Pastor, Church & Law

§ 1.03.01

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Key point 1-03.01. While most ministers are employees for federal income tax reporting purposes, they all are self employed for Social Security purposes with respect to services they perform in the exercise of ministry. This means that ministers are not subject to "FICA" taxes, even though they report their income taxes as employees and receive a W 2 from their church. Rather, they pay the "self employment tax."

Social Security taxes are collected under two separate tax systems. Under the Federal Insurance Contributions Act (FICA)[24] I.R.C. §§ 3101 et seq. , half the tax is paid by the employee and the other half is paid by the employer. Under the Self Employment Contributions Act (SECA)[25] Id. at §§ 1401 et seq. the total tax is paid by the self employed person. Which tax applies to ministers and religious workers?[26] For a full discussion of Social Security see R. HAMMAR, CHURCH AND CLERGY TAX GUIDE.

1. MINISTERS

The Self Employment Contributions Act provides that a "duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry" is self employed for purposes of Social Security[27] I.R.C. § 1402(c). See also Treas. Reg. § 1.1402(c)-5(a)(2), which provides that "a duly ordained, commissioned, or licensed minister of a church is engaged in carrying on a trade or business with respect to service performed by him in the exercise of his ministry … unless an exemption under section 1402(e) … is effective. …" Similarly, IRS Publication 517 specifies that "members of the clergy are treated as self-employed individuals in the performance of their ministerial services." See also IRS Publication 560. Treasury regulation 1.1402(c)-5(b)(2) provides that "service performed by a minister in the exercise of his ministry includes the ministration of sacerdotal functions and the conduct of religious worship, and the control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body constituting a church or church denomination." even if he or she is considered to be an employee for income tax or other purposes.

The Federal Insurance Contributions Act provides that the term employment does not include "service performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry."[28] I.R.C. § 3121(b)(8).

In summary, for Social Security, a duly ordained, commissioned, or licensed minister of a church is treated as a self employed person with respect to services performed in the exercise of ministry. This is true even if a minister is an employee for income tax purposes. Accordingly, a minister reports and pays his or her Social Security taxes as a self employed person (and not as an employee) with respect to services performed in the exercise of ministry.[29] I.R.C. § 3121(b)(8)(A). Many large number of churches withhold FICA taxes from ministers compensation, and pay the employer's share of FICA taxes with respect to ministers income. Such reporting is incorrect.

It is important to emphasize that it is only with respect to services performed in the exercise of ministry that ministers are always deemed self employed for Social Security. This significant term is explained fully in a companion text (as is the definition of "minister").[30] See R. HAMMAR, CHURCH AND CLERGY TAX GUIDE.

See Table 1-3 for a summary of every court case that has addressed the question of whether ministers are employees or self-employed for income tax reporting purposes.

2. NONMINISTER WORKERS

Nonminister workers employed by churches and other religious organizations generally are treated the same for Social Security as they are for income tax reporting purposes.

Example. D is employed as a full-time office secretary by a church. D is not a minister. D is an employee for federal income tax reporting purposes, and should be treated by the church as an employee for Social Security.

There is one major exception. Federal law allowed churches that had nonminister employees as of July of 1984 to exempt themselves from the employer's share of FICA taxes by filing a Form 8274 with the IRS by October 30, 1984. Many churches did so. The exemption was available only to those churches that were opposed for religious reasons to the payment of Social Security taxes. The effect of such an exemption is to treat all nonminister church employees as self employed for Social Security purposes. Such employees must pay the self employment tax (just like ministers). They are not exempt from Social Security taxes, as some church leaders have assumed. Churches hiring their first nonminister employee after 1984 have until the day before the due date for their first quarterly 941 form to file the exemption application. Churches can revoke their exemption by filing a Form 941 accompanied by full payment of FICA taxes for that quarter.

Example. A church filed a timely Form 8274, exempting itself from the employer's share of FICA taxes with respect to its 3 nonminister employees. The church does not withhold FICA taxes from the wages of its nonminister employees, but these employees must report their Social Security taxes though they are self-employed. This means that they pay the self-employment tax.[31] Id.