Even though a pastor is technically an employee of the church, his income must be treated differently than other employees of the church.
Further, in many churches volunteer board members who may or may not have relevant experience manage the hiring process. Combine the two and you have a recipe for mistakes that can be costly. Here are three things a church must do properly when it comes to a pastor’s salary:
- For federal tax purposes, treat the minister as an employee. Many churches take the path of least resistance here and issue a 1099 as though the minister were self-employed. This is likely to raise red flags that can lead to an audit when the minister lists the salary on Schedule C and deducts unreimbursed expenses, which is incorrect. The minister should be issued a W-2 form to show all wages from the church.
- For Social Security purposes, treat the minister as self-employed. Confusing, right? An employee for one purpose and self-employed for another? Here’s the explanation: because a minister has ‘dual tax status,’ the church, as employer, should not withhold FICA taxes, as would be the case for most other employers and employees in the secular world. However, the minister is still responsible for full payment of self-employment taxes, unless they’ve opted out, and therefore, taxes, and for those purposes should be considered self-employed.
- Institute a voluntary withholdings agreement. Because a minister’s wages are exempt from withholding, a church should have a written voluntary withholdings agreement in place with the minister before withholding taxes. Bear in mind that this agreement applies to federal income taxes only, not Social Security taxes. A properly completed Form W-4 can be used to accomplish this requirement. Absent such an agreement, it is the minister’s responsibility to make quarterly estimated tax payments using Form 1040-ES and in accordance with the schedule on the form.
The special tax treatment afforded to pastoral professionals can complicate the process of arriving at a compensation system that is in the best interests of both the minister and the church. Make sure that at a minimum the three steps above are in place, and if a church has been doing one or more of them incorrectly, a professional should review the situation and make necessary corrections.
Salmon Sims Thomas Accountants & Consultants specializes in churches, ministries, and nonprofit organizations. For more information about pastoral salaries, please contact Bill Sims, CPA at Salmon Sims Thomas.