Do Pastors Pay Taxes on Their Income?

Ministers pay taxes on their income, though their tax situation includes unique rules that differ from typical employees. This is because ministers are often considered employees for income tax purposes but are treated as self-employed for Social Security and Medicare taxes. Their tax obligations are further distinguished by benefits like the housing allowance exclusion and specific Social Security and Medicare tax exemptions.

Ministerial Income Subject to Tax

Ministerial income includes payments for services performed in a ministerial capacity. This includes regular salary or wages, as well as fees for specific services like weddings, funerals, and baptisms. Any offerings received by a minister are also considered taxable income, unless immediately turned over to the church or religious organization. Other compensation, like bonuses or special gifts, is also taxable.

For federal income tax, ministers are typically employees of their church or religious organization. Their income is subject to federal income tax, similar to other employees. While churches do not withhold federal income tax from a minister’s wages, ministers are responsible for ensuring these income tax liabilities are met, often through estimated tax payments or voluntary withholding agreements.

Self-Employment Tax for Ministers

Ministers have a unique “dual tax status” for Social Security and Medicare taxes. While employees for income tax, they are self-employed for Social Security and Medicare (SECA) taxes. They pay the full self-employment tax, covering both employee and employer portions.

Self-employment tax applies to a minister’s net earnings from ministerial services, including salary and any other taxable income, even if they receive a W-2 form. The self-employment tax rate is 15.3% (12.4% for Social Security, 2.9% for Medicare). Net earnings from self-employment are calculated using 92.35% of gross ministerial earnings. They can deduct one-half of their self-employment tax from their gross income.

The Housing Allowance Exclusion Explained

The housing allowance, also known as a parsonage or rental allowance, is a tax benefit for ministers. This allowance is an amount officially designated by a church or religious organization for housing expenses. For income tax, the housing allowance can be excluded from gross income. This exclusion does not apply to self-employment tax, meaning the housing allowance is still subject to Social Security and Medicare taxes.

To qualify, the amount must be formally designated in advance by the church or organization. The excluded amount cannot exceed the lesser of the designated allowance, actual housing expenses, or the home’s fair rental value (including furnishings and utilities). Qualifying housing expenses include:
Rent
Mortgage payments (principal and interest)
Real estate taxes
Property insurance
Utilities (electricity, gas, water, sewer, trash, local telephone, internet)
Repairs
Improvements

If a minister lives in a church-provided parsonage, its fair rental value can be excluded from income for income tax purposes, but it must still be included in net earnings for self-employment tax calculations.

Social Security and Medicare Tax Exemption Criteria

A limited exemption from self-employment tax is available to some ministers. This exemption is based on religious or conscientious opposition to public insurance programs, not economic reasons. To claim this exemption, a minister must file Form 4361 with the IRS.

The IRS verifies the minister understands and genuinely seeks the exemption based on religious principles opposing public insurance benefits. If approved, the minister does not pay Social Security or Medicare taxes on ministerial earnings but irrevocably waives the right to receive Social Security benefits based on those earnings. This election is made early in a minister’s career, by the tax return due date (including extensions) for the second tax year with at least $400 in net self-employment earnings. Once granted, the exemption is irrevocable.

Reporting Ministerial Income and Deductions

Ministers must report income and calculate tax liabilities using specific IRS forms. Regardless of a W-2, income from ministerial services (salary, fees for weddings or funerals) is reported on Schedule C (Form 1040). Schedule C accounts for income and related business expenses.

Self-employment tax for Social Security and Medicare is calculated on Schedule SE (Form 1040). On Schedule SE, a minister’s salary and housing allowance, less deductible expenses, are included in net earnings from self-employment. The housing allowance exclusion, while not taxable for income tax, is subtracted from gross income on Form 1040, noted with “Hsg”. Ministers are advised to make estimated tax payments throughout the year using Form 1040-ES to cover their income and self-employment tax obligations and avoid underpayment penalties. Common deductible expenses include professional or unreimbursed business expenses related to their ministry.