Key point. Ministers always are self-employed for Social Security with respect to services performed in the exercise of ministry (with the exception of some government-employed chaplains). As a result, ministers pay the self-employment tax rather than the employee’s share of Social Security and Medicare taxes—even if they report their federal income taxes as employees.
A federal district court in New York ruled that a church did not act improperly in failing to withhold Social Security taxes from its pastor’s compensation.
A pastor was employed by a denominational agency (the “church”) for 20 years. During his employment, the church classified him as an employee and issued him annual W-2 forms, but it did not withhold FICA taxes (Social Security and Medicare) from his compensation.
In 2017, the pastor retired and the Social Security Administration informed him that he was not eligible for retirement benefits or Medicare because his employer had failed to withhold FICA taxes from his compensation.
Pastor sues his church for failing to withhold FICA taxes
The pastor sued the church claiming that it had negligently failed to withhold FICA taxes from his compensation. A federal court in New York dismissed the pastor’s claims. It concluded:
Because FICA exempts [the church] from withholding contributions on behalf of a person employed as a pastor, dismissal . . . is warranted here. FICA mandates that all employers are subject to “an excise tax, with respect to having individuals in his employ . . . paid by the employer with respect to employment.” The statute, however, excludes from its definition of employment “service performed by a . . . minister of a church in the exercise of his ministry.” For FICA purposes, “minister” encompasses “individuals who are duly ordained, commissioned, or licensed by a religious body” and who “have the authority to conduct religious worship.”
Employees not covered by FICA are required, under the Self-Employment Contributions Act (“SECA”) to pay taxes for Social Security and Medicare. SECA explicitly applies to “an individual who is a duly ordained, commissioned, or licensed minister of a church.” Ministers may be exempt from mandatory SECA contributions only if they have been granted an exemption [by the IRS]. [The church’s] purported mischaracterization of the pastor as an independent contractor does not alter the outcome because [the church] had no obligation to withhold FICA taxes on his behalf. . . . The court concludes, therefore, that the pastor has failed to state a claim upon which relief can be granted [and the church’s] motion to dismiss the complaint is granted.
What this means for churches
The pastor in this case was understandably shocked to find out after he retired that he was not eligible for retirement benefits or Medicare under Social Security, because his church had not withheld Social Security or Medicare taxes from his compensation for the 20 years of his employment.
Two special rules apply to ministers under the payroll reporting rules. Unfamiliarity with these two rules has created untold confusion.
The first special rule is that ministers always are self-employed for Social Security with respect to services performed in the exercise of ministry (with the exception of some government-employed chaplains).
As a result, ministers pay the self-employment tax rather than the employee’s share of Social Security and Medicare taxes—even if they report their federal income taxes as employees. It is incorrect for churches to treat ministers as employees for Social Security and to withhold the employee’s share of Social Security and Medicare taxes from their wages. It was this rule that the pastor did not understand.
The second special rule is that ministers’ compensation is exempt from federal income tax withholding whether ministers report their income taxes as employees or as self-employed. They can elect voluntary withholding, but this is not required. However, this rule does not exempt ministers from filing federal income tax returns and paying income tax. Kuma v. Greater N.Y. Conference of Seventh-Day Adventist Church, 2020 U.S. Dist. LEXIS 156665 (S.D.N.Y. 2020).