Jump directly to the content
The Two Most Confusing Aspects of Classifying Your Minister for Tax Purposes

The Two Most Confusing Aspects of Classifying Your Minister for Tax Purposes

When it comes to payroll, does your church get turned around on this critical matter?

Unlike any other employee, a minister creates special issues for the payroll functions of a church. These issues aren't intuitive in nature, so it's not uncommon for errors to occur in the payroll reporting of a minister's compensation package. One of the most confusing aspects of a minister's compensation package is how he or she will be classified when paying into the Social Security and Medicare system.

There are two methods of paying into the Social Security and Medicare system.

1. Federal Insurance Contributions Act (FICA)

Employees traditionally pay in through the Federal Insurance Contributions Act. The employee pays into FICA via taxes withheld from their paychecks by their employers. The employer then matches the employee's amount and pays it directly into the system on the employee's behalf.

2. Self Employed Contributions Act (SECA)

The other system is the Self Employed Contributions Act, which assesses the tax to the self-employed individual on a Schedule SE filed with an individual's Federal Form 1040.

Participation in each of these systems is defined in the Internal Revenue Code (IRC).

The Internal Revenue Code

IRC Section 3121 determines who is covered by FICA. IRC Section 3121(b)(8) states that employment for this tax doesn't include services performed by an ordained, commissioned, or licensed minister in the exercise of his ministry.

IRC Section 1402 governs who is covered by SECA. IRC Section 1402(c) states that a "trade or business" for purposes of SECA will include the performance of services by a duly ordained, commissioned, or licensed minister in the exercise of his ministry (if no exemption as provided by IRC Sec. 1402(e) is in effect). This explanation demonstrates that, by law, the compensation paid to a minister (for the performance of ministerial duties) is a trade or business subject to self-employment tax. It can't be considered as wages for FICA withholding and matching. This self-employment status is mandatory, and for people who employ ministers, it's a key concept to understand. If a minster is paid for ministerial duties, the church may never withhold FICA/Medicare taxes from the minister and pay the matching portion.

Article Preview

This article is currently available to ChurchLawAndTax.com subscribers only. To continue reading:

LoginorSubscribe

Related Resources

See All
from our store
20 Finance Questions Churches Ask eBook

20 Finance Questions Churches Ask eBook

Richard Hammar shares his answers to 20 of the most widely asked and relevant tax and finance questions for church leaders.
2014 Church & Clergy Tax Guide

2014 Church & Clergy Tax Guide

Get a comprehensive understanding of tax laws as they relate to pastors and churches.
Preventing Top Tax Pitfalls

Preventing Top Tax Pitfalls

Learn the background you need on tax laws to know what questions to ask.
Managing Stress for Church Leaders

Managing Stress for Church Leaders

Discover the causes of stress and ways to keep your church workers healthy.
browse
Follow us:Church Law & Tax on FacebookChurch Law & Tax on TwitterChurch Law & Tax RSS FeedsChurch Law & Tax on Youtube