March 26, 2008

Minister, But Not a Minister

Question:

Can a minister elect to be treated as a non-minister?

Answer:

In other words, while ministers are defined by the Internal Revenue Code as employees in every respect except for purposes of computing their 15.3% Self-Employment tax on Schedule SE (Form 1040), may a minister choose to have the church withhold the 7.65% FICA tax and then match the other half out of church money? The simple answer: "no."

Many churches, in recognition that they are saving 7.65% by not having to match their ministers’ FICA tax, choose to increase their pay by this amount and then immediately withhold it as federal income tax. That way, when the minister computes his full 15.3% SE tax, at least ½ is already paid in through withholding.

There may be good reason not to be treated as an employee even if the Internal Revenue Code allowed it. Before calculating one's SE tax a minister can reduce his reportable earnings by the excess of his employee business expenses over any reimbursement by the church. An employee cannot do this; he must pay FICA tax on his full earnings. Also, any contributions to 403(b) plans reduce a minister's SE reportable earnings. This provision is not available to employees. They must pay FICA on their full pay even though income taxable wages are reduced by 403(b) or 401(k) elective deferrals.

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