@aprcox20
1. I don't understand what you think you mean by dual status. His pastor income is taxed according to those rules, and non-religious income is taxed according to the rules appropriate for that income. Your spouse has a job and a side-gig and reports like anyone else in the same situation.
2. There is no general tax exemption for pastors. However, a pastor can receive a housing allowance that is excluded from income tax (but still subject to self-employment tax). The church must designate this in advance an in writing. It is a great benefit that you should read more about, and ask the church about. This is an excellent ecumenical resource, your denomination may already be a member.
https://www.ecfa.org/ProductDownload.aspx?ProductID=361
3. For clergy, federal and state income tax withholding is optional. You can discuss with the church treasurer if you want withholding.
4. This is correct. Pastors are considered "Self employed" for some income tax purposes and are exempt from social security and medicare withholding. Instead, they pay self-employment tax on their income. When entering the W-2, you need to check the box for religious wages, and answer that you need to pay SE tax on both wages and housing allowance or parsonage. Because a secular employee pays 7.65% FICA which is matched by the employer, but pastors pay 15% SECA, churches often "gross up" a pastor's salary. You should discuss this with the church along with the housing allowance.
For example, if a secular employee's salary is $50,000, the employer actually pays $53,800 (because of the SS match) and the employee takes home $46,200 (because of mandatory ss and medicare tax). To pay a pastor the equivalent wages, the church should offer to pay $53,800, and the pastor will net the same $46,200 after paying SE tax.
5. You would deduct only expenses related to his adjust job on his schedule C. For unreimbursed pastoral expenses, you list them as work-related expenses on form 2016. However, there are 3 key points you need to know.
- Employee expenses are not deductible on a federal tax return for 2025. You can enter them, and they might be deductible on your state return, but they aren't deductible on the federal return.
- Pastor employee expenses must be adjusted according to the Deason rule. This relates to a parsonage or housing allowance. Suppose his overall compensation is $50,000, with $30,000 wages and $20,000 as a housing allowance or the value of a parsonage. Because 60% of his compensation is taxable wages, he can only deduct 60% of his expenses. Turbotax does not make this adjustment, you must do it.
- Even though expenses are not deductible itemized deductions for 2024, they can still be deducted from his income subject to SE tax. This adjustment must be made on the Schedule SE Adjustment Worksheet, which is only accessible in Forms mode in Turbotax Desktop installed on your own Mac or PC. It is not available with Turbotax Online. Put the expenses on line 5c of the worksheet. Enter the net amount of expenses after the Deason rule adjustment.
