An ordained minister occupies a unique niche in the United States tax code, as he or she is a dual-status taxpayer. A minister is an employee for income tax purposes and is self-employed for social security and Medicare. This dual status has frequently been the source of confusion for both ministers, churches, and tax preparers. A complicating factor is that a minister may opt-out of social security and Medicare but that is a topic for another time.
It is proper for the church to issue a W-2 to the minister. A 1099-MISC is an incorrect treatment in this instance, although many churches do issue 1099-s to their ministers. Some churches do not fully understand their own tax-exempt status and do not give the minister any tax documents at year end. Obviously, this is also improper.
The W-2 that is issued to the minister should include an amount in box 1 representing the taxable compensation paid to the minister. No entries should be made for social security or Medicare wages, as the minister does not have any from the church. The church is not required to withhold income tax from the minister, but may do so if the minister makes a request for withholding. This withholding may be of sufficient amount to cover the minister’s self-employment taxes and would be included in box 2 as Federal income tax withheld. If the minister receives a housing allowance, it should not be included in the box 1 amount, but the church may indicate in box 14 the amount received as housing allowance.
In preparing his or her 1040, the minister must report ministerial earnings from the W-2 on Schedule SE and pay the appropriate amount of self-employment taxes. Any outside ministerial income, such as fees for weddings and funerals, counseling, and serving as a guest speaker at another church should be included in self-employment earnings on Schedule C and Schedule SE in order to pay both income and self-employment taxes on these earnings. Any ministerial expenses incurred by the minister may be deducted in determining the amount of income and self-employment tax to pay. Housing allowance is subject to self-employment taxes.
Love gifts given by the church to the minister should be included by the church on the W-2 as regular earnings. This would include the value of any non-cash gifts such as a vehicle or a vacation given to the minister. However, any gifts given by a church member directly to the minister are not taxable income as the gift did not come through the church. Of course, the member does not get a charitable contribution deduction for this gift.
Some ministers may wish to avoid the hassle of self-employment status and simply be treated as other employees, having the church withhold (and match) social security and Medicare. This is not an option. The minister may not reject the self-employed status and be treated as an employee. The church cannot withhold social security and Medicare withheld as would be done for non-ordained employees.