Minister Status and Compensation

Below are tips on paying your pastor or minister such as whether to issue a W-2 or 1099 and the legality of paying them a percentage of a church's income.

Minister Dual Status:

Minister Employment Status

The answer to whether to issue the pastor a W-2 or 1099 always lies in determining if the clergy is an employee of the church or considered self-employed.

A long time ago...all clergy were considered self-employed; however, in the mid 1980’s the IRS decided to declare ministers “employees” of the church.

"Most pastors should be considered employees. They typically have a governing council they work with or for to determine to work to be performed (which is one of the criteria the IRS uses to determine the status of a person).

Exceptions to this would be supply pastors or missionaries who travel from church to church filling in or working for short periods." Read more potential exceptions in the Church Accounting: How to Guide.

Side Note: Misclassification of workers is a big issue with churches and the IRS, so be very certain you have properly classified your clergy and other workers such as musicians, nursery workers, and, custodians. See this article: Misclassification of Workers

Now remember...even though they are an “employee” of the church...the IRS considers ordained ministers to have a “dual status” . Which means clergy is considered an employee for federal income tax purposes and self-employed for Social Security and Medicare purposes.

That brings us to another frequently asked question: FICA or SECA?

Social security and Medicare taxes are collected under two systems. Under the Self-Employment Contributions Act (SECA), the self-employed person pays all the taxes. Under the Insurance Contributions Act (FICA), the employee and the employer each pay half of the taxes. No earnings are subject to both systems.

A church  cannot withhold and match Social Security and Medicare taxes (FICA) from a clergy's wages. Clergy pay their Social Security and Medicare taxes under the SECA system.

Minister Compensation :

Figuring what is correct for a clergy's salary can be complicated especially when you are a start-up or small church.

Some weeks are good and some weeks are not so good. Which is one of the reasons why some churches base their pastor's salary on a percentage of the church’s revenue...but is this legal? 

I have heard very different opinions on this issue. Many years ago, I attended a church tax conference. The speaker stated that paying a pastor a percentage of the church’s income would endanger the church’s tax exempt status and may also cause the IRS to impose excise taxes on the clergy because it would fall under the private inurement and private benefit regulations

I cannot find anything to prove or disprove that statement. However, in the Church and Clergy Tax Guide, Richard Hammar, Attorney, CPA, and Author, states, “Churches are free to pay their clergy reasonable compensation for services rendered. Compensation packages based on a percentage of income are "reasonable" and appropriate so long as the amount of compensation paid to a clergy under such an arrangement is in fact reasonable in amount.”

So if your church decides to or is already paying your pastor a percentage of the church's income, you should do 3 very important things:

  • Research the legality of paying the percentage. (Seek the advice of a qualified tax professional)
  • Make sure it is considered reasonable compensation for your pastor in regards to the size of your church's income and location.
  • Put a cap on the amount and that cap must be recorded in the minutes. Without a cap, any amount paid ...no matter how small would be considered private inurement and excessive benefit transactions which could threaten your church's tax exempt status. The IRS could also impose penalties on your pastor and church leaders.

Whether you pay a percentage of income or more commonly a set amount, the total compensation MUST be considered "reasonable"!

Another area that gets pastors in trouble is in the church paying their personal expenses. See this page on accountable reimbursement plans for more information. 

See more on minister’s compensation issues:

The Church Accounting: How To Guide devotes a whole section of the book to payroll for churches. It covers payroll terminology and forms and then takes you through the steps necessary to set up a payroll, calculate and file the necessary taxes and forms, and even details how to handle the minister's payroll. It also includes sections on filling out IRS forms: 1099 and 1096.

If you have QuickBooks or are considering using it in the future, go ahead and purchase the QuickBooks for Churches and the How To Guide combo for a complete package on setting up and administering a payroll using QuickBooks.

