Congress made several tax law changes in late 2010 – some of which impact ministers and churches. The following information about clergy tax law changes is from CapinCrouse, a CPA firm that specializes in church and nonprofit tax issues.
Non-Clergy Income FICA Changes for 2011
The Social Security payroll tax on individual wages (FICA and Medicare) will be lowered from 7.65% to 5.65%. An individual earning $60,000, for example, will save $1,200. If that individual is paid twice a month, it will mean an extra $50 in his or her paycheck starting in January 2011. Employees do not have to repay this reduction when filing Form 1040 for the 2011 calendar year.
The employer’s share of Social Security (FICA and Medicare) tax is not affected; it stays at 7.65%.
Clergy Income SECA Changes for 2011
While self-employed workers, including ministers, pay both the employer and employee portion of the Social Securty tax, they also get the tax break on the employee portion. The self-employment taxes for pastors will be cut from 15.3% to 13.3%. The Self-Employment Contributions Act (SECA) tax deduction on Line 27 of Form 1040 – the equivalent of the employer portion of Social Security tax – will not be affected by the change and will remain at 7.65% for 2011.
If you are a pastor and your church withholds money from your paycheck to cover the SECA tax, you might want to adjust your withholding accordingly. As always, we encourage you to check with an attorney before making any changes.
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I am a treasurer for a Baptist Church in Florida. We are giving our Pastor a housing allowance as self-employed. We want to be sure we are doing the right thing. He has no other pay. No emplyee pay either.
If we change him to employee of the Church, can we pay the entire housing allowance that way or does he have to receive a salary other than housing allowance? If we can pay all of the housing allowance as if he is an employee, what forms and responsibilities do we have?
I ask because I only see information for Pastor’s who have a salary and a housing allowance.
PS. I don’t even know if it is the best thing to do. We are trying to figure this out.
Barbara, thanks for reading Money Wise Pastor and for asking your question!
The IRS considers pastors to have “dual status,” which means they are considered an employee for federal income tax purposes and self-employed for Social Security and Medicare purposes. Churches typically give their pastors a W-2 at the end of the year to show the income they’ve received. But the church is not obligated to withhold FICA.
Instead, the pastor pays quarterly estimated SECA taxes as a self-employed person would, or he/she could ask the church to withhold a specific amount from each of his/her paychecks to cover the expected amount of SECA tax owed.
Re: the housing allowance vs. the salary, it all depends on how much the church is paying the pastor, and how much of a housing allowance they’d qualify for. (To learn how to correctly calculate the housing allowance, be sure to read Choosing Between a Church Parsonage and a Clergy Housing Allowance).
For example, suppose your church pays the pastor $30,000 a year and the pastor’s housing allowance is $20,000. This means the pastor has a taxable salary of $10,000.
Here are a couple of very helpful resources that I’d recommend: Zondervan Church and Nonprofit Tax and Financial Guide and Zondervan Minister’s Tax and Financial Guide.
Hope this helps!
Hi Rich – Thanks for this article. I look forward to reading more of your writings in the future. It’s always helpful to be reminded of the truth of God’s word in relationship to finances.
Your second paragraph can be a bit confusing, though. You state that the employee portion of SECA in 2011 and 2012 should be 5.65% and employer 7.65%. However, that is only if the church elects to pay a portion of the tax. Our church does. But it should be noted that the church is not obligated to pay any of that tax, and in effect, in SECA there is no ’employee/employer’ portion, just the employee portion and whatever the church chooses to contribute.