Are Pastors Employees or Self-Employed Contractors?
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One of the most confusing elements of being a pastor is your employment status. Your employment status in a secular job is crystal clear: you are either self-employed or you are an employee of someone else. Unfortunately, for pastors, the issue of employment status is not so clear-cut.
IRS Tax Topic 417 (Earnings for Clergy) will illustrate the complexity of this issue:
A licensed, commissioned, or ordained minister is generally the common law employee of the church, denomination, sect, or organization that employs him or her to provide ministerial services. However, there are some exceptions, such as traveling evangelists who are independent contractors (self-employed) under the common law. If you're a minister performing ministerial services, all of your earnings, including wages, offerings, and fees you receive for performing marriages, baptisms, funerals, etc., are subject to income tax, whether you earn the amount as an employee or self-employed person. However, how you treat expenses related to those earnings differs if you earn the income as an employee or as a self-employed person.
For social security and Medicare tax purposes, regardless of your status under the common law, the services you perform in the exercise of your ministry are considered self-employment earnings and are generally subject to self-employment tax. See Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, for limited exceptions from self-employment tax.
If you can translate and understand ancient Hebrew texts with ease, but feel incapable of translating and understanding IRS regulations, here is what this means: most pastors will be treated BOTH as an employee and as a self-employed contractor at the same time and for the same job by the IRS. Or, to put it in a more commonly used term, pastors are considered “dual-status employees.”
Now, this isn’t always the case, and you will need to clarify your employment status as soon as possible in the early days of your ministry. Some pastors choose to act and be treated as a self-employed contractor across the board (though, I think this is rare).
Normally, you will be considered an employee of the church for federal income tax purposes and a self-employed contractor for Social Security and Medicare purposes. This distinction is important to understand because of the differences between FICA and SECA and because of how it affects your withholdings for your ministerial pay.
FICA vs. SECA
What is the difference between FICA and SECA? FICA is an acronym for the Federal Insurance Contributions Act, and it is the way employees pay Social Security and Medicare Taxes. SECA is an acronym for the Self-Employment Contributions Act, and it is the way self-employed workers pay Social Security and Medicare Taxes. Both do the same thing – they extract money from your paycheck to cover Social Security and Medicare taxes. However, even though they do the same thing, the differences they make on a pastor’s paycheck can be significant.
Under FICA, you and your employer split the cost of coverage 50/50. You pay 7.65% out of your gross income, and your employer pays a matching amount out of their own pocket for a grand total payment equal to 15.3% of your gross annual income.
But if you are self-employed, you don’t have an employer to pay that other half. Does the government just allow self-employed individuals to pay half? No. Under SECA, you pay the full cost of your Social Security and Medicare tax, yourself . . . 15.3%!
Under SECA, allowances are made to help balance the differences from FICA (to a point), but in the end, you will likely be paying a large portion of your income into SECA. While you may or may not pay federal income taxes on your ministerial salary (depending on how much salary you receive), neither your salary nor your housing allowance are free from SECA unless you file for an exemption.
Another area where your employment status matters is in the issue of paycheck withholdings. As an employee of a secular company, your payroll department deducts the proper amount of federal and state income taxes, as well as FICA payments, from each paycheck automatically. They then turn that money over to the IRS to be “credited to your account.”
People who are self-employed have to do that for themselves (or pay an accountant to do it for them) and must send their payments to the IRS on, at least, a quarterly basis.
Because pastors are considered to be both employees and self-employed contractors, the proper way to handle their withholdings is a bit unusual, and you should check with an accountant or tax professional to get guidance on how best to manage this in your specific circumstance.
Used with permission. From How to Not Be a Broke Pastor, Copyright 2017, BROKEPASTOR LLC
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