Basics of Clergy Finances and Taxes

For many pastors, ministers, or clergymen the reason that they get involved in church ministry is because of a higher calling, a passion for their religious beliefs and the people around them. They usually are not in it for the money, concerns about salary or clergy finances are often an afterthought. However, everyone has financial needs and there are some basic questions that need to be answered when it comes to clergy finances and clergy taxes.

Self Employed vs. Employee

As with other employees, religious organization report clergy income on a form W-2. The difference comes in the collection of Social Security and Medicare taxes. Total income is reportable as if they are employees, but the Social Security Administration treats them as if they are self-employed. So instead of paying Social Security or Medicare tax as employees, they pay self-employment tax. Clergymen report their earnings on 1040 tax returns and make their Social Security and Medicare payments along with any amounts due on their personal tax returns.

Exemption from Self-Employment Taxes

Clergy have the opportunity to not pay Social Security taxes by filling out a form 4361. This exemption stops the requirement for paying self-employment tax but it also prevents clergy from receiving benefits during the period of their exemption, in which case they can contribute extra money to their own retirement plan.

Housing or Parsonage Allowance

Housing Allowance is a non-taxable benefit for clergy used to defer part of their salary toward the expenses of running their homes. Whether they own or rent, a fraction of their earnings is exempt from income tax if the income is for housing expenses. Clergy that own a home are limited to the lesser of actual expenses, fair rental value of the home or the amount designated by their church organization. This exemption applies to income tax only, as housing allowance is still subject to self-employment taxes unless the Form 4361 filing is complete.

Clergy taxes can be complicated and there is a lot to keep in mind. There are a number of clergy tax breaks and incentives so it is best to work with a clergy tax professional to ensure that all bases are covered, leaving the clergymen the ability to do what he does best, ministering to the people.