Tax season has just come to an end and most of us are either eagerly awaiting a return or bemoaning how much we had to pay. The rest of you filed an extension and are still trying to get your papers together or get your tax preparer to answer your calls. Isn’t tax season fun?
If you haven’t opted out of Social Security, then you would have filed Schedule SE to calculate your Social Security and Medicare taxes, also called payroll taxes. Front and center, in the biggest, boldest print is the title for Schedule SE: Self-Employment Tax. But if you’re a church employee and not self-employed, why are you filling out a form for self-employment taxes? Allow me to enlighten you.
What Is The Difference Between FICA And SECA?
Let me start by introducing you to FICA and SECA. While FICA and SECA may sound like the names of some prophet’s twin sons, they are just two different ways for the government to collect Social Security and Medicare taxes. The big difference between the two is who pays the taxes.
FICA is the system for employed people, where the employee and employer each pay half of the taxes due. SECA is the system for self-employed people, where they pay the entire tax since they are essentially both the employer and employee. Any money you earn will be taxed under one of the two systems, but never both.
Most Ministers Have Dual Tax Status
If you work for a church, you have dual tax status. You will pay income taxes as a common law employee, but you have to pay payroll taxes as if you were self-employed. The only ministers who do not have dual tax status are those that the IRS views as independent contractors, people like traveling evangelists who do not receive wages from any specific church. Either way, you have to pay your payroll taxes under SECA, as if you were self-employed.
Why? I wish I knew. Maybe because pastors are ultimately employed by God and God alone? (And the IRS hasn’t figured out how to get him to pay payroll taxes yet?) The internet has failed me on this one, so if you know why the IRS considers all ministers self-employed for payroll taxes, please let us know in the comments! All I know is that it’s the law.
Can A Church Help Pay Payroll Taxes?
Thus, all pastors have to pay both the employer and employee portion of their payroll taxes. For 2023, that is 12.4% for Social Security taxes and 2.9% for Medicare taxes, for a total of 15.3%. That tax applies to the parsonage and housing allowance as well, not just the wages subject to income tax. Ouch!
Many churches feel bad about the extra payroll taxes that pastors have to pay and want to help. However, if a church pays FICA for their pastor, they are violating the law. Doing so will cause errors in Social Security Administration records that could affect future benefits.
If a church tries to offset the SECA taxes by paying their pastor extra (commonly called a Social Security Offset), that extra money counts as additional income. It will be subject to both income taxes and SECA.
There is one thing a church can do to help out the pastor. Churches are not required to withhold any taxes from a pastor’s salary, that responsibility is ultimately the pastor’s. However, by filling out a Form W-4, a pastor can request withholding so that they don’t have to make quarterly payments or have an unpleasant surprise when filing their tax return. This article explains how that method of withholding taxes works.
What About Non-Ministerial Church Employees?
Pastors always have to pay SECA, but what about other church employees? Well, that depends on whether or not the church that employs them has opted out of paying payroll taxes. Churches do have that option, just as licensed ministers do.
If your church has opted out, you have to pay SECA, no matter what your job is. However, you will pay only the employee portion under FICA if you are a non-ministerial employee and your church has not chosen to opt out.
Well, I hope this has clarified things for you a bit. If you have any other questions, don’t hesitate to ask! I’m here to help you sort out your financial life so you can focus on your ministry.
49 Responses
Scott
May 29, 2018Thanks for the great info, Amy. I do have one question in regards to working as a pastor with a supplemental part time job. This sentence in your article made me seek clarity, “Any money you earn will be taxed under one of the two systems, but never both.” I had been thinking that I would need to pay my own FICA and SECA from my income from the church in my new role as a pastor, but would continue to pay taxes as usual with my supplemental job in manufacturing. Is this true? Thanks.
Amy
May 29, 2018You are correct. Your different kinds of income can be taxed under different systems, but one paycheck can’t be taxed both ways. So, your supplemental income will be taxed under FICA (if you’re a normal employee) while your pastoral income will be taxed under SECA.
