Understanding Tax Differences Between Secular and Clergy Employees

Understanding Tax Differences Between Secular and Clergy Employees

Churches are required to classify each person that is hired as either a secular or clergy employee. This is a very crucial step in the hiring process. Clergy Staff are taxed differently than secular employees and this treatment is mandated by law. It isn’t optional, so it is important to know who qualifies as secular or clergy status. Student and intern clergy should be classified as a secular employee.

Secular employees, student and intern clergy are subject to standard federal and state tax withholdings. The FICA tax is 7.65% withheld from the employee’s wage and 7.65% paid by the employer. Clergy are exempt from standard federal withholding but required to pay Self Employed Contributions Act (SECA) tax (15.3%) on their individual tax return. To offset the additional 7.65% from SECA, many churches provide their clergy a social security allowance of 7.65% of total compensation. This social security allowance is always taxable income.

Most secular employees have taxes withheld from their paychecks on a bi-weekly basis. However, if you are classified as clergy and received ministry income or other sources of income such as interest, dividends, or secular business income, then estimated tax payments may very well be required. The IRS requires that you pay estimated taxes if you will owe $1,000 or more by year end.

Only ordained, licensed or commissioned clergy are eligible for housing allowance on their ministerial earnings. Church custodians, student and intern clergy, secretaries and “ministerial staff” are not eligible for the housing allowance. An organization may call someone a “minister,” but the IRS may not treat that person as a minister for tax purposes.

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