Tax Withholding for Clergy
Ministers working for churches are treated differently than other employees when it comes to tax withholding.
- One major difference between clergy and regular employees is Social Security and Medicare taxes. Ministers are responsible for paying all Social Security Self-Employment tax on their salary and housing allowance, in addition to whatever State and Federal Income Taxes apply. This is why Social Security is often the minister’s greatest tax. (There are two ways you can help your ministers reduce this tax with an Accountable Plan and a properly set up Clergy specific 403(b).
- While Social Security and Medicare taxes do not NEED to be withheld from the ministers pay by the church; they can enter into a voluntary withholding arrangement but the church is not required to do so.
- Also, minister’s are exempt from State and Federal Income Tax withholding from their pay (IRC 3401 (a)(9)). Here again, the minister may enter into a voluntary withholding agreement with the church, which we recommend, whereby Federal Income Tax is withheld in an amount that could ultimately cover the Self-Employment tax obligation. The Federal Income Tax can be withheld in whatever amount the minister requests.
For voluntary withholding of Federal Income Tax:
- Tax withheld is reported to the IRS on Form 941 (line 3).
- The minister’s wages must be excluded from lines 5a and 5c of Form 941.
- The tax withheld is also reported on the minister’s W-2 Form (box 2).
- Boxes 3, 4, 5 and 6 of the minister’s W-2 Form should be blank.
You can find more detailed information about this topic including W-2’s and other special reporting issues with pay structuring in our video, “The Church Treasurers’ Tool Kit,”along with other vital clergy tax and retirement information. Click here to see a listing of our videos
Always seek a qualified clergy advisor for personal advice. We’d love to talk to you. Contact us.