How Pastors Pay Federal Taxes

by Monday, February 24, 2020
Picture of a person holding a pencil and receipt with a calculator and blog post title: How Pastors Pay Federal Taxes

I recently received an email from a pastor’s wife of 15 years asking for clarification on how their taxes were paid. She was too embarrassed to ask their tax preparer after all this time, so I was a safe place to turn. (If you have any questions, no matter how dumb you may think they are, I’d be happy to help!)

She felt dumb asking, but it was unwarranted. Taxes for pastors are unusual and it’s very rare for someone to actually explain them to you when you enter the ministry. It took me a while to figure out how they all work, so I don’t fault anyone else for not knowing. 

Today we are going to go over the three different options that pastors have for paying their taxes.

Five Facts About Ministerial Taxation

Before we get too far in, though, we need to lay the foundation for what we are going to be talking about. There are some basic facts that you need to understand about taxes for pastors before we get into how to pay them.

Pastors Are Dual Status Taxpayers

First, all “ministers” by the IRS definition are dual status taxpayers. That means that you pay income taxes as an employee but pay payroll taxes (Social Security and Medicare taxes) as if you were self-employed. Self-employed people pay these taxes under the SECA system. ALL ministers pay under the SECA system, it is not optional.

Churches Cannot Withhold SECA Taxes For Pastors

Second, churches are not allowed to withhold SECA taxes for pastors. Neither the pastor or the church has any say in the matter, that’s just the way it is. If a church withholds SECA taxes, it can mess up the pastor’s records with the Social Security Administration.

Churches Can Withhold Income Taxes For Pastors

Third, unlike SECA taxes, churches have the option to withhold income taxes for pastors. It is not required. Every other employer is required by law to withhold income taxes for their employees, but pastors are exempt from that. So, churches don’t have to withhold income taxes for their pastors but they can.

We Have A Pay-As-You-Go Tax System

Fourth, the US tax system is a pay-as-you-go system. That’s why we have employer withholdings. The IRS doesn’t want to wait until the end of the year to get your tax money. They want a little bit from every paycheck. 

For self-employed people who don’t receive paychecks (and pastors who are treated as self-employed), that means they have to pay quarterly estimated payments four times a year. You do your own calculations for the amount that you pay quarterly, but if you don’t pay enough and have a big tax bill at the end of the year you can be penalized by the IRS.

SECA And Income Taxes Are Combined On Your Tax Return

Finally, when you file your tax return all of your taxes are lumped into one final bill. You calculate your income taxes and SECA taxes separately but then add them together. If you end up owing, you don’t write one check for SECA taxes and one for income taxes. If you get a refund, you don’t get two separate checks for each kind of tax. It all gets added together on your tax return.

In light of those five facts, these are the options that ministers have for paying their taxes:

Option #1: Quarterly Estimated Payments

Your first option is to handle everything on your own. Your church withholds nothing and pays you your full salary. Then you calculate your expected tax liability (both income and SECA taxes) each quarter and pay your estimated taxes. At the end of the year, you file your tax return to see how accurate your estimates were and either get a refund or owe a little bit more.

Option #2: Quarterly Estimated Payments & Employer Withholding

The second option is to split the responsibility with your church. You have them withhold income taxes from your paycheck and you handle the SECA taxes on your own. You calculate your expected SECA taxes quarterly and pay them. Then, at the end of the year, you file your tax return and make sure to count the taxes that your employer withheld and the estimated payments you made when determining if you get a refund or owe more.

Option #3: Only Employer Withholding

The third option is to have your church withhold all of the taxes you will need to pay. Wait, what happened to “churches can’t pay SECA taxes for ministers?” It still applies. Your church can withhold all of the taxes that you will need to pay if they are all labeled as income taxes, not SECA taxes. For example, if your SECA taxes from every paycheck would be $150 and your federal income taxes from each paycheck are $150, you can have your church withhold $300 for income taxes from each paycheck. 

