October 22, 2019
Ministerial Payroll
Pastors – it’s time to review your Ministerial Payroll. Going into the last quarter of the year is a great time to review what is going on, and to look towards next year. Looking at you, Housing Allowance.
Housing Allowance Qualifications:
First, let’s define Housing Allowance: an annual amount of compensation that is set aside by the church to cover the cost of housing related expenses for its ministers. The amount spent on housing reduces a qualifying minister’s federal and state income tax burden.
The primary requirement to qualify for housing allowance is for “a person who is ordained, commissioned, or licensed as a minister by a church, body of churches, or a religious order.”
IRS guidelines stipulate that all housing allowances are approved in advance of paying the minister. We recommend approval by December 31st, for the upcoming year. Housing allowances cannot be approved or changed retroactively.
For more in-depth requirements, how it works, estimating the correct amount, and the timing of approval, view our position paper on the subject:
Social Security & SECA Tax :
Fair Wage
For more information regarding Ministerial Compensation, we have put together a form for how to pay a fair wage – see the link below. For now, let’s review Social Security (S.S.), Federal Insurance Contributions Act (FICA), and Self-Employed Contributions Acts (SECA.)
The standard MM recommends when formulating minister’s compensation is to be certain that there is a level playing field among all church staff. Although the church is not permitted to directly pay in matching FICA funds for ministers, they should be given the matching amount, just as all other employees are receiving through the mandatory matching FICA that the church pays, on behalf of the employee. It will be considered taxable income, but it should not be considered a part of their wage package unless the employer FICA contribution is considered a part of a secretary or custodians compensation package.
Social Security
However, during approximately the first year of employment as a minister, they have the right to “opt out” of the Social Security System if they can morally sign an agreement that they have “religious beliefs that prevent you from accepting government benefits from taxes paid into a government system from compensation received from a church.” Most people attempt to make this decision based on the investment worthiness of the Social Security System, when in reality, it has nothing to do with rate of returns or benefits, but rather must be driven by a religious objection.
If a minister has chosen to opt out of the social security system, then they will not be responsible for paying in the self-employment FICA payments. If they chose to stay in the social security system, then they will be responsible for paying 15.3% of their combined salary and housing allowance. The IRS requires quarterly payments (that do not match the calendar quarters) or they have the option of taking out extra federal withholding tax from their paychecks to compensate for the amount owed for social security. Click here to view when quarterly estimated tax payments are due.
View our position paper for a one-page document filled with more information regarding this topic.
Checklist:
Click here to download our PDF fillable checklist to help guide you through the end of year preparations. The following are what you will find in the checklist.
- Get with a qualified, experienced tax accountant who has experience with clergy tax preparation.
- Set 2020 housing allowance and have it approved.
- Determine your estimated annual liabilities for: FICA and federal & state income tax.
- Determine the method of payment.
More Resources:
Here are links to even more resources, if you would like more information regarding a certain topic. Feel free to also pass along these resources to someone else in your organization as well.
- IRS Publication 517 – Social Security and Other Information for Members of the Clergy and Religious Workers
- Ministerial Taxes – MM workshop that covers the basics of ministerial taxes in a class setting. Contact our office if that is something your organization could benefit from attending.
Lastly, since October is Pastor Appreciation Month, we wanted to share our post from last year where the staff had a thank-you video to all the pastors we get to work with and see on Sunday mornings.
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