Are Pastors Self-Employed or Church Employees?

A reader named Barbara asks whether her church’s pastor should be considered self-employed or an employee of the church.

I am a treasurer for a Baptist Church in Florida. We are giving our Pastor a housing allowance as self-employed. We want to be sure we are doing the right thing. He has no other pay. No employee pay either.

If we change him to employee of the Church, can we pay the entire housing allowance that way or does he have to receive a salary other than housing allowance? If we can pay all of the housing allowance as if he is an employee, what forms and responsibilities do we have?

Barbara, thanks for reading Money Wise Pastor and for asking your question!

Are Pastors Self-Employed or Church Employees?

Are pastors self-employed or church employees?  The answer is “YES”!

The IRS considers pastors to have “dual status,” which means they are considered an employee for federal income tax purposes and self-employed for Social Security and Medicare purposes.

As an employee, the pastor would receive a W-2 from the church at the end of the year to show the income they’ve received. However, the church should not withhold FICA (payroll tax) from the pastor’s income like they would for traditional employees because pastors pay SECA (self-employment tax) instead.

This means the pastor would pay quarterly estimated SECA taxes, as a self-employed person would, to the IRS, or he/she could voluntarily pay the SECA through the church by asking the church to submit a specific amount to the IRS from each paycheck.

Personally, I’ve always paid my SECA through the church payroll since I became a pastor in 1998.

Clergy Housing Allowance vs. Pastor’s Salary

Whether you can just pay the pastor a housing allowance instead of a salary depends on two things:

1. How much money the church is paying the pastor
2. The amount of housing allowance the pastor has requested

For example, suppose your church pays the pastor $30,000 a year and the pastor’s housing allowance is $20,000. This means the pastor will have a taxable salary of $10,000.

The amount declared as the pastor’s housing allowance must be requested by the pastor and officially declared by the church board in its minutes.  The board can do that annually or it can do it once and state that it will remain in effect until such time as it is changed.

There are several important IRS guidelines for Pastors to follow to calculate their clergy housing allowance. Be sure to read Choosing Between a Church Parsonage and a Clergy Housing Allowance for details.

Helpful Clergy & Church Tax and Finance Guides

Because church finances are complicated and tax laws change every year, I recommend that every church treasurer and pastor buy two key tax and finance resources every year:

 

The Zondervan Minister’s Tax & Financial Guide and the Zondervan Church & Nonprofit Tax & Financial Guide are both trusted resources that pastors and churches have counted on for years.  Both are written by Dan Busby, the head of the Evangelical Council for Financial Accountability.

Please click on the images or links above to buy your copies today.

You might also like:

• Can a Pastor Claim a Housing Allowance When the Home Mortgage is Paid Off?
• IRS Tax Help for Pastors
• Pastor Tax Saving Strategies