That way, you know that the IRS is happily getting everything they need on a regular basis, even though it is mislabeled. At the end of the year when you file your tax return, it will look like you overpaid income taxes and underpaid SECA taxes but it will all even out. Remember, in the end, they are lumped together for one tax bill. As long as you paid enough and don’t end up owing a lot, the IRS doesn’t mind. 

There you have it, the three different options that pastors have for paying their taxes. If you want to do options #2 or #3, you’ll have to make sure that your church is willing to cooperate. And, as you file your tax return this year, make sure that anyone who is helping you understands ministerial taxes because not all paid preparers do!

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Can Pastors Deduct Expenses From An Accountable Reimbursement Plan?

by Monday, February 17, 2020
Picture of a cash register drawer with blog post title: Can Pastors Deduct Expenses From An Accountable Reimbursement Plan?

We usually think of taxation as just a way for the government to raise funds for their many activities. But did you know that one of the stated purposes of taxation is to try to influence people’s behaviors? There are some things that the government feels are good for society and they want to encourage people to do them. How do they encourage them? Through tax breaks.

Do you know why you get to deduct property taxes and mortgage interest when you itemize deductions? Because the government thinks it’s good for people to own homes. Do you know why the saver’s credit exists? Because the government wants to encourage even low-income earners to save for retirement. The government uses taxation to encourage certain behaviors that they feel are beneficial to society. 

One way to encourage people to do something is to let them avoid paying taxes on it. They say, “We want to encourage philanthropy, so we won’t charge income taxes on money given to charities.” From a practical standpoint, how do they actually do that?

How Tax Deductions Work

Imagine if you had to report to your employer how much of your income you planned on giving to charity so that they could separate that out and not withhold taxes on that portion. (It sounds a lot like the clergy housing allowance, doesn’t it?) Even though pastors have managed to do it for the housing allowance, the IRS thinks it’s too complicated for everyone else. (Maybe you guys are just a little bit smarter and more responsible than average.) I agree with them. Especially because there are multiple behaviors that the government wants to encourage and therefore multiple things you can spend money on tax-free. 

So, how can you let people spend certain money tax-free while taxing the rest of their money? The IRS does it through tax deductions. Instead of trying to separate your income between taxable and tax-free before you make your spending decisions, they do it on the back end. 

When you file your tax return, you start by adding up all of your income. Then, you take out things that the government doesn’t want to tax you on. Those things you take out are called deductions.

Let’s say you make $50,000, give $8,000 to charity, and spend $7,000 on mortgage interest and property taxes. You had income taxes withheld on the full $50,000. However, on your tax return you will subtract, or deduct, the $8,000 and the $7,000 before you calculate your tax bill. After subtracting those deductions, then you have $35,000 of income for calculating the taxes you owe. That’s how the IRS lets you pay for certain things tax-free, by not including those expenses in the income used to calculate your taxes. 

How An Accountable Reimbursement Plan Works

Now that you understand tax deductions, we need to go over accountable reimbursement plans, since we are looking at how they work together. Usually, any money your church gives you is taxable income. Even your housing allowance is subject to Social Security and Medicare taxes. 

As a pastor, you likely spend a lot of money on church-related things. That could be anything from picking up the tab for a restaurant counseling session to renting a rototiller to landscape the church property. If your church decides to pay you a little extra to cover those miscellaneous expenses, that extra income is subject to taxes. That doesn’t seem quite right, does it?

If the church wants to be able to reimburse employees without the money being subject to taxes, they have to set up an accountable reimbursement plan. It’s simply a business expense reimbursement plan that is set up according to the IRS rules. This is how it works:

  1. You spend money on church-related expenses
  2. You report it to the church with receipts as proof
  3. The church reimburses you and the money is not counted as taxable income

Why You Cannot Deduct Expenses From An Accountable Reimbursement Plan

I’ve been asked several times whether or not you can deduct expenses from an accountable reimbursement plan on your tax return. The answer is NO. Why is that?