Scott
May 29, 2018Thanks Amy!
-Scott
Brent
September 26, 2018Amy, an important point to make is that churches and pastors can agree to have any or all of the taxes (SECA included) withheld from the paycheck. All such withholding would appear in box 2 of the W-2.
Amy
October 1, 2018That is correct, Brent. I will updated the article to include that. Thank you.
Kasema Phillips
August 6, 2023Explain the difference between FICA and SECA?
Amy
September 8, 2023They both refer to Social Security and Medicare taxes. FICA is the system that employees pay the taxes through and SECA is the system that self-employed people pay the taxes through.
Ryan
December 12, 2018I have a question. I have a pastor friend who says that he doesn’t pay the self employment tax because his church is incorporated, so that even though he’s ordained, he is paid as an employee, and not as a dual tax employee. Is that true or is this something he needs to change?
Amy
December 12, 2018Ryan, according to IRS Publication 517 (https://www.irs.gov/pub/irs-pdf/p517.pdf) ordained ministers are always subject to SECA (where they pay as self-employed) unless they have opted out of Social Security, taken a vow of poverty, or are subject to another country’s social security that has an agreement with the US. A church’s incorporation status would have no bearing on the minister’s taxation. Your friend should consult a tax specialist that understands clergy issues (many tax people don’t).
Peter
February 3, 2019Amy our church pays the pastor a salery and at the end of the year they give him a receipt for the total he was pay for that year. No taxes are taken out. Shoul we give him a W-2 or a 1099 or just keep doing what the church has been doing for 20 years? The pastor is reponsable to do his own taxes.
Amy
February 4, 2019If the pastor is considered an employee of the church, then the church must issue him a W-2. If he is considered self-employed and working as an independent contractor, the church must issue him a 1099 if they pay him over $600. Even if they do not withhold any taxes, they have to report his income to both him and the IRS with one of those two forms.
Joy Chappell
April 30, 2023A 1099 would only be appropriate if the pastor was performing similar minsiterial activities for other churches or organizations. If he is only pastoring at their one and only church, then he is their employee and they must issue a W-2, not a 1099-NEC or 1099-MISC.
Amy
May 8, 2023That is correct. Sometimes churches mistakenly believe that they get to decide whether to pay their pastor as an employee (W-2) or as self-employed (1099) but that designation is determined by IRS rules, not the church.
Jenni
February 18, 2019Hi Amy,
Thank you for this information! You mention at the end of your post that if a pastor fills out a W4 form a pastor can request withholding. Can they request withholding for social security and medicare? Would their W2 still show amounts withheld in box 4 and box 6?
Amy
February 18, 2019A pastor can request to have enough withheld to cover Medicare and Social Security taxes. However, it cannot be specifically withheld as those kinds of taxes.
When you file your tax return, your income tax, Medicare tax, Social Security tax, and other taxes are all lumped together for one final tax bill. While the church cannot specifically withhold Medicare and Social Security taxes, if they withhold enough for income taxes it can cover the cost of those taxes as well. On the W-2 it would only show as federal income taxes withheld.
Allison
April 9, 2019Amy
If a church has been erroneously withholding FICA or its ministers does it need to go back and correct this mistake or can this mistake be corrected going forward. If the church does need to correct past years how do you go about doing that?
Amy
April 12, 2019Allison,
You need to consult with a CPA or payroll provider that specifically works with churches. I’m not exactly sure the process for fixing mistaken FICA with holdings. It is important to fix, though, because it can mess up the pastor’s records with the Social Security Administration and affect his/her benefits.
Paul
January 29, 2020Hello! Thank you for your article! So, for clarification, with your statement “Many churches feel bad about the extra payroll taxes that pastors have to pay …” it is my understanding that the same amount of taxes eventually gets paid no matter the method (employer or self employed).
