Ministers are individuals duly ordained, commissioned or licensed by a church. The term "church" is generic 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-NEC (if the minister performed services such as weddings and baptisms). An individual could potentially receive both forms.
Most ministers are treated as dual-status taxpayers:
- They are employees for income tax purposes;
- They are self-employed for Social Security and Medicare tax purposes.
Ministers are not subject to federal income tax withholding, though the minister may instruct their employer to withhold tax to cover any income and SE taxes.
All withheld tax is reported in Form W-2 Box 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 minister's income.
If the minister received a parsonage allowance and utilities allowance, they will generally be reported in Form W-2 Box 14. The amount on the W-2 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-NEC, or received other self-employment income from weddings, baptisms, etc., the income should be reported on Schedule C. If the minister incurred out-of-pocket expenses related to this income, those expenses can also be reported on the Schedule C.
Schedule SE will need to be completed to calculate SE tax on the minister's W-2 wages and parsonage and utilities allowance. The only exception to paying SE tax is when the minister or clergy member has filed for an exemption using Form 4361 or Form 4029, either of which must be approved by the IRS.
To enter minister's income on Schedule C in TaxSlayer ProWeb, from the Federal Section of the tax return (Form 1040) select:
- Profit or Loss from Business
- + Add a Schedule C Income from Business
- For a MFJ return, indicate who the Schedule C is for.
- If the ministerial work is done under a separate name, has an employer ID number, or has a separate address, enter the information as appropriate.
- Enter the Principal Business Code. This is a code used by the IRS to classify the type of business being operated. For ministers, this is generally 813000 (Religious).
- Select Continue to move to the Questions menu. In the Schedule C Questions Menu, indicate the accounting method, inventory valuation method (if needed), and check any checkboxes as appropriate. In particular, be sure to check "Check here to Prorate Expenses for Minister/Clergy." Click Continue to move to the Clergy Tax-Free Income Worksheet.
- Complete the Clergy Tax-Free Income Worksheet.
- Enter the W-2 Box 1 minister income in the appropriate field.
- Enter the ministerial income being reported on Schedule C.
- If the church provided the minister with a parsonage, be sure to check the box indicating that.
- Enter the amounts for the fair rental value of the minister's home, the utilities, and any allowances received. This information is necessary to calculate the percentage of tax-free income, and the calculated amount will carry to the SE tax line of the Form 1040.
- Return to the Schedule C edit menu and enter the non-W-2 income from other services the minster performed. Also enter expenses incurred by the minister related to income received that is not included in W-2 income. The expenses will be prorated based on the percentage of tax-free income. This information will flow to the Schedule SE.
Schedule SE is created automatically upon creating Schedule C, but it might need to be edited in a few situations:
- To indicate that the taxpayer has an approved Form 4029 or 4361 exemption.
- To indicate that the taxpayer also has notary income that is exempt from self-employment tax.
- For tax year 2020, to indicate that the taxpayer is deferring half the SE tax payment.
To edit Schedule SE directly if necessary, from the Federal Section of the Tax Return (Form 1040) select:
- Other Taxes
- Self-Employment Tax
- For a MFJ return, select the Schedule SE for either the taxpayer or spouse as appropriate.
- If the taxpayer has an approved Form 4029 or 4361 exemption, indicate that under the section Religious and Exempt Income. (The taxpayer will know if they have this exemption and will have a copy of the approved form in their files.)
Minister's Income Tax vs. SE Tax
|Income Tax||SE Tax|
|Parsonage Provided To
|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.|
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 Minister||A retired minister 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 a retired minister and housing allowance paid to a retired minister is not subject to SE tax.|
Independent contractor vs. employee
The determination for ministers is made under the same common law rules that apply to other taxpayers. The IRS takes the position that few ministers are independent contractors - ministers employed by a congregation for a salary are generally employees; traveling evangelists, for example, may be independent contractors. Even though a minister receives Form 1099-MISC, he or she may be an employee who should 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 non-ministerial wages. Earned income includes a parsonage allowance.
Parsonage allowances are generally not subject to income tax but are subject to SE tax.
Fair Rental Value
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.
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 their 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.
Note: This is a guide on entering clergy information into TaxSlayer ProWeb. It is not intended to be used as tax advice.