When your church reimburses you through an accountable reimbursement plan, that money is not taxed. It is tax-free. The purpose, as explained above, of tax deductions is to remove the taxes from something that the government wants you to get tax-free. If the money that you get through an accountable reimbursement plan is already tax-free, then there is no reason to deduct it. It is already tax-free. To try to deduct the expense on your personal tax return would be double-dipping and is not allowed. You can have one or the other, but not both.

In conclusion, tax deductions are good. Accountable reimbursement plans are good. Trying to deduct expenses from your accountable reimbursement plan is bad.

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The #1 Financial Regret Most Pastors Have

by Monday, February 10, 2020
Picture of a pastor with his head on his knees with blog post title: The #1 Financial Regret Most Pastors Have

From time to time I read Thom Rainer’s blog to stay up to date on the issues that pastors are facing today. The most enlightening part is the comments that pastors leave on his articles. When I read the comments on his financial posts, my heart breaks. 

There are so many challenges that pastors face that it makes me want to round you all up, give you big hugs, big thanks, a check for a million dollars, and a free week-long vacation on a private island with your spouse or family. And then go to your congregation and give some of the people a talking to. 

But I can’t really do that, so I’ve chosen just one area, personal finance, where I feel I can actually make a positive impact on your lives. That’s why this blog exists.

What Pastors Regret Most About Their Personal Finances

In reading the comments on his articles and hearing from my own Pastor’s Wallet readers, it’s glaringly obvious that there is one financial area where most pastors end up with regrets. The older pastors are saying, “I wish I had listened when they told me…” and the young pastors are saying, “It’s just too hard right now…”

Can you guess what it is?

Saving for retirement. Like Americans in general, many pastors are saving nothing for retirement. Especially the younger ones. Unlike most Americans, a lot of these pastors won’t even have Social Security to fall back on in their old age because they have opted out.

Why You Need To Save For Retirement

Now, I know that some of you just aren’t planning on retiring. However, that might not be an option for you. If you don’t agree, follow that link and read the article. 

Yes, you can pastor people and preach well into your 80s. But only if you’re sane and healthy. What happens if you get Alzheimer’s? Do you think you’ll still be pastoring then? Or what if you get cancer? My church’s senior pastor had to take a year off to fight cancer. I watched my dad do it, and believe me, you can’t just “keep working.”

Another common excuse I hear among Christians in general for not preparing for the future is “the Lord will take care of me.” Yes, the Lord will take care of you. He is taking care of you now, he gave you a job and tax-advantaged opportunities to save for retirement. He also gave you the Bible as a guidebook for life.

You know what the Bible says? 

Go to the ant, you sluggard;

    consider its ways and be wise!

It has no commander,

    no overseer or ruler,

yet it stores its provisions in summer

    and gathers its food at harvest. (Proverbs 6:6-8, NIV)


Several verses later it goes on to say that if you don’t heed this warning, “poverty will come on you like a thief and scarcity like an armed man.” (verse 11) In times of plenty, you are supposed to prepare for times of scarcity. Joseph understood that and we all know the incredible results of his wisdom.

You are working now. You need to prepare for times of scarcity, like when you cannot work any longer. God is providing now for your future needs. Don’t waste the opportunity that he has given you. 

The Value Of Starting Young

When you’re young, you think of old age as being a lifetime away. Because, well, it pretty much is. But that makes it hard to think of the necessity of saving for retirement in concrete terms. It’s just not very real to you when you’re in your 20s. 

However, that’s the most important time to be thinking about it. Why? Compounding interest. If you aren’t familiar with it, follow that link and read the article. When it comes to saving, compound interest makes time your most valuable asset.

If you start to save $20 a month when you are 25 and it grows at a rate of 8% until you are 65, you will end up with $69,820.


If you wait until you are 45 to do the same, you will end up with $11,780. Your total contributions are half what they would have been if you had started younger but your growth is only 12% of what it would have been. 


To start at age 45 and get the same results as the 25-year-old putting away $20, you would have to save over $118 a month! You see why it’s so valuable to start saving early?

