Are Pastors Taxed? How Minister and Clergy Taxes Work

Pastors in the United States have a unique tax situation. While ministers are subject to income tax, their “dual tax status” impacts how ministerial income is treated for both income tax and self-employment tax purposes.

Ministerial Income and Housing Exclusion

Ministerial income encompasses various forms of compensation received for services performed in the exercise of ministry. This includes regular salary, wages, fees, and offerings.

Ministerial compensation often includes a housing allowance, also called a parsonage or rental allowance. Ministers can exclude designated housing income from gross income for federal income tax.

The church or religious organization must officially designate the amount as a housing allowance in advance of payment. The excluded amount cannot exceed the lowest of three figures: the designated allowance, actual housing expenses, or the fair rental value of the home including furnishings and utilities.

Common eligible housing expenses include rent, mortgage payments (principal and interest), property taxes, utilities, homeowner’s insurance, and costs for repairs, maintenance, and furnishings. Ministers living in a church-provided parsonage can also exclude the fair rental value of the home from their gross income for income tax purposes. While the housing allowance is excludable for income tax, it remains subject to self-employment tax.

Self-Employment Tax for Ministers

Ministers have a “dual tax status”: they are common-law employees for federal income tax but self-employed for Social Security and Medicare taxes. This classification requires ministers to pay self-employment tax (SE tax) on their ministerial earnings. The SE tax rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare. This rate is applied to 92.35% of the minister’s net earnings from self-employment. Ministers can deduct one-half of their SE tax from their gross income when calculating their adjusted gross income.

Some ministers may qualify for an exemption from Social Security and Medicare taxes by filing Form 4361. To obtain this exemption, ministers must be conscientiously opposed to public insurance on religious grounds. The application must be filed by the due date of the tax return for the second tax year in which the minister had net earnings from self-employment of $400 or more, with ministerial services contributing to those earnings.

Opting out of these taxes means the minister will not receive Social Security or Medicare benefits based on those ministerial earnings in retirement. The exemption, once approved, is irrevocable.

Fulfilling Tax Obligations

Churches typically do not withhold federal income tax from ministers’ paychecks. Ministers must pay income and self-employment taxes through estimated tax payments throughout the year.

Payments are made using Form 1040-ES, Estimated Tax for Individuals, and are due quarterly. The standard quarterly due dates are April 15, June 15, September 15, and January 15 of the following year. If a due date falls on a weekend or holiday, the deadline shifts to the next business day.

To avoid underpayment penalties, taxpayers must pay at least 90% of their current year’s tax liability or 100% of their prior year’s tax, whichever is smaller. For those with an adjusted gross income over $150,000 in the prior year, the safe harbor rule requires paying at least 110% of the prior year’s tax.

Ministers can also adjust their withholding on Form W-4 if they have other employment or wish to have their church voluntarily withhold federal income tax to cover their tax obligations, including self-employment tax. Ministers can deduct ordinary and necessary business expenses related to their ministry, such as unreimbursed ministry-related expenses, professional development, books, and mileage for ministry travel. These expenses are reported on Schedule C (Form 1040).