Topic Number: 417 - Earnings for Clergy
A licensed, commissioned, or ordained minister is generally the common law employee of the church, denomination, sect, or organization that employs him or her to provide ministerial services. However, there are some exceptions, such as traveling evangelists who are independent contractors (self-employed) under the common law. If you're a minister performing ministerial services, all of your earnings, including wages, offerings, and fees you receive for performing marriages, baptisms, funerals, etc., are subject to income tax, whether you earn the amount as an employee or self-employed person. However, how you treat expenses related to those earnings differs if you earn the income as an employee or as a self-employed person.
For social security and Medicare tax purposes, regardless of your status under the common law, the services you perform in the exercise of your ministry are considered self-employment earnings and are generally subject to self-employment tax. See Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, for limited exceptions from self-employment tax.
Facts and circumstances determine whether you're considered an employee or a self-employed person under common-law rules. Generally, you're an employee if the church or organization you perform services for has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. For more information about the common-law rules, see Publication 15-A, Employer's Supplemental Tax Guide. If a congregation employs you for a salary, you're generally a common-law employee of the congregation and your salary is considered wages for income tax withholding purposes. However, amounts you receive directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are generally earnings from self-employment for income tax purposes. Both the salary you receive from the congregation and fees you receive from members of the congregation are subject to self-employment tax.
If you itemize your deductions, you may be able to deduct certain unreimbursed business expenses related to your services as a common-law employee on Form 1040, Schedule A (PDF), Itemized Deductions. You may need to fill out Form 2106 (PDF), Employee Business Expenses, and attach it to your Form 1040 (PDF), U.S. Individual Income Tax Return. Refer to Topic No. 514 for information on employee business expenses, and Topic No. 508 for information on the 2% of adjusted gross income limitation. For your self-employment income (the offerings or fees you receive for performing marriages, baptisms, funerals, etc.), use Form 1040, Schedule C (PDF), Profit or Loss From Business (Sole Proprietorship), or Form 1040, Schedule C-EZ (PDF), Net Profit From Business (Sole Proprietorship), to report these earnings and related expenses.
A licensed, commissioned, or ordained minister may be able to exclude from income the fair rental value of a home (a parsonage) or a housing allowance provided as compensation for ministerial services performed as an employee. A minister who is furnished a parsonage may exclude from income the fair rental value of the parsonage, including utilities. However, the amount excluded can't be more than reasonable compensation for the minister's services.
A minister who receives a housing allowance may exclude the allowance from gross income to the extent it's used to pay expenses in providing a home. Generally, those expenses include rent, mortgage interest, utilities, repairs, and other expenses directly relating to providing a home. The amount excluded can't be more than the reasonable compensation for the minister's services.
If you own your home, you may still claim deductions for mortgage interest and real property taxes. If your housing allowance exceeds the lesser of your reasonable compensation, the fair rental value of the home, or your actual expenses, you must include the amount of the excess in income.
The minister's employing organization must officially designate the allowance as a housing allowance before paying it to the minister.
The fair rental value of a parsonage or the housing allowance is excludable only for income tax purposes. The minister must include the amount for self-employment tax purposes.
For social security and Medicare tax purposes, a duly ordained, licensed, or commissioned minister performing ministerial services is considered to be self-employed. This means that your salary on Form W-2 (PDF), Wage and Tax Statement, the net profit on Schedule C or C-EZ, and your housing allowance less your employee business expenses are subject to self-employment tax on Form 1040, Schedule SE (PDF), Self-Employment Tax.
However, you can request an exemption from self-employment tax for your ministerial earnings, if you're opposed to certain public insurance for religious or conscientious reasons. You can't request exemption for economic reasons. To request the exemption, file Form 4361 (PDF), Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, with the IRS. You must file it by the due date of your income tax return (including extensions) for the second tax year in which you have net earnings from self-employment of at least $400. This rule applies if any part of your net earnings from each of the two years came from the performance of ministerial services. The two years don't have to be consecutive.
For more information, refer to Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.