05.2 - Tax Tips for Clergy
by Scott Selman
Pay to all what is due them – taxes to whom taxes are due, revenue to whom revenue is due, respect to whom respect is due, honor to whom honor is due.
Romans 13:7 (NRSV)
The Internal Revenue Service website contains valuable information for clergy taxpayers and local churches. The website includes most of the common forms and their instructions, along with various publications. Two publications of special interest to clergy include Social Security and Other Information for Members of the Clergy and Religious Workers (Publication 517) and Tax Guide for Churches and Religious Organizations (Publication 1828).
Every pastor should receive a Form W-2 from his or her local church. Form W-2 provides wage and tax information to the pastor, the Social Security Administration, the Internal Revenue Service, and state and local governments.
Employment Status - Clergy
- Clergy serving local churches are employees of the local church for Federal and state income tax purposes, and are self-employed for purposes of Social Security taxes. This distinction means that clergy income is reported in Box 1 (Federal wages), Box 16 (state wages), and Box 18 (local wages), as applicable, of Form W-2, but not reported in Box 3 (Social Security wages) or Box 5 (Medicare wages) of Form W-2.
- Local churches should never withhold Social Security taxes from clergy or pay an employer share of Social Security taxes for clergy. However, clergy who have elected to have Federal income taxes withheld may have additional tax amounts withheld to prepay their estimated self-employment tax liability.
Federal and State Income Taxes - Withholding
There are no mandatory requirements for withholding of Federal and state income taxes for clergy. However, Federal and state income taxes may be withheld at the request of the clergyperson. Amounts withheld should be reported in Boxes 2 and 17 of Form W-2 as applicable.
Professional expense amounts paid to clergy under the allowance method are taxable and must be reported as wages in Box 1 of Form W-2. Professional expense amounts paid to clergy under the reimbursement method are not taxable and should not be reported on Form W-2. Generally, churches should not give their pastor any unused reimbursement amounts at the end of the year to avoid the possibility of the entire reimbursement amount being treated as a taxable allowance. Professional expense reimbursement amounts may not be increased without a corresponding increase in the pastor’s total compensation.
- Housing allowances must be approved prospectively and may be increased without a corresponding increase in the pastor’s total compensation.
- The Internal Revenue Service does not require local churches to report clergy housing allowances on Form W-2, but housing allowances may be reported in Box 14 of Form W-2 at the church’s discretion.
- Clergy housing allowances may not be excluded from income subject to Social Security taxes. In addition, the fair rental value of a church-owned parsonage provided to the pastor rent-free is subject to Social Security taxes.
- Housing allowances received by clergy in excess of actual qualified housing expenses incurred should be reported by clergy as other income on Line 21 of Form 1040.
- Pension payments paid by the General Board of Pension and Health Benefits are designated as a housing allowance for retired clergy. However, these payments do not qualify as a housing allowance for surviving spouses of retired clergy.
Other Clergy Income
Many pastors receive other church-related income in addition to their regular compensation paid by the church. Examples include honorariums (e.g., weddings), love offerings, and other gifts of cash (e.g., at Christmas).
Honorariums are always taxable. Love offerings and other gifts of cash are taxable to the pastor when paid by the local church and should be included on the donor’s annual giving statement prepared by the local church and reported in Boxes 1, 16, and 18, as applicable, of Form W-2. Love offerings and other gifts of cash received directly from individuals are not taxable to the pastor provided these amounts are not included on the donor’s annual giving statement.
United Methodist Personal Investment Plan (UMPIP) Contributions
- Salary reduction contributions to the denomination’s United Methodist Personal Investment Plan should be reported in Box 12 of Form W-2 and listed as Code E.
- Clergy salary reduction contributions to 403(b) church plans, such as UMPIP, are not subject to self-employment tax. This rule does not apply to lay employee contributions to 403(b) church plans.
Salary Reduction in Lieu of Tithing
Pastors should not relinquish a portion of their salary in lieu of a tithe, or other gifts to the church, in order to obtain a tax advantage because of concerns related to constructive receipt, the availability of itemized deductions for charitable contributions, the reduction of pension benefits, irrevocable refusal to accept salary, permanent loss of compensation, and theological issues.
Spousal Travel Expenses
In most instances, clergy spousal travel expenses are not considered deductible business expenses. In addition, reimbursement of such expenses is generally considered compensation and therefore taxable income to the pastor. As compensation, amounts paid by the local church as reimbursements should be reported in Box 1 of Form W-2.
Deacons – Tax Status
United Methodist deacons appointed to local churches may be considered clergy (“ministers of the gospel”) for Federal income tax purposes depending on their specific circumstances. Visit www.gcfa.org/deacons-tax-status-memorandum online for additional information.
Alabama Exemption for Defined Benefit Plan Payments
Pension payments for pre-1982 service paid to United Methodist clergy retirees, or their designated beneficiaries, should not be included in gross income for the purpose of determining taxable income for the State of Alabama.