Tax Instructions for Pastors

Tax Instructions for Pastors
Making sense of a pastor's taxes

What is a Pastor's Tax Status?

A pastor's dual-status classification as both a church employee and self-employed can be confusing for both pastors and congregations. When reporting income tax, pastors are seen in the eyes of the Internal Revenue Service (IRS) as employees of the church. The pastor’s employer, the church, can decide whether or not to withhold tax from the pastor’s pay. For Social Security and Medicare, however, pastors are classified as self-employed. Under federal tax law, churches cannot withhold FICA and Medicare taxes, and no taxes are reported on the pastor’s W-2 form at the end of the tax year.

What Income Is Included?

For purposes of a federal income tax return, a pastor pays tax on only the amount of salary paid by the church, not including expenses such as housing and fringe benefits. Pastors should pay close attention to self-employment tax, however,. A pastor must pay self-employment tax not only on his salary but also on a housing allowance and fair-market value for rental of a church parsonage, including utility bills the church pays. Honorariums and gifts are also included under Schedule C.

How Does a Pastor Manage Tax Payments?

Between federal income taxes and self-employment tax, a pastor has a lot of tax payments to manage. To help matters, she can ask her church's payroll officer to withhold federal income tax from regular pay. Also, self-employment tax can be paid on a quarterly basis throughout the year based on estimated earned income. Because quarterly tax payments are estimates, the balance of the actual tax amount due must be paid when filing an annual tax return. State taxes also can be paid on a quarterly basis. The goal is to get to the yearly tax return having paid some taxes. The tax can be significant, depending on salary, housing arrangements and honorarium. By paying taxes each paycheck for federal taxes and quarterly for self-employment tax, a pastor can manage her budget and avoid surprises when April 15 rolls around.