QuickBooks for Churches & Church Accounting Combo Bundle

References:

flumc.org:Employee or Independent Contractor

Richard Hammar's Church & Clergy Tax Guide 

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Questions and Comments on Ministers Employment Status

Do you have a question or comment about minister or pastor employment status? Share it!

Archive of Minister Employee Questions (& Answers)

The following comments, tips, and Q/A were provided by FreeChurchAccounting's generous readers:

Reasonable Percentage 
So, What is considered a reasonable percentage of total income to pay a pastor?

Zero Compensation Pastor 
I am starting a new church, I am a disabled veteran receiving Social Security. I have informed the members that I will not take a salary, this has been …

What is taxable compensation for a pastor? 
Our pastor does not receive a salary and does not work a job outside of the church. The church does give him love gifts throughout the year for birthdays, …

Unpaid pastor and parsonage 
I am an unpaid pastor. I do live in the parsonage of the church free. I am disabled and do not file taxes. Because I do not file any federal or state …

Teacher at a Christian School 
My wife is teaching at a Christian school. They hired her and she was ordained by them as a minister and filled out whatever IRS form was necessary and …

Clergy Wages & Church quarterly 941 reporting 
Should the church include wages paid to clergy on the quarterly 941 form? If not, how does the w-2 reconcile at the end of the year with the 941 payments. …

Guest speaker later hired as pastor 
Our church had a minister speaking for a couple of months and was paid as a guest speaker. He has now been voted in as full time pastor. Is it advisable …

Church pays for pastors health insurance - is this considered income? 
Our church has agreed to pay the pastors health insurance premiums. He does not get any salary. He is listed as an 'employee' of the church in order …

interim pastor 
We are searching for a pastor. We are thinking about having a preacher that is not licensed or ordained to fill in during this time. Do we cut and match …

love offering for the pastor or payroll? 
every month the pastor of our small church receives $200 as a love offering. the pastor does not receive a w2 from the church nor is on any type of payroll. …

office in home deduction for pastor 
if a pastor is considered an employee and received a w2 from the church, with deductions of Medicare and social security can he still claim a deduction …

Cleaning done by student- not a business 
Our small church pays a student member to clean. He doesn't own a business. Should he get a 1099misc and have to report it as nonemployee compensation? …

When is income taxed if it is back pay that is owed a pastor? 
Our pastor elected to not be paid during some lean months our church had, and we are now in the process of paying him the salary he is owed for those months. …

Paying a pastor a love offering, not on payroll 
501(3)c Non profit organization (not a church). Can I pay a pastor who is not on payroll a love offering gift? He receives a housing allowance and claims …

Both spouses employed by church 
My husband is the senior pastor and I just came on staff as the ministey pastor. He already gets full housing beneft and pays his own FICA. Is there any …

minister with another job at the church 
I am a youth and children's minister - part-time and receive no other benefits. I am an employee of the church. I am also a director of a choir and I …

Interim Pastor's Salary 
We have an interim pastor who is now employed by one of the members of the congregation, as their corporate Chaplain. Is this ok? It seems like a conflict …

Independent contractor vs employee 
Some members of our church want to begin their own church but use our facilities until they can afford to move to their own facilities. We are currently …

DBA Ministry 
I am a new pastor with a 15 member ministry. I receive no salary and have no employees. We rent a community room in the State of MA. Do I have to file …

Part time youth minister, W2 or 1099 
I am a part youth minister at a small congregation bringing home $833 per month. Obviously taxes are NOT removed from this amount, I receive no other benefits …

Intern to Minister 
Our church is considering hiring a Seminary Student this summer as an intern to preach for us and attend to other church duties this summer. Once he graduates, …

I am seminary student serving as youth pastor in small church. 
I am seminary student serving as youth pastor in small church. I have been approved by the church steering committee and the whole church body as youth …

Housing allowance only?  
Can a minister elect to collect an $80,000 housing allowance and no salary and not pay any taxes whatsoever? If this handled directly with the treasurer …

Home Equity in housing allowance 
Is a home equity payment eligible to be included in the housing allowance?

