This post breaks down all of the major types of income a pastor can earn and explains how the IRS treats them for Social Security, income tax, retirement plan and payroll tax purposes. It is based on IRS Publication 517.

Have you ever taken the time to read IRS Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers? Did you get through the whole thing without falling asleep or going cross-eyed?

As a licensed minister, it is dangerous for you not to know what it says. But, it is a tedious piece of literature, to say the least. People complain that taxes are complicated and confusing, but it seems that things are even twice as bad for pastors. You probably know that already, which is how you ended up here.

I spent some quality time in Publication 517 for you, sorting through all of the various tax treatments for the different kinds of income a pastor can earn. Below I will attempt to make things clear and easy to understand in regards to how different kinds of income are treated for different IRS purposes.

I know this doesn’t sound very interesting, but it’s important. You need to know this stuff if you’re a licensed minister. I’ll do my best to make it bearable for you. Let’s go!

Three IRS Areas That Income Affects

There are three different tax-related areas that are affected by income. Different sources of income are treated differently for the following purposes:

Income Tax Purposes

For income taxes purposes, you can be considered a common-law employee or self-employed:

Employees earn wages that are reported on Form W-2. When filing taxes, those wages are reported at the beginning of Form 1040, the individual income tax return. Employees can no longer write-off or deduct unreimbursed business expenses associated with these wages.

Self-employment income is reported on Schedule C. It is calculated by reducing the total income by applicable business expenses to end up with a net amount that is subject to taxes.

Payroll Tax Purposes

The payroll tax has two parts: Social Security and Medicare. The IRS has two systems for collecting payroll taxes, FICA and SECA. Without getting into details, the basic difference is that under FICA the employer pays half of the tax, while under SECA, the worker pays the entire tax.

All pastors pay under SECA by law. This is not optional. Church employees are taxed under FICA unless their church opts out because they “are opposed for religious reasons to the payment of social security and Medicare taxes.” If the church opts out, then its employees pay their payroll taxes under the SECA system.

As a licensed minister, you have the option to opt out of the Social Security and Medicare tax system. If you choose to do so, it only applies to income you earn performing “ministerial services,” not income that you earn in a secular job.

Retirement Plan Purposes

Aside from employer-sponsored retirement plans, the only available tax-advantaged retirement savings vehicles for employees are IRAs, both traditional and Roth.

In addition to IRAs, self-employed people have the ability to establish other kinds of tax-advantaged retirement plans, such as SEP, SIMPLE, and qualified plans, and deduct contributions as business expenses. For more information, see IRS Publication 560. 

Types of Income & Their Treatment

Ministerial services, in general, are defined as the services you perform in the exercise of your ministry. These could include sermon preparation, pastoral counseling, running church business meetings, etc.

#1 Income paid by your church for your ministerial services

This is the paycheck you receive from your church for being on staff.

Income Tax: This income is considered employee wages.

Payroll Taxes: Pastors pay under SECA unless they have opted out, in which case they pay nothing. Non-pastor church employees pay under FICA (SECA if your church is exempt).

Retirement Plan: You are considered an employee for retirement plan purposes.

#2 Income paid by others for your ministerial services

This includes money that individuals give you directly for performing weddings, baptisms or other personal ministry-related services.  

Income Tax: This is considered self-employment income and calculated on Schedule C.

Payroll Taxes: Not applicable if you are exempt. Otherwise, you pay under SECA.

Retirement Plan: You are considered self-employed and qualified to establish a small business retirement plan.

#3 Income earned as an employee from non-ministerial services

This would be any income you earn from a secular job where you work for someone else.

Income Tax: This income is considered employee wages.

Payroll Taxes: Subject to Social Security, even if you have a ministerial exemption. Paid under FICA.

Retirement Plan: You are considered an employee for retirement plan purposes.

#4 Income earned as a self-employed person from non-ministerial services

This would be any income you earn from side gigs, your own business or as a contractor or freelancer.

Income Tax: This is considered self-employment income and calculated on Schedule C.

Payroll Taxes: Subject to Social Security, even if you have a ministerial exemption. Paid under SECA.

Retirement Plan: You are considered self-employed and qualified to establish a small business retirement plan.

#5 Other kinds of income

Royalties from books, songs, etc.

Religious books are considered to be a part of your ministerial duties and fall under category #1 income. Songs written for congregational worship are seen in the same way.

Gifts & Love Offerings (Birthday, Christmas)

• If they come from the church, they are taxable income and fall under category #1.

• If they come from an individual as a result of a ministerial duty you performed (counseling, preaching, etc.), they are taxable income and fall under category #2.
• If they are from an individual and not related to a ministerial duty you performed, they are tax-free.

 

Reimbursements For Employee Expenses

How these are treated depends on whether or not your employer has an accountable plan.

Accountable Plan: These are not reported on Form W-2 and are not taxable. The rules state that your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. You must adequately account to your employer for these expenses within a reasonable period of time and you must return any excess reimbursement or allowance within a reasonable period of time.

Non-accountable Plan: Any reimbursements made outside of an accountable plan are reported on form W-2 as wages and are taxable.

Housing Allowance

The housing allowance must be an officially designated, specific amount. It is not considered income for income tax purposes. However, it is considered income when calculating self-employment taxes for those who are not exempt.

There you have it. A bunch of different kinds of income that you, a pastor, can have, and how the IRS treats each one. I hope this has helped clarify things for you. If you have any further questions, let me know if the comments!