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Opus 17 · ‎March 6, 2025

@joshwats wrote:

Yes, clearly it's all being considered self-employment. But why? It's nothing like owning a business. I was a guest speaker once, serve as a pastor for a job, and get some royalties from a curriculum I wrote. How is our system set up to tax such a person as myself for this type of work 46% on 41k taxable income? A pastor with 4 kids and making 41k is taxed almost half his income?!

You said,

'If SE taxes were withheld, be sure that you choose to only have the SE taxes withheld on your Housing Allowance if it is included in your W-2 and you did not have Medicare and social security taxes withheld already on the housing allowance.'

Please explain the above sentence a little more. Thank you.

Start with this organization, they are ecumenical and very good on pastor taxes and church finances.

https://www.ecfa.org/ProductDownload.aspx?ProductID=361

Also read this.

https://www.irs.gov/businesses/small-businesses-self-employed/members-of-the-clergy

To try and briefly summarize:

Regular employees pay 7.65% for social security and medicare, which is matched by their employer who also pays 7.65%. Therefore, self-employed people, who are both employee and employer, pay the full 15.3% self-employment tax (which covers the same thing, social security and medicare).

Due to a number of court cases and common law precedents, clergy are considered self-employed for some tax purposes, including self-employment tax. Your church should not withhold social security or medicare tax from your wages. Your W-2 should have your wages in box 1, federal income tax withholding is optional and will be in box 2 (if any), and boxes 3-6 should be blank -- zero social security or medicare withholding. If you have that withholding, the church is doing your taxes wrong and we can talk about how to adjust that.

Then, instead of having social security and medicare taxes withheld, you pay the full 15.3% self-employment tax. Because the church effectively pays 107.65% of the salary of regular (non-clergy) employees (due to the mandatory social security and medicare tax contribution), many churches will "gross up" the salary of their pastors, to assist the pastor in paying the 15% SE tax. At least, the SE tax issue should be something you discuss in salary negotiations.

In effect, if you are paid $50,000 for your services, and the music director is also paid $50,000, the music director is being paid more than you because of the church's mandatory contribution to social security and medicare that is not shown on their pay stub but must be paid to the IRS.

Your housing allowance, assuming it is properly designated, is exempt from income tax but is still subject to self-employment tax. (And, if your qualified housing expenses are less than your housing allowance, the excess is also added back to your taxable income. If your qualified expenses are more than the housing allowance, there is no additional deduction or adjustment for expenses.)

A housing allowance must be designated in advance and in writing by the church board, elders, finance manager, or whatever your governing body is called. If you want to change it, you can increase or decrease it going forward, but you can't make retroactive changes if you budgeted your housing expenses wrong.

The various tax credits for children and dependents cover your income tax but not your self-employment tax, because that's how those taxes work.

If you were a regular employee with an $80,000 salary, you would have seen $6,120 withheld for social security and medicare, and your employer would have paid an additional $6,120 that you would never see. Because pastors are considered self-employed for certain income tax purposes, you are responsible for paying the entire $12,240 of self-employment tax yourself. You need to plan for that as part of your monthly budget, and make estimated payments to the IRS 4 times a year to avoid penalties. Since you have book royalties, that is also considered compensation for work you performed, so that is also subject to SE tax.

Some denominations take a vow of poverty, and some denominations have a religious objection to participating in the social security system. If that is the case, you can file a form to opt out of social security in which case you don't have to pay SE tax in the future, and you can get up to 3 years of past SE tax refunded to you. However, that application is irrevocable, so as long as you are a pastor, you will not accumulate retirement credits in the social security system, which will limit any future benefit. And, any work you do that is not considered pastoral or ministerial, is never exempt from social security or SE tax even if you have a religious exemption on file.

For example, if you worked at a religious school as a teacher, and did not have pastoral or ministerial duties as defined in the regulations, you are subject to the same social security and medicare withholding as any other regular employee.

Lastly, if you have work-related expenses as a pastor, they are not deductible from your income tax due to the 2017 TCJA, but they are still deductible from income subject to SE tax. This might include books and study materials that were not reimbursed by the church, mileage, and other expenses of being a pastor. The adjustment is made by making a manual adjustment to the schedule SE worksheet using Turbotax installed on your own computer (the adjustment can't be made in Turbotax online). And the adjustment must take into account the "Deason rule." Basically in your case, because 70% of your total compensation is wages and 30% is non-taxable housing allowance, you can only deduct 70% of your work-related expenses.