Is The Minister “Self Employed” or a “Minister Employee?”
The answer to this question is Yes and No. There is still a great deal of confusion regarding the “Dual Status,” of the ordained Minister. There is another area of concern, if a minister chooses to take the position of “Self-Employed,” that I will address later in this article. Following is a very brief review of this question. NOTE: See “A CONCERN,” at the end of this article.
Formerly, all pastors and ministers were considered “Self-Employed.” In the mid 1980′s, the IRS redefined their position, asserting that all ministers and pastors are ‘employees’ of the church. Unless the pastor is fully in control [ideally having a contractual agreement with the church], most tax professionals are in agreement that the minister is to be reported with a Form W-2, as “a Minister Employee.”
A Minister whose Ministerial Credentials authorize him or her to perform the sacraments, that is to marry and to bury, is a “Self Employed” minister, so far as Social Security issues are concerned. And as such, he is required to file a Form 1040ES quarterly, and pay estimates on his potential Federal [and include extra for SECA] tax obligations. The church is not obligated to withhold taxes from his compensation, as is the case for other “non-ministerial” positions, i.e.: the church secretary of janitor.
Having said that, the church can agree to accommodate and help the minister by withholding funds sufficient to meet his required tax obligation. How to calculate and report? Unless he has exempted by timely filing a Form 4361, the pastor is subject to SECA [at 15.3%, not FICA at 7.65%]. The minister could carefully estimate his annual Federal and SECA tax obligation, fill out and present a Form W-4, authorizing the church to withhold a specific amount from his compensation. Because there is no provision for reporting SECA on the Form 941, the church would simply report any funds paid as “Federal Tax.” This will suffice as having made estimate tax payments.
The other side of the “Dual Status” however, is in regards to how the church is required to report to the IRS any monies paid the minister. We recommend the church report his compensation as a minister employee on a Form W-2. The church is not obligated to report funds [properly identified in advance, and noted in the church records] paid him as “Housing Allowance.” It is the ministers responsibility to inform his tax preparer, about his Housing Allowance, if any SECA taxes are due.
There are no economic advantages to the minister in taking the position of being self-employed. Rather, if the church is willing to pay all ministry related expenses directly, he even escapes having to pay SECA on those expenses. Second best, is to structure the compensation package so that the minister is able to receive reimbursements for his ministry related expenses. Reimbursement of his expenses will still leave him owing SECA [15.3%] tax on those funds. Of course, a minister may well be both an employee and self-employed, as any fees and honoraria received for other aspects of ministry are self-employment income. If he does receive other income as a self-employed minister he would report this income, together with related-incurred expenses against that income, on a Schedule C.
A CONCERN. If the Minister is insisting on being classified as a ”Self Employed” minister, and having an IRS 1099 issued as opposed to a W-2, he is NOT entitled to participate in a church paid Health Insurance program. If he is participating in the churches Health Insurance program, he has more than likely signed an application for this coverage as “An Employee,” of the church. Should he ever make a claim on his insurance, the Insurance Company might discover that he has been reported on the Form 1099 and, for tax purposes, has taken the position as a “Self Employed” minister. They will probably disallow his claim, returning any premiums paid in his behalf. This is not a “Stretch,” as it has happened – and we have seen it. Furthermore, insurance is NOT an allowed benefit. The IRS requires the church to report any premiums paid for the 1099 minister, as additional compensation.
If this discourse is of interest to you, please see Chapter 10 in The Church Administration ‘How To’ Manualfor more detailed information about how to set up the Ministers Compensation Package. There are Worksheets and Forms at the end of the chapter to enable you to maximize the Housing Allowance benefits made available by law. A Disk is included with the purchase of the manual, with all the Worksheets, Forms and Policies. See Chapter 12, Pages 12 & 13 for a 20 point evaluation to determine whether one is “Self Employed,” or a “Minister Employee.”
The above information is provided as a service to the Body of Christ by ADMINISTRATIVE ASSISTANCE
If you would like more information about similar issues, please consider “The Church Administration ‘How To’ Manual.” This Manual, endorsed by three CPA’s, an EA and two attorneys, was updated again in January, 2011, for the 12th time, since its original publication in 1991.
Copyright © 2003 by Administrative Assistance
- Reporting The Minister – W-2 or 1099?
- Ministers Credentials and the IRS
- Social Security – Should The Minister Exempt?