The Minister’s Dual Tax Status

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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.

Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.

Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.

He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.

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One comment

  1. Barbara Riggs says:

    Thank you for this valuable information.

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