Employee or Self-Employed?
Ministers are generally employees of the church, denomination, sect, or religious organization that hires them.
Exceptions: Some ministers, such as traveling evangelists, are considered self-employed (independent contractors).
Taxation of Earnings:
All income (salary, offerings, fees for marriages, baptisms, funerals, etc.) is subject to income tax.
The way expenses are treated depends on whether the minister is an employee or self-employed.
Determining Employment Status
If the church controls what you do and how you do it, you're considered an employee under common law.
Salary paid by a congregation is wages and subject to income tax withholding.
Fees received directly from congregation members are self-employment income and subject to self-employment tax.
If you're self-employed, all income received for ministerial services is reported on:
Schedule C (Form 1040) – Profit or Loss from Business (Sole Proprietorship).
Housing Allowance
Ministers may exclude housing benefits from taxable income if provided by their employer:
Parsonage: The fair rental value of a home provided as compensation (including utilities) is excludable from income.
Housing Allowance: If the church designates an official housing allowance, ministers can exclude it to the extent it is used for housing expenses (e.g., rent, mortgage, utilities).
Limitations: The exclusion cannot exceed the lowest of:
Reasonable compensation,
Fair rental value of the home, or
Actual expenses for providing the home.
If you own your home, you can still deduct mortgage interest and real property taxes.
Social Security Note: Housing allowances are excluded for income tax purposes but must be included for self-employment tax.
Social Security Coverage
Ministers' income is subject to self-employment tax, covering Social Security and Medicare, regardless of their employment status.
This includes:
Salary reported on Form W-2,
Net profit from Schedule C,
Housing allowance less deductible expenses.
Exemption from Self-Employment Tax
Ministers may request exemption from self-employment tax for religious or conscientious objections.
To qualify:
File Form 4361 (Application for Exemption from Self-Employment Tax for Ministers, Members of Religious Orders, and Christian Science Practitioners).
Must be filed by the due date of the second tax year in which you have at least $400 of ministerial self-employment earnings.
The two years don’t have to be consecutive.
Important: Once approved, the exemption is irrevocable.