Ministers are individuals duly ordained, commissioned, or licensed by a religious body or church. The term "church" is generic and doesn't refer to any particular religion. A minister has the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the tenets and practices of the church.
The IRS treats ministers as dual-status taxpayers:
- They are employees for income tax purposes.
- They are considered self-employed for Social Security and Medicare tax purposes.
If the minister is an employee of the church, their compensation is reported to them on Form W-2. Ministers are not subject to federal income tax withholding, although the minister and employer may agree to voluntary withholding to cover any income and self-employment tax.
If Form W-2 Boxes 3-6 are empty, you will need to complete Schedule SE using the tax-free income worksheet to determine the taxable amount of their minister income.
If the minister received a parsonage allowance, it will generally be reported in Form W-2 Box 14. The amount listed there is considered the fair rental value of the parsonage and will also need to be entered on the tax-free income worksheet.
A minister may also receive Form 1099-NEC or MISC for additional services performed, such as at weddings and funerals or as a guest speaker, and this income and its related expenses should be reported on Schedule C (Form 1040).
Schedule SE will need to be completed to calculate self-employment tax on the minister's W-2 wages and parsonage and utilities allowance, unless the taxpayer has an approved exemption on either Form 4361 or Form 4029.
Step 1: Create the Schedule C for the business
If you are unfamiliar with creating and editing Schedule C in TaxSlayer Pro, see here for instructions. For a minister/clergy Schedule C, make the principal business activity code 813000 (Religious organizations).
Step 2: Update Schedule SE
From the Main Menu of the tax return (Form 1040) select:
- Other Taxes
- Self Employment Tax (Sch SE) - For a MFJ return, indicate if the schedule is for the taxpayer or the spouse.
- Is this Schedule SE being filed for a Minister or Clergy? - Answer YES.
- Member of Religious Order & Filed Form 4361 or 4029 - If the taxpayer has an approved Form 4361 or 4029, answer YES and indicate which form. (The taxpayer will know if they have either of these forms approved.)
- Minister, Member of Religious Order & Filed Form 4361 But has Other Self Employment Income > $400 - If appropriate, select to change to YES. (The taxpayer will know if they have an approved Form 4361.)
- Non Farm Regular (Including Ministers Income)
- Clergy Tax-Free Income Worksheet
- Did the Church Provide You with a Parsonage? - Answer Yes or No as appropriate. The answer to this question is important as it affects how the remainder of the worksheet is completed.
- Complete each line of the Tax Free Income Worksheet as needed.
For a comparison of how different sources of a minster's income are treated for income tax purposes versus self-employment tax purposes, see the knowledgebase article here.
Independent contractor vs. employee
Whether or not a minister is an employee of a church is determined under the same common law rules that apply to other taxpayers. The IRS takes the position that few ministers are independent contractors - a minister employed by a congregation for a salary is generally an employee. A traveling evangelist, on the other hand, may be an independent contractor. Even though a minister receives Form 1099-NEC or MISC, he or she may be an employee who should also receive Form W-2.
Earned Income Credit (EIC)
A minister's earned income is net self-employment income from Schedule SE minus one-half of self-employment tax plus any nonministerial wages. Earned income also includes the parsonage allowance.
Parsonage allowances are generally not subject to income tax. Parsonage allowances are subject to SE tax.
Fair Rental Value
Determining fair rental value is a question of all the facts and circumstances based on the local market. The IRS has not set guidelines for calculating fair rental value.
A minister's surviving spouse cannot exclude a parsonage allowance from income unless it is received for ministerial services he or she performs or performed.
Exemptions From Self-Employment Tax and Social Security Tax
Ministers, members of religious orders who have not taken a vow of poverty, Christian Science practitioners, and members of recognized religious sects can request exemption from SE tax. The taxpayer must be conscientiously opposed to public insurance because of religious considerations or principles. See Publication 517 for more information.
Vow of Poverty
Members of religious orders who have taken a vow of poverty are exempt from paying SE tax on earnings for qualified services. In this case earnings are considered the income of the religious order.
Church Employees Other Than Ministers
Churches and qualified church-controlled organizations that are opposed for religious reasons to payment of Social Security and Medicare taxes can elect to exclude their employees from FICA coverage. Their employees are required to pay SE tax if wages exceed $108.28. Report wages on Schedule SE, Form 1040.
Note: This is a guide for entering minister and clergy information into the TaxSlayer Pro program. It is not intended as tax advice.
IRS: Publication 15-A - Employer's Supplemental Tax Guide
IRS: Tax Topic 417 - Earnings for Clergy
IRS: Publication 517 - Social Security & Other Information for Members of the Clergy & Religious Workers
IRS: Pub 529 - Miscellaneous Deductions