Click here to write your own.

Can a Minister Obtain Health Insurance as Self-Employed 
If a minister is considered to have dual status of "employee" for federal income tax purposes and "self-employed" for Social Security and Medicare purposes, …

Ordained associate pastor 
As treasurer and payroll administrator, do I withhold FICA, Federal and State taxes for an ordained associate pastor?

I voluntarily have my Social Security taken out. 
I'm am a pastor. The church and I have agreed to have my Social Security taxes taken out voluntarily. I filled out the w-4 to have this done. On my w-2 …

how do you calculate what a pastor salary/his housing allowance 
Please tell me if this is correct we calculate a pastor's monthly housing multiply it by 12 and that is what his total housing is yearly. If a pastor makes …

Housing allowance 
Our pastor has been with us two years, received a 1099 for the previous tax year. This year he does not want a 1099 so that he can get a housing allowance. …

Pastor signed over payment for services as a musician 
Our pastor also served as a minister of music and was issued payment for this through the church and not Paycheck (where is pastoral salary is paid). He …

Pastor (SECA or FICA) 
Our Pastor is the pastor and founder of our church with complete control along with the Board of Directors. We have been being treating our pastor as …

Independent Minister to Employed Minister 
We had a youth minister try out last summer. He came twice to preach. The church paid a total of $500.00 for his service. A few months later, he decided …

Unpaid pastor 
I am an unpaid pastor of a church in RI, but I do live in the church parsonage, rent free and bill free. Must I claim this on my taxes, and also am I allowed …

Pastor FICA vs SECA 
My Pastor has a full time job and pastor's part time. He does not have regular office hours at the church. He has been treat as an employee, issued a W-2 …

End of year 
I have taken on the position as church secretary so I want to make sure I am doing things right. We have a cleaning lady that we pay once a month, will …

Quarterly Reports 
The pastor at this small Presbyterian Church is a Commissioned Lay Pastor hired by the church Session. As the treasurer for this church, I prepare a W-2 …

clergy preforming weddings only 
I have recently received my license to preform marriages although I am solely on my own with no church or members, how do I file my taxes? Thank you. Robin …

Associate Pastors and Housing Allowance 
We have an associate pastor who reports to the Pastor as his boss. Can the associate receive a housing allowance? Currently we give a housing allowance …

1099-Misc and W-2 
Can a pastor that is issued a W-2 for his/her church duties also be issued a 1099-Misc for special events like marriages if performing the special event …

Issued a 1099-MISC instead of W-2--what now? 
I've been issued a 1099-MISC for my work as pastor of a church, but I'm reading here that I should have received a W-2. So how do I file my taxes, and …

SE Tax & Housing Allowance 
I am the Associate Pastor at our church. Although I meet the five criteria of a "minister", our church has treated me as an employee rather than self-employed. …

Pastor's compensation is not even enough for his rent. Should he get a 1099? 
We're a small church and could not even pay our pastor enough for his apartment rental. The church's compensation is his only source of income. Should …

Small Church Pastor Employee or Self Employed 
If a small church has no employees other than the pastor, is the pastor considered Self Employed or an employee? The person who does taxes for our pastor …

Tax Status for corporate officer of a religious orginization 
Under common law rules it states that the officer of a corporation is a employee. Is this true for a religious organization also? and if so, do you withhold …

1099-misc issued to a self employed minister 
If a minister has full control of a church and is considered self employed, does the church issue him a 1099-misc?

Can I choose between w-2 or 1099 
I am a youth pastor in Missouri and our church is switching from the "self employed 1099" stuff to w-2. I have debating whether or not to be ordained with …

Federal Taxes 
I'm the Director of Student Ministry at a United Methodist Church and I'm not currently an ordained minister. An older pastor I know mentioned that …

Employee or nonemployee 
The church pay him weekly, but he does not considered as an employee of the church because he does not want the church to match his payroll tax, and he …

How do report half the SS tax paid by the church? 
Where, on the 1040 form, should I report the half of the SS tax that the church paid on my behalf? Misc income? Know the answer? Face the same

Click here to write your own.

