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 for other purposes it believes that 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). If the church reports his compensation,including the housing allowance, on Form 1099-MISC as taxable income, will he be able to deduct his housing expenses somewhere else on the Form 1040?

Answer:

This questions 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-MISC. On Form W-2, Box 1 for taxable compensation is reduced reflecting the church's designation of a portion of his pay as non-taxable. Then in Box 14, it typically reports as a memorandum item his additional non-taxable, housing allowance compensation. In the situation addressed in the question, this Form W-2 reporting may or may not a…

Heath Care Sharing Ministries and the SE Insurance Deduction

Question:

Can payments made to a health care sharing ministry (e.g., Samaritan Ministries, Christian Healthcare Ministries) which are exempt from the Affordable Care Act be deducted from income as a self-employed (SE) insurance deduction?

Answer:

First, to be technical, "health care sharing ministries" (IRS exemption D) provide participants an exception from Shared Responsibility Payments (ACA penalties), but don't connote other tax benefits.

Second, a health care share ministry does not qualify as health insurance. One does not pay what the IRS considers to be premiums, but instead shares the health expenses of others. And according to IRS Pub 535, in order for self-employed individuals to qualify for a SE insurance deductions they must be to pay premiums for qualifying health insurance. 


Church Car Purchase for Pastor

Question:

A church would like to purchase a car for the pastor's use. What is the best method to accomplish this goal? Should the car be titled in the pastor's name? What will be the tax consequences of this arrangement?

Answer:

The church has two main alternatives for this purchase: 
Title the car in the pastor's name and reimburse him for business expensesTitle it in the church's name and treat personal use as taxable compensationThere are fewer immediate tax consequences for the latter. Since both are viable options, we will discuss both situations in this post.

If the church chooses to give the car to the pastor and register it in his name, he is free to use it for whatever personal use he desires with no tax consequences. However, the fair value of the car is taxable as compensation at the time it is given to the pastor. Internal Revenue Code section 102(c) clearly states that gifts given to employees by their employers are taxable compensation. The church can reimburs…