It’s Never Too Late To Start Saving For Retirement

That’s all fine and dandy, Amy, but it’s a little too late for me to start saving young. Is there any hope?

Yes! If you’re getting on in years and haven’t been saving much, you may find this article pretty depressing so far. Cheer up! While you may have missed out on some opportunities, it’s never too late to start saving. Even if you’re 50-years-old, if you start saving $350 a month and don’t retire until age 70 you’ll have over $200,000 to live off of with an 8% rate of growth. 

The good news is that pastors usually don’t need as much saved for retirement as some other people. Why? You’re used to living on less.

The two major factors in retirement planning are how much you’ve saved and how much you spend. Some people have such a lifestyle where even having $5 million in savings won’t be enough. 

Even if it’s too late for you to save a lot for retirement, you can develop a lifestyle that will not require a lot in retirement. And that can be just as powerful. 

How Do You Start Saving For Retirement?

While you may be convinced of the importance of saving for retirement, that doesn’t mean you have any clue what to do about it. It’s okay, I was in the same boat. Until I sat down with a financial advisor, I had no idea what to do with money beyond my Bank of America savings account. And I wasn’t going to get very far with my savings with that 0.04% interest rate.

That 1½ hours with a financial advisor completely changed the trajectory of my family’s finances and I know its impact will be felt for multiple generations. While I’m a proponent of working with a financial advisor on a regular basis, I understand that it simply isn’t feasible for many people. However, I know from personal experience that even just an hour can be life-changing. 

Because of this, I would encourage every one of you to do just that: sit down with a financial advisor for an hour or two so that he or she can get you on the right track for retirement. 

If you don’t know a trusted financial advisor, my friend Ben Wacek of Guide Financial Planning is a Certified Financial Planner™ and Certified Kingdom Advisor® who works with pastors on a regular basis, mostly via video calls. He offers Quick Start Sessions where he will sit down with you for one to two hours and answer any questions you have and help you figure out a plan for your finances. You’ll also get a written summary of your meeting that clearly outlines the next steps you need to take, all for $500. You can schedule a Quick Start Session directly on his calendar using this link. He’s even agreed to offer a $50 discount to anyone who books before February 29, 2020 and mentions Pastor’s Wallet.

Five hundred dollars is a lot, but I am fully convinced that it will be more than worth it for you. If you don’t have an extra $500, go talk to one of the businessmen or businesswomen in your congregation. Tell them that you want to meet with a financial advisor (who won’t be selling you any products) in order to be a better steward of your finances and ask them to foot the bill. I’d love it if my pastor asked me that and I’d bend over backward to make it possible. (This is a good test to see if my pastor reads this blog!)

Full Disclosure: I do work with Ben on a part-time basis but receive no commission or monetary benefit if you choose to work with him. My only incentive is to help you make the most of the money God has entrusted to you. 


If you won’t meet with a financial professional, at least open up an IRA and start putting some money into it. Make sure the money is invested so that it can grow. If you’re not interested in learning all about investments, just stick it in the Target Date Fund where the year is closest to your anticipated retirement. Then set up automatic contributions from your bank account. Even if that’s all you do, you’re heading in the right direction and ahead of a lot of your peers.

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What Is Faith-Based Investing? (And Should You Do It?)

by Monday, February 3, 2020
Picture of a woman reading the Bible with blog post title: What Is Faith-Based Investing? (And Should You Do It?)

When you think of investing, you probably think of trying to grow your money as much as possible without doing anything too risky. That is what investing has traditionally focused on; growing money. However, things are changing.

Our culture has evolved to a point where people want their investments to do more than just make them money, they want them to reflect their values. Because of this, there has been a recent surge of values-based investing. 

Types Of Values-Based Investing

Have you heard of any of these terms before?

