:
| IRS form | Purpose of the document |
| W-2 | Reporting yearly wages |
| Form 1040 | Filing annual income tax returns |
| Schedule SE (Form 1040) | Calculating self-employment tax |
| Form 4361 | Requesting an exemption from SE tax |
| Form 1040-ES | Figuring out and paying estimated income and SECA taxes (Used if the church isn’t withholding taxes from a pastor’s income) |
Proper recordkeeping is key. Pastors will need proof that the numbers in their tax returns are true and accurate in case of IRS audits.
Church’s tax responsibilities
Key tax responsibilities of religious organizations include:
1. Classifying workers and submitting payroll taxes
When your church hires a worker, it must determine whether the person is a:
- Clergy (minister)
- Independent contractor
- Non-clergy employee (regular church worker)
Ministers and independent contractors are responsible for calculating and paying their income, Social Security, and Medicare taxes. But if ministers ask for taxes to be withheld from their income, the church can choose to handle the calculations and payments on their behalf.
The church, however, is required to withhold payroll taxes from the salaries of non-clergy employees.
2. Setting up housing allowances
Pastors can’t get the housing allowance tax break unless the church officially sets one up for them — ideally before the start of each calendar year. Religious organizations can put MHA in writing through:
- The pastor’s employment contract
- Meeting minutes from the church
- The church budget
- Any official decision made before the allowance is paid
Avoiding common tax pitfalls
Common tax mistakes churches should avoid include:
- Skipping the housing allowance paperwork: The MHA must be official. Informal agreements don’t count.
- Treating pastors like regular employees: Churches should not withhold income, Social Security, or Medicare taxes from pastors’ earnings without a voluntary withholding agreement.
- Forgetting to issue a W-2: Generally, pastors are church employees, not independent contractors. So they get a W-2 instead of Form 1099.
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Tax exemptions for churches
Churches don’t have to apply for tax-exempt status. They’re automatically exempt from federal income tax, so they don’t deal with corporate IRS documents like Form 1120. But still, many churches apply for a tax-exempt status to get official recognition from the agency.
To apply, your church must:
- Obtain an Employer Identification Number (EIN)
- Submit IRS Form 1023
- Pay application fees when submitting the form
The IRS will notify you if the exemption is approved.
Manage your clergy’s payroll with a dedicated payroll management system
Pastor taxation involves a blend of employee and self-employed status, housing allowance calculations, potential exemptions, and specific documentation requirements that differ significantly from typical payroll situations. With dual tax obligations, special exclusions, and various compliance requirements to track, there’s quite a bit for churches to manage when it comes to clergy compensation.
That said payroll software with clergy tax considerations in mind makes everything easy. OnPay allows you to mark clergy members exempt from FICA taxes and automatically and accurately calculate what church employees owe the IRS. And if you have any questions, our team can help!
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.