Also, can you clarify “…if a church pays FICA for their pastor, they are violating the law”. Although not required, can the church do this? Our main goal is to have the church take the burden of paying quarterly, or at all, and have the church pay the taxes on their behalf to reduce administrative overhead with managing the payments and paperwork.
I understand the comment regarding the W4, and if the church withholds the funds (even an amount equivalent to the FICA/Med, -not necessarily the best option), would the church be paying this in to SSA anyway? SO at year end, the FWH would show a credit, and the FICA/Med would be outstanding, but the net result would be the accurate tax liability?
In addition, our Pastor is considered ‘dual status’, as he also is an employee of a local hospital, permanent part time.
Any info you can clarify is greatly appreciated. I hope this article has not expired it’s time frame for comments!
Amy
January 29, 2020Paul, the same amount of payroll taxes eventually get paid no matter the method, as you said, but WHO pays them differs. Pastors have to pay the full 15.3% whereas other employees only pay half of that because their employers pay the other half.
Churches are not allowed to pay FICA for pastors. I don’t understand why, that’s just the way it is. If a church pays FICA for their pastor, they can get into trouble with the IRS and mess up the pastor’s Social Security earnings records.
If churches want to save their pastors the trouble of having to make quarterly Social Security tax payments, they can just withhold extra. Those extra withholdings would be labeled as “income taxes,” not “Social Security taxes,” but when the pastor files his or her return the Social Security taxes due would cancel them out.
Thomas Halsell, CPA
April 18, 2020The SECA is reduced to 92.35% for all SE people. The total is less when paying SECA by a small fraction. Schedule SE should be reviewed. I know for the article it is simpler to say the same tax but in reality it gets reductions and up to the max SS wage rate.
Amy
April 19, 2020That is correct, Thomas. The 15.3% SE employment tax is calculated based on 92.35% of income as seen on Schedule SE. I cover that in my article on how to calculate taxes but that wasn’t the focus of this one so I didn’t get into all of the detail.
Danny Cleave
February 12, 2020I am an Administrative pastor at my church and I am licensed. Most of my job does not entail pastoral work in the sense of doing worship services, counseling etc. I run errands, maintain database, make sure other ministries have what they need, prepare and clean Sunday School classes and answer phones and email. Can my church just consider me an employee and pay me as one?
Amy
February 12, 2020Danny, unfortunately I cannot answer that definitively for you. It would be best to contact the IRS for a determination.
Alan
October 29, 2021Thank you for your helpful article. I am a full-time Pastor and my church would like to help cover half of my SECA. However, the question the Treasurer is wrestling with is “Should the church pay half (7.65%) of the SECA on my full income or should they first use the .9235 multiplier on my income and then pay 7.65% on that slightly lowered amount?”
I have seen some church accountants and denominations suggest using the multiplier first, which obviously results in a lower SECA allowance.
But I have seen other denominations and accountants suggest using the full 7.65% to determine the SECA allowance, without the multiplier, knowing that the SECA allowance itself will increase both the pastor’s tax obligation for income tax and SECA tax. One website, “freechurchaccounting.com” writes, “…many churches figure that allowance at 9.8% of their salary (7.65% plus the additional amount to help with the additional taxes they owe when their salary is increased).” This last approach could, of course, be a never ending cycle because the more allowance a church gives the more taxable income the Pastor will have for both income tax and SECA tax obligations. (Frankly, I have no idea how they arrived at the figure of 9.8%.) So any advice you can give will be appreciated. And any sense of what the “standard” or normative practice is for the majority of churches would give us some assurance that our church is doing what is fair and equitible for both me and for the non-clergy employees of the church. Thanks so much!
Amy
October 31, 2021Alan, that is a very good question and I don’t think there is one “right” answer. I’m not sure if there is one way that the majority of churches do it, but if anyone else reading this gets a Social Security offset, please let us know how your church does it in the comments. The difference between using the multiplier first is 0.59% of income. For a $50k salary, that is less than $300. Paying a Social Security offset is not required, it is something that a church does voluntarily. Because of that and the fact that the dollar difference in the different calculation methods is so small, I would just choose whichever method is easiest for the church treasurer and make sure to be consistent with it.