Clergy request to withhold both employer and employee FICA 
We are volunteer business managers for our church and as such have responsibility for preparation of W-2's and all other related aspects of the staff's …

Half of Fica paid by the church in behalf of self employed clergy.  
How do you file a tax return on behalf of self employed clergy for whom the church paid 50% of the total FICA taxes (thus 7.65% of income)?

1099 MISC vs W-2 
My husband is a youth pastor at a church and for the last 3 years has received a 1099-MISC. This past year we have a new financial secretary and she …

FICA Taxes 
I am the secretary for our small congregation. I did not know anything about taxes and learned as I went along. I have been confused about FICA(Med/Soc …

Church Withholding Social Security Tax 
Question reagrding a church withholding a FICA tax from a minister's paycheck: I have had a church ask me to print their W-2's from their information. …

Should a Pastor be Given a 1099 or a W-2? 
I was wondering if a pastor's income should be reported on a 1099 or a W-2? He is the only "employee" of the church. All others are volunteers. Thanks …

Pastor Compensation appointed by the Bishop 
Our Pastor is appointed by the CME Bishop for a period of time and he has most of the Church control. For tax purposes, since is appointed and not …

taxable income 
I pastor a small church. I receive no salary. they do however rent an apartment for me to live in. Is this rent considered taxable when paid directly to …

MINISTER SOCIAL SECURITY ISSUE 
A CHURCH HAS BEEN WITHHOLDING SOCIAL SECURITY TAX FROM THEIR PASTOR'S WAGES. THEY HAVE NOT BEEN TURNING IN THIS SOCIAL SECURITY ON THE 941s. THEY HAVE …

Not salaried minister but has housing allowance 
We have Associate Pastor (Ordained and License) which conducts Sunday worship service and do bible studies. He serves as Administrative assistant of Senior …

W-2 or 1099 ? 
Most tax professionals will tell you unless the pastor has full control over the church...they should be considered an employee of the church and be issued …

Are Reimbursable Health Payments and SS Payments SE Taxable 
We reimburse some of our pastor's health insurance expenses, make some pension payments and reimburse about half of his Self-Employment/Medicare payments. …

FICA Tax Paid by the Church. SECA Paid by the Pastor. Double up? 
Church ministers and staff were employees of a leasing company to lower Workers' Compensation insurance. The leasing company calculated and remitted …

Do I have to pay Social Security Quarterly? 
I'm a new bi-vocational minister. My question(s) is(are) simply: do I have to pay social security and medicare taxes quarterly or can I pay it once a year? …

Self Employment Tax  
I work for a church and I have the 15.3% withheld every check. I use turbo tax to file my taxes. Do I need to pay the self employment tax when filing my …

Medicare and Social Security withheld from wages. 
I just realized that the church withheld Medicare and Social Security taxes all year for my husband (a new minister). The w-2 reflects this as well as …

Self Employment Tax Matched 
We withhold and match the amount of our pastor's and assistant pastor's SE tax. This is remitted on a quarterly basis. If the total due has been overpaid, …

Monthly stipend for a pastor 
Does the church need to report to IRS the total stipend paid to the pastor. If the pastor is the incorporator and President of a church is he considered …

Children's Ministry Leader and Payroll Taxes? 
Question regarding Children's Ministry leader and payroll taxes: I am a bookkeeper for a small church and we are hiring a children's ministry director …

Clergy Social Security 
Can the church or should the church pay directly to the clergy half of the social security tax? Vickey's Reply Yes you can...if the church …

Social Security Taxes - When to Pay? 
When do you pay Social security taxes? Is it at the end of the year, or do you have to pay monthly/quarterly as a full-time minister/pastor? Vickey's …

Click here to write your own.

The comments above are for general information purposes only and do not constitute legal or other professional advice on any subject matter. See full disclaimer.

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