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?"
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."