Clergy Tax

Properly Handling Minister's Paycheck

How to handle clergy taxes and compensation is always a big concern for churches. Some churches do not even know that clergy (ministers/pastors) compensation and payroll taxes are handled differently than any other profession in the United States. See how to determine if the IRS classifies your minister a "minister" under the tax laws and how to handle their payroll taxes below...

Factors to Consider Regarding Clergy Tax:

Clergy Taxes

Is the church required to hold out federal and state income tax from a minister's paycheck?

How about Social Security and Medicare taxes? Is the church required to match the FICA tax?

Is their compensation taxable?

What is the SECA system?

A minister's tax situation is unique and as church administrators residing in the United States, it is imperative that we know the IRS's tax laws regarding minister or clergy taxes!

But first and foremost.....



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Clergy Tax Factor 1: Determination

In order to be classified a minister (clergy) for tax purposes, a minister should satisfy five separate tests:

  1. Be licensed or ordained
  2. Administer the sacraments of the church (weddings, funerals, baptisms, and communion, etc...)
  3. Be considered a religious leader by the church
  4. Conduct religious worship
  5. Have management responsibilities in the church

NOTE: a Pastor is almost always considered a clergy for tax purposes.


Clergy Tax Factor 2: Special Tax Treatment

Clergy receive special tax treatment for the following three topics:

  1. Ministers pay their own self-employment tax.(Even though ministers can be considered church employees, they are treated as self-employed for Social Security and Medicare tax purposes. See more below)
  3. Churches cannot withhold Social Security and Medicare tax from a minister's paycheck.



Minister taxe

Clergy Tax Factor 3:  Self-employment Tax

Like I stated in the beginning of this article...ministers are unique and their compensation is handled differently from other church staff such as the secretary, treasurrer, nursery worker, etc. The IRS considers minister to have a 'dual status" when it comes to their employment status. 


What this boils down to is that ministers pay their SS and Medicare taxes through the SECA system instead of the FICA system that most employees are under.

I are scratching your head and wondering what in the world is SECA and FICA!

Well...let me try to spell out what those acronyms stand for and what the difference is between them...

  • SECA is an acronym for the Self-Employment Contributions Act. It is the system that self-employed individuals like myself pay our Social Security/Medicare taxes through.
  • FICA is an acronym for the Federal Insurance Contributions Act. It is the system that MOST employees in the United States are under ... including your secretary, treasurer, nursery worker, etc.. With FICA the employee and the employer each pay half of the taxes.

No earnings are subject to both systems!

Ok...we have establish the fact that most ministers are under the SECA system ... if they meet the guidelines discussed earlier in this article.

So what does that mean to the individual handling their compensation?

It means that unlike your non-minister employees, your church cannot withhold half of the Social Security and Medicare tax from a minister employee’s paycheck. The church also does NOT match any FICA tax as none is held out.

Instead, a minister employee is responsible for paying his own self-employment tax. The self-employment tax consists of 12.4% for Social Security and 2.9% for Medicare (15.3% combined).

 As a result, the minister employee actually pays twice as much Social Security and Medicare as a non-minister employee. 


An example of what a minister could expect to pay in self-employment tax:

32,000 (base salary) plus and an additional $14,400 (housing allowance)= $46,400 times 15.3% =$7048 (Note: This amount does not include the minister's income tax)

Some churches will include a "Social Security Tax Allowance" in a minister's compensation package to help off set this burden. That is perfectly legal...BUT be aware that the "allowance" is taxable income and MUST be included in Box 1 of his W-2.  So many churches figure that allowance at 9.8% of their salary {7.65% (half of their SE tax) plus the additional amount to help with the additional taxes they owe when their salary is increased}.

See an example of a Pastor's W-2 that has a Social Security Allowance as part of the compensation package.

Clergy Tax Factor 4: Opting Out

A minister can opt out of paying in Social Security, but he must do it by the second year in which he earned more than $400 of ministerial income.

IRS Form 4361 must be used and it must be filed on the correct basis of religious belief. If approved by the IRS, only earnings from ministerial services are exempt from self-employment tax. Form 4361 indicates that once the exemption is approved, you cannot revoke it.

Clergy Tax Factor 5 - Withholding Taxes

A church can withhold income tax (at the minister requests), but not Social Security and Medicare tax. Let me repeat that...a church CANNOT withhold FICA from a qualifying minister's compensation.

As I stated earlier in this article, minister pays the Social Security and Medicare tax himself under the SECA system. He can pay this tax by making quarterly estimated tax payments, or by requesting the church to hold out extra income tax.





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  • Fund Accounting Examples and Explanations
  • Setting up a fund accounting system
  • Donation management
  • Minister compensation and taxes
  • Internal controls and staff reimbursements
  • Much more - Click here for details


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