  • Faith-based Investing
  • Values-driven Investing
  • Values-based Investing
  • Biblically Responsible Investing
  • Ethical Investing
  • ESG (Environmental, Social, and Governance)
  • Socially Responsible Investing (SRI)
  • Impact Investing
  • Sustainable Investing
  • Responsible Investing


Those are all types of values-based investing. Values-based investing is simply investing in companies that reflect your values instead of just focusing on growth potential. The first five are based on religious values and the last five are based on secular values. There is a lot of overlap between the two but also some stark differences.

Differences Between Faith-Based Investing & Secular Values-Based Investing

Some of their commonalities between faith-based investing and secular values-based investing would be things like avoiding companies that exploit the poor or damage the environment. Both would favor companies with high ethical standards and legal compliance and that give back to and lift up their communities. 

Where they would diverge would be on things like LGBTQ issues or abortion. Investments based on religious values would shun companies that supported those things while those based on secular values would favor them. Faith-based investing also usually avoids companies involved in tobacco, gambling, and pornography while secular values-based investors may see nothing wrong with those.

Arguments In Favor Of Faith-Based Investing

The arguments in favor of faith-based investing are simple. Earning a financial return on our investments is a huge part of stewardship, but there is more. We are responsible for how our money is used. We need to ask ourselves, What am I investing in and are there ethical or moral implications? 

The Scriptures address some of the questionable behaviors that modern-day companies participate in. Proverbs 10:2 says, “Ill-gotten treasures have no lasting value, but righteousness delivers from death.” You don’t want your investment income to be ill-gotten treasures. Also, we can see from the way that Jesus threw tables around the temple in Mark 11 that he doesn’t appreciate those in positions of power profiting off the backs of the poor and powerless. In Matthew 25:45, when Jesus says, “Truly I tell you, whatever you did not do for one of the least of these, you did not do for me,” he assigns us the responsibility for how we act (or don’t act) towards others. And that spills over into how the companies that we finances with our (really God’s) money act towards others as well.

To proponents of faith-based investing, the Bible makes it clear that we have a responsibility to ensure that our money is not financing anti-biblical activity. We are responsible for how our money is used even after we invest it in a company.

Arguments Against Faith-Based Investing

While the arguments in favor of faith-based investing are compelling, so are those against it. They ask, How much responsibility are we called to take on? None of us are Jesus and are prepared or called to take on the weight of the entire sinful world. 

If we don’t want our money funding things that we don’t agree with, doesn’t that mean that we should boycott all businesses that act against our beliefs? All for-profit companies that provide health insurance pay for contraceptives and many pay for abortions. If you buy their products or services, you are giving them money to pay for those things. Does that mean you can only shop at the Salvation Army or small businesses that cannot afford health insurance?

What about the government? They pay for abortions, sex changes, and all kinds of other anti-biblical things. Does that mean you shouldn’t pay your taxes? In Matthew 22, Jesus told the people to pay their taxes to Caesar, even though Caesar used the money to do some terrible things. 

Is Faith-Based Investing Right For You?

The question you have to ask is, How far does my responsibility go? And you have to ask it of God, no one else. You see, there isn’t one right answer to that question. It is a matter of personal conviction between you and God. What he asks of one person will be different than what he asks of another person.

A great example of this is the different lifestyles of John the Baptist and Jesus. According to Jesus in Matthew 11, “John came neither eating nor drinking” and “The Son of Man came eating and drinking.” Which was wrong? Neither. They each did as God had called them to do, they just had different calls. 

So, pray about it. Ask God what he has called you to do. Don’t let anyone try to guilt you or pressure you one way or the other. John ate locusts in the desert and Jesus partied with choice food and wine, but they were both faithful to the call of God on their lives in doing so. Don’t compare yourself to others, just be obedient to what God has called you to. 

Where To Find Faith-Based Investments

If you are interested in faith-based investing, here are some of the options available to you: 


Remember, each organization or investment uses different standards. Just because it’s called faith-based doesn’t mean it will necessarily align with your personal values. Make sure you do your homework to learn about each investment. You are the steward of the resources God has entrusted to you. You are the one that will answer to God for what he has called you to, not your investment company. 

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