Special Clergy Tax Topics

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Wednesday, November 2, 2022

Clergy Housing Allowance

Housing allowance is a benefit to clergy that lowers the amount of income subject to federal income tax. You can find a detailed explanation of this benefit in our resource Clergy Housing Allowance. The housing allowance is not exempt from Social Security and Medicare taxation. When you calculate your self-employment taxes on IRS Form 1040, you will have to add your housing allowance to the wages reported on your W-2 to figure your total taxable income for Social Security and Medicare purposes. GCFA’s General Counsel, Bryan Mills, held a webinar explaining the ins and outs of the Clergy Housing Allowance, and will be holding a follow up Question and Answer webinar on Nov. 14 at 2 p.m. CST/12 p.m. PST.

Dual Status Taxation

United Methodist clergy have what is commonly referred to as “dual status taxation.” This is because they are considered self-employed for Social Security tax purposes with respect to their ministerial services, but for federal income tax purposes they are treated as common law employees. Self-employment tax (SE tax) is the Social Security and Medicare tax paid by clergy and self-employed individuals. It is similar to FICA which is the Social Security and Medicare taxes withheld from an employee’s paycheck. Self-employed individuals do not have Social Security and Medicare taxes automatically deducted and withheld from paychecks. Instead, clergy can either make the estimated tax payments for SE tax during the year or can work to their church to have those taxes voluntarily withheld. It is the responsibility of the pastor to pay the SE tax on his/her salary and housing allowance.   

Exemption from Income Tax Withholding

Clergy are exempt from income tax withholding. This does not mean that pastors are exempt from having to pay income tax, but rather, the church does not have to withhold the income tax from his/her paycheck. This is true even though United Methodist clergy are considered employees for federal income tax purposes. However, according to IRS Publication 517, if both parties agree, a pastor and a church can enter into a voluntary withholding agreement to help facilitate the necessary tax payments for clergy.

Paying Self-Employment Tax

If a clergy person and a church do not agree to voluntarily withhold taxes then clergy must make estimated tax payments on a quarterly basis – e.g., when they receive income in the first quarter of the year, the taxes are due at the end of that quarter. The year is divided into four payment periods, or due dates, for estimated tax purposes. Estimated payments can be made using IRS Form 1040-ES.

 

 

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