Understanding the Dual Tax Status of Clergy

If you’re an ordained minister, you probably know that your tax situation differs from most workers. The IRS treats clergy as having a dual tax status — ministers are considered employees for income tax purposes but self-employed for Social Security and Medicare taxes. Add the ministerial housing allowance exemption and you have a triple-decker sandwich of potential tax complexity. Let’s break it down layer-by-layer.

Employee for Income Tax Purposes

The IRS considers most members of the clergy employees of their church or religious organization. This means that when you receive a salary, your employer will typically provide you with a W-2 form at tax time. However, churches are not required to withhold federal income tax from your paycheck like they would for most other employees. That means it's on you to make estimated tax payments throughout the year — or opt to have voluntary withholding — to avoid a big tax bill in April.

Self-Employed for Social Security and Medicare

Here’s where things get tricky. When it comes to Social Security and Medicare taxes (also known as FICA taxes), ministers are considered self-employed. This means that instead of having Social Security and Medicare taxes withheld from your paycheck like regular employees, you are responsible for paying self-employment tax (SECA tax), which covers these contributions.

The self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare). This is higher than what regular employees pay since they only pay half — the employer covers the other half — but ministers can deduct half of their self-employment tax as an adjustment to income when filing their tax return. Some churches offer a SECA allowance of 7.65% of the minister’s compensation as a benefit to their ordained staff members to pay the employers’ half of this tax.

Housing Allowance Exemption

One special tax benefit available to clergy is the housing allowance exemption. If your church designates part of your salary as a housing allowance (or provides you with a parsonage), that amount is excluded from federal income tax. The portion of your compensation allocated as housing allowance is still subject to the 15.3% self-employment tax, but the housing allowance exemption can provide significant tax savings.

In conclusion, understanding the dual tax status of clergy is crucial to avoid surprises at tax time. Because ordained ministers must handle their own tax payments for Social Security and Medicare, many choose to make estimated quarterly payments or request voluntary withholding from their paycheck. It is always a good idea to consult a tax professional who specializes in clergy taxes to ensure you’re taking advantage of available deductions and exemptions. In addition, the IRS provides clergy-specific resources and publications that can be helpful in understanding the dual tax status and related tax issues. You can also find valuable information on websites and publications that cater to clergy financial matters.

Talk to your Auxilio Partner Strategist about setting up voluntary withholding if you do not want to make quarterly tax payments. If you’re not yet an Auxilio client partner, contact us to learn how we can serve your church or faith-based nonprofit by reducing your administrative burden to free you up for ministry.