Ministers are individuals duly ordained, commissioned or licensed by a church. 'Church' is used generically and does not refer to any particular religion. Compensation paid to a minister or clergy member typically is reported to them on Form W-2 (if the minister is an employee of the church), or Form 1099-MISC (if the minister performed services such as weddings and baptisms). Most ministers are treated as dual-status taxpayers. They are employees for income tax purposes but not for Social Security and Medicare tax. Ministers are not subject to federal income tax withholding. A minister and employer may agree to voluntary withholding to cover any income and SE tax. All withheld tax is reported in box 2, Form W-2, as federal income tax withheld. If boxes 3-6 on the Form W-2 are empty, the minister is required to complete a Schedule SE using the minister's worksheet to determine the taxable amount of their ministers income. If the minister received a parsonage allowance, it will generally be reported in box 14. The amount listed there is considered the fair market value of the parsonage and will also need to be entered on the Schedule SE minister's worksheet.
If the minister received a Form 1099-MISC, or has self-employment income from weddings, baptisms, etc., the income should be reported on Schedule C, Form 1040. If the minister has incurred out of pocket expenses related to this income, they should be reported as expenses on the Schedule C.
Schedule SE will need to be completed to calculate SE tax on the minister's Form W-2 wages, parsonage and utilities allowance. The only exception to paying SE tax on these items when the minister or clergy member has filed either Form 4361 or Form 4029 which must be approved by the IRS.
To enter Minister's Income on Schedule C in the tax program - From the Main Menu of the Tax Return (Form 1040) select:
- Income Menu
- Business Income/Loss (Sch C, C-EZ, 1099MISC)
- Select 'New' or double-click the entry you wish to 'Edit'. Select 'Pull' if you prepared the return using the software in the previous year and wish to pull the data forward.
- Select Schedule C
- Select either Taxpayer, Spouse, or Qualified Joint Venture
- Enter a Principal Business Activity Code. This is a code used by the IRS to classify the type of business being operated. (81300 Religious Organization)
- Input the heading information in the Schedule C Data Entry Menu. Input the address, and the zip code. The city and state information will fill in automatically based on the zip code that is entered. It is not necessary to enter a business name or EIN. Select 'OK' and then Exit.
- Change the Prorate Expenses for Minister/Clergy? menu item to 'YES'
- Did the Church Provide You with a Parsonage? - Select YES / NO
- Complete each line of the Tax Free Income Worksheet that applies. This will generate the percentage of tax-free income for the minister. The amount determined will be carried to the SE tax line of the Form 1040
- Return to the Schedule C edit menu and enter the income from the Form 1099-MISC or any income from weddings, baptisms, etc. Also enter expenses incurred by the minister related to this income. The expenses will be prorated based on the percentage of tax-free income.
- Other Taxes Menu
- Self Employment Tax (Sch SE)
- Select either Taxpayer or Spouse
- On the Schedule SE Menu, change the question 'Is this Schedule SE being filed for a Minister or Clergy?,' to 'YES'.
- If the taxpayer was a member of Religious Order and filed Form 4361 or Form 4029, answer 'YES'. (The taxpayer should know if he filed Form 4361 or Form 4029.)
- If the taxpayer was a member of Religious Order and filed Form 4361 and has other Self Employment Income, answer this question 'YES'.
- Select Non Farm Regular (Including Ministers Income)
- Select 'Clergy Tax-Free Income Worksheet'
- Complete each line of the Tax Free Income Worksheet that applies. This will generate the percentage of tax-free income for the minister. The amount determined will be carried to the SE tax line of the Form 1040
Minister's Income Tax vs. SE Tax
| Income Tax | SE Tax | |
| Parsonage Provided To A Minister |
The value of the home, including utilities, is excluded from income. The exclusion cannot be more that reasonable pay for the minister's services. | The fair rental value of the home, including the cost of utilities, is included in gross income when calculating SE tax. |
| Housing Allowance Paid To A Minister |
A minister can exclude from income the smallest of: • The amount officially designated by the employer as housing allowance. Amounts must be designated as housing allowance before payment is made. • The amount actually used to provide a home. Include amounts paid in the tax year for rent, mortgage payments (principal, interest, insurance, property tax, etc.) furnishings, appliances, repairs, utilities, and down payments. Do not include food, entertainment, servants, or home equity loan payments for items unrelated to the home. (Mortgage interest and property tax used in this calculation can also be deducted on Schedule A.) • The fair rental value of the home, including furnishings, utilities, garage, etc. • The minister' reasonable pay. Employers typically report housing allowances in box 14, Form W-2. Housing allowances are not included in taxable wages in box 1. If the amount the minister can exclude from income is less than the housing allowance, include the excess as income on line 7, Form 1040. |
The entire housing allowance, including any allowance for utilities, is included in gross income when calculating SE tax. |
| Retired Ministers | Retired ministers can exclude from taxable income: • The value of housing and utilities provided to them. • The part of a pension officially designated as housing allowance. The amount excluded is limited to actual expenses or fair rental value of the home. |
Housing provided to retired ministers and housing allowances paid to retired ministers are not subject to SE tax. |
Expenses - Employee expenses are reported on Schedule A, Form 1040, subject to 2% AGI limitation. Self-employment expenses are deducted on Schedule C.
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 includes a parsonage allowance.
Parsonage Allowance
Parsonage allowances are generally not subject to income tax. Parsonage allowances are subject to SE tax.
Determining fair rental value is a question of all facts and circumstances based on the local market. The IRS has not set guidelines for calculating fair rental value.
Surviving Spouse
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.
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
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.
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