If you want to be really exact with the calculations and take into account the multiplier and also the fact that the offset is taxable, you would divide the original salary by .9294 to get a total salary + offset to pay. For example, if a pastor’s salary is $50k, you would pay $53,800. When you reduce it by the multiplier you get $49,684 and 7.65% of that is $3,800.
Halley
November 30, 2022yes i am glad to see this addressed. but i do have a question. i understand you can not find the logic/reason for this law, but you say “its the law”, so does that mean you can cite the penal code so one can see the law? or are you saying that all your sources simply make declaratory statements that “it’s the law” but you have not actually see the penal code or law itself?
Barbara L. Starley, CPA
April 24, 2023Halley – IRS Publication 517 – “Social Security and Other Information for Members of the Clergy and Religious Workers” is an excellent resource.
Jayme Parks
December 28, 2022Having just taken over as treasurer of our very small rural church, I am finding myself searching for clarity on the correct and most advantageous way for our church to handle the salary paid our single non pastoral
employee. She is our custodian and she is claimed as a dependent by her parents. In the past, our church has held out FICA and Medicare on her wages. Would it be best for us to “opt out” as you had stated and how is that accomplished?
Barbara L. Starley, CPA
April 24, 2023Jayme – A non-pastoral employee does NOT have the option to opt-out. Her status as a dependent of her parents is irrelevant. Your church should absolutely withhold (and match) FICA on her wages as you are currently doing.
David Rutledge
January 6, 2023FOR MINISTERS – Prior to 1951, those in the non-profit sector were not in Social Security. Beginning in 1951 the government decided to allow those in the non-profit sector to enter Social Security. This decision thus started a debate as to whether a minister would be considered an employee or would be considered self-employed.
Several denominations lobbied Congress at this time to allow their ministers to be considered self-employed, but at the same time, the President argued for treating the ministers as employees. The different denominations won out and congress decided to treat the ministers as self-employed.
In 1955 the government allowed those ministers classified as self-employed the option of entering the Social Security program. To do so, the minister had to pay the full self-employment tax themselves, the standard arrangement for other self-employed workers.
As we came into the 1960’s talk again arose about ministers and Social Security. Finally, in 1968, ministers were required by law to enter the Social Security program. There were more discussions as several denominations raised legitimate opposition to the forced inclusion of their ministers. These denominations offered arguments based on conscientious objections to insurance, public insurance, and public benefits programs. These denominations argued that according to the Bible, God and His church were to take care of the members in need not the government or insurance companies.
Barbara L. Starley, CPA
April 24, 2023David – Thank you for taking the time to share this historical information. I believe it’s always worthwhile to know the background.
Amy
May 8, 2023Thank you for the history, David, that’s great!
Darrell L Brown
April 24, 2023Amy, we are a small start-up church with a bi-vocational pastor. I am trying to use QuickBooks online payroll and they don’t seem to know how to advise me regarding setting up a housing allowance. One part-time minister’s compensation will be entirely housing allowance. Any advice or anyone in your network?
Amy
May 8, 2023Darrell, I’m not familiar with QuickBooks to be able to tell you the specifics on how to set it up. Barbara Starley (who has commented here) is a QuickBooks expert that works with churches. This is her website: https://www.barbarastarley.com/
David
April 24, 2023I do not use QB payroll, but wouldn’t you set the person up as an exempt employee? Or better yet, since all of the money is housing, none of the money will go on a W-2. Why use the P/R module?
Darrell L Brown
May 9, 2023Amy, thank you for the information on Barbara. I signed up for her website.
David, I appreciate your comment as well. However, since the pastor needs to file income tax and pay social security taxes, he does need to get a W-2 that shows how much he was given in Housing Allowance in box 14. QB says that since he had no taxable income their system does not generate a W-2.
