Skip to main content

Pastor's Social Security and Medicare Tax Assistance: Why is it Taxable?

Question:

A treasurer recently asked:
"I recently became the treasurer for our local church and am trying to nail down what I need to include as income for our pastor's Form W-2. I was told that income includes weekly salary, monetary gifts, and half of the quarterly taxes that we pay directly to him. The first two items I get, but why would we include the quarterly taxes (and only half that amount) as income?"   

Answer:

In order to answer a question like this, it is important to understand the difference between a Federal Insurance Contributions Act (FICA) church employee and a Self-Employed Contributions Act (SECA) church employee.

FICA employees have 7.65% withheld from each of their paychecks to contribute towards Social Security and Medicare. Their employers contribute an additional 7.65% to total the 15.3% tax due for FICA employees. Examples of FICA church employees include: administrative assistants, janitorial staff, and any other non-minister workers.

SECA employees, on the other hand, are responsible for the entire 15.3% tax. Since the employee, namely a church pastor, is considered a "self-employed" individual, he is required to contribute both the employee and employer portion of the Social Security and Medicare funds. By statute, a minister may not be treated as a FICA employee (https://www.irs.gov/pub/irs-utl/ministers.pdf).

Many churches recognize that the full 15.3% SECA burden falls on ministers rather than being shared by the church as is the case for FICA employees. In order to assist, churches often supplement their ministers' salaries by one-half of the minister's expected SECA tax obligation. This additional amount is itself considered taxable income.

According to the Internal Revenue Service "Minister's Audit Techniques Guide" linked above (page 5), "If the church or church agency pays amounts in addition to salary to cover the minister's self-employment tax or income tax, these are also includible in gross income. Rev. Rul. 68-507, 1968-2 C.B. 485."



Comments

Popular posts from this blog

Housing Allowance and Form 1099-MISC Reporting

Question:A church provides its minister a housing allowance but believes it must report the full amount of compensation (including the non-taxable housing allowance portion) on Form 1099-MISC in order to demonstrate the full earnings of the minister. (Starting in 2020, Form 1099-MISC is replaced with Form 1099-NEC for non-employee compensation.)If the church reports his compensation, including the housing allowance, on the Form 1099-NEC as taxable income, will he be able to deduct his housing expenses somewhere else on the Form 1040?Answer:This question brings up a couple of issues. First, most ministers are properly classified as employees who receive Form W-2, not as independent contractors who receive Form 1099-NEC. Box 1 on Form W-2 reports taxable compensation. It is reduced to reflect the church's designation of a portion of his pay as non-taxable housing. Then, in Box 14 (Other), Form W-2 typically reports as a memorandum item his additional non-taxable, housing allowance c…

Debits and Credits for Designated Gifts

Question:A church is setting up QuickBooks for its accounting, but its personnel have little experience with fund accounting. What are the entries for the receipt and disbursement of designated gifts and the opening balances?Answer:We recommend that most churches that do not need to present financial statements in accordance with Generally Accepted Accounting Principles (GAAP) observe the following steps. Even those churches that do report using GAAP can employ these methods but must make some adjustments when preparing their financial statements.What we will demonstrate relates to what most churches call "designated gifts" (CPAs call these Temporarily Restricted gifts). These are gifts that donors contribute with the intention that the church will spend the funds as they direct. Most churches do not receive "endowment gifts" in which donors prohibit the expenditure of the core gift (CPAs call these Permanently Restricted gifts). Only earnings on the subsequent inv…

Rental of a Church Parsonage to a Non-Minister

Question:A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer:Whether the money is used for church purposes is irrelevant. IRS Publication 598 states:"If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business."Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property. However, a second concern not addresse…