09 Mar What Does Clergy Dual Tax Status Mean?
Under federal law, most ministers have dual tax status. Dual tax status means a minister is an employee of the church for federal income tax purposes, and self-employed for Social Security and Medicare taxes. For ministers, wages are reported in two different ways:
Federal Income Tax = Employee status
Ministers who meet the Internal Revenue Service (IRS) definition of a minister are considered an employee of the church for federal income tax purposes.
- Ministers are required to pay federal income taxes, although they are exempt from automatic federal income tax withholding from their paycheck.
- To cover any tax liability, the ministry can set up voluntary income tax withholding at the minister’s request.
- All voluntary withholdings should be reported by the ministry in Box 2 of Form W-2 and forwarded to the U.S. Treasury.
It is possible, but much less common, for ministers to be designated as self-employed for federal income tax purposes. Before doing this, seek the advice of a clergy tax professional. These returns are more likely to be audited by the IRS because, often, they’re not in compliance.
Social Security and Medicare Tax = Self-Employed Status
For Social Security and Medicare tax reporting purposes, the majority of ministers should be classified as self-employed with respect to income for pastoral duties. This means they are generally subject to Self-Employment Contributions Act (SECA) tax. When this is the case:
- The church should not withhold Social Security and Medicare FICA taxes from the minister’s wages.
- The church should not make a FICA payment for the minister.
- The minister is responsible for paying into the Social Security/Medicare system through self-employment (SECA) tax payments. Amounts are reported quarterly on Form 1040-ES.
- The minister is voluntarily allowed to withhold sufficient federal income taxes to cover any self-employment tax liability.
Original content by clergyfinancial.com. This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.