David Rutledge
May 9, 2023Darrell
QB is correct. Housing Allowance in Box 14 is optional. It is for informational purposes only. (Look at the IRS instructions for filling out a W-2) At year-end, the church treasurer can give the minister a memo, or a letter, stating how much the minister received as housing allowance during the year. Most ministers do not know how much housing they received during the year and that is why in preparing a minister’s taxes the information in Box 14 is good. Otherwise, I request a memo from the church treasurer as to the amount of housing allowance. Most ministers and numbers do not get along.
Darrell L Brown
May 9, 2023How does the IRS know regarding the amount of Housing for which the Pastor must pay SS tax? That isn’t entirely dependent on self-reporting, is it?
Amy
May 10, 2023Darrell, David is correct that putting the housing allowance on the W-2 is optional. The IRS does prefer that, though. Churches are also allowed to just provide the information in a letter and not report anything directly to the IRS. It is entirely dependent on self-reporting.
Barbara
June 20, 2023I am a member of a small Lutheran congregation in Texas. Per the budget prepared by our treasurer (who has been in that position for a number of years and and who is not a CPA or accountant) indicates that (1) 7.65% is withheld from pastor’s salary; (2) our church matches that with 7.65%; (3) treasurer makes monthly FICA deposits totaling 15.3% and (4) adds 7.65% to pastor’s salary as “social security allowance. It is my belief that most of the congregation think the pastor is an employee of the congregation and not self-employed. The treasurer insists that since he’s been doing this for so long he is correct.
Is this the correct way to handle the pastor’s salary? From what I have read (and I may be wrong), the correct way to handle this is to pay the pastor his salary and add a social security allowance of 7.65% of his salary. I also understand that we cannot withhold anything from the pastor’s salary and cannot make monthly payroll deposits.
Can you please clarify which is the correct method? Thank you. Barbara
Amy
June 21, 2023Barbara, you are correct. Ministers are dual-status taxpayers, so even if they are an employee of a church they pay Social Security and Medicare taxes as if they were self-employed. It would be okay to handle things as they currently are if they are not treating the pastor as a minister, but then the pastor would also not be eligible for a housing allowance. Also, while the church cannot withhold and pay FICA, it can withhold income taxes, though that is optional.
Barbara
June 21, 2023Amy, thank you for your response. Our pastor is a Rostered Minister of the ELCA. So he is eligible for a housing allowance AND the church cannot withhold Social Security and Medicare from his salary and pay FICA – is that correct?
Thank you.
Amy
July 2, 2023Barbara, that sounds correct. As long as he is ordained, licensed, or commissioned and providing ministerial services, then what you stated is correct.
Barbara
July 7, 2023Yes he is an ordained minister in the ELCA and performs/provides services (Sunday services, baptisms, weddings, funerals, Bible study, Confirmation classes).
Sharon
July 23, 2023Are there different tax rules for a religious non-profit vs a church? My husband is licensed and has to pay SECA. But the mission agency he works for says they can’t pay an offset for the “employer portion.” They are even saying we aren’t allowed to choose to withhold any extra taxes.(I’d like to have extra taxes withheld so we don’t have to pay quarterly.) They say it’s because there are different rules for non profits than a church. (The kind of non profit we are referring to is like a 501c3 – think Cru or Navigtors, for example.) Is that accurate? If that’s not accurate and the IRS rules are the same, can anyone point me toward the IRS document/publication that would help us show the organization otherwise? Thank you.
Amy
July 29, 2023Sharon, I am not sure of the rules for tax withholding for 501(c)(3)s. I am not aware of any limits as to how much an employer can withhold. I know some people (with all kinds of employers) request extra withholding as a forced savings program, so I’m not sure why the IRS would limit what can be withheld. It could be an organizational policy.
The Social Security offset is an optional thing that some churches choose to do but many do not. When they do pay it, it is simply paid as additional salary and there is no IRS designation for it to be used for SECA. Your husband’s organization could do it, it would just be a matter of increasing his salary. The real question is probably whether or not they have the budget for it.