Clergy Taxes

[LdiJ]

I am hoping that TaxingMatters will be able to steer me in the right direction.

Over the years I have seen many clergy members with normal W2s, with normal withholding, including Social Security and Medicare taxes. I have also seen some with no SS or Medicare taxes withheld. It was my understanding that it was an election not to collect hem. One of my clients who is a pastor, is being informed by the church's new payroll company that it is illegal for a church to withhold Social Security and Medicare taxes from his pay.

I am finding several lay sources that seem to agree with that position, but I am having trouble finding any IRS sources that state that, let alone any real authority. I am finding info that churches can make an election to not collect SS and Medicare taxes for their employees, but I am having trouble finding anything that say that they are not allowed to do so at all for Clergy.

If you agree that it is not legal for them to do so, can you please point me to something other than a lay site that states that. My client is upset and I need to confirm it definitively for him.

 

[cbg]

LdiJ, I don't know for sure, but I have a passing acquaintance (not much of a one, but some) of the back of the house with churches. Do you know what denomination the pastor is with? The heirarchy differs with the denomination and whether the pastor is an employee of the church, or the conference, can vary.

 

[Just Blue]

lol...slght hijack. Every time I see the title of this thread my dyslexic brain tells me it says Clergy Texas.

 

[Taxing Matters]

I am hoping that TaxingMatters will be able to steer me in the right direction.

Over the years I have seen many clergy members with normal W2s, with normal withholding, including Social Security and Medicare taxes. I have also seen some with no SS or Medicare taxes withheld. It was my understanding that it was an election not to collect hem.

It is not elective. IRC § 3121(b) defines what is considered employment for purposes of FICA. The flush language at the beginning of the section is very broad, effectively providing that pretty much any payment by an employer to an employee is considered employment for FICA purposes, but then sets out exceptions in paragraphs (1) through (21). Thus there are essentially 21 exemptions from employment that is subject to FICA. Paragraph (8) is the exemption that applies to clergy/ministers. Specifically, that paragraph excludes:

service performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties required by such order, except that this subparagraph shall not apply to service performed by a member of such an order in the exercise of such duties, if an election of coverage under subsection (r) is in effect with respect to such order, or with respect to the autonomous subdivision thereof to which such member belongs;​

​

IRC § 3121(b)(8). Thus, this paragraph excludes the work done for a religious order by its ministers/clergy for the religious work the minister does from being taxed under FICA. That's simply the rule. It's not an election (with one exception coming next). It is by statute exempt.

There is only one circumstance in which it is elective. As the paragraph notes, a religious order must treat employment by a minister as employment for purposes of FICA if it has an election in effect under IRC § 3121(r). That election is available only for religious orders that require their clergy to take a vow of poverty. In short, the only circumstance in which a religious order may opt-in to FICA for its ministers/clergy is where the religious order requires its ministers to take a vow of poverty and elects to cover those minsters under FICA. The order cannot pick and choose which ministers get covered under that election and the election once made is irrevocable. The election is made on Form SS-16.

Instead of being covered under FICA, ministers/clergy are covered under SECA, which is the Act that sets up the self-employment tax system for self-employed persons. So they still get covered by Social Security in the end; they just pay it themselves instead of the religious order withholding half of it and paying the other half itself as employers do.

IRS Publication 517 explains in much more depth the rules pertaining to ministers. It starts out by noting on page 3 the basic rule:

The services you perform in the exercise of your ministry, of the duties required by your religious order, or of your profession as a Christian Science practitioner or reader are covered by social security and Medicare under SECA. Your earnings for these ministerial services (defined later) are subject to self-employment (SE) tax unless one of the following applies.​

• You are a member of a religious order who has taken a vow of poverty.
• You ask the IRS for an exemption from SE tax for your services and the IRS approves your request. See Exemption From Self-Employment (SE) Tax , later.
• You are subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. For more information, see Bilateral Social Security (Totalization) Agreements in Pub. 54.

Your earnings that aren't from ministerial services may be subject to social security tax under FICA or SECA according to the rules that apply to taxpayers in general. See Ministerial Services , later.​

Table 1 of the publication is a very handy quick guide to what pay by religious orders is subject to FICA and what is subject to SECA. If it's FICA exempt on the table then the religious order must not be withholding and paying FICA taxes — leave it to the minister to pay self-employment tax under SECA (unless the minister has a SECA exemption).

There is a process for getting exemption from SE tax for those who oppose public insurance on religious grounds. Similarly, a religious order may exempt the pay of its employees who are not ministers/clergy from FICA if it opposes public insurance on religious grounds. The Amish come first to my mind as a religious order that opposes public insurance on religious grounds. I handled some of that early in my IRS career when I worked in Pennsylvania.

 

[LdiJ]

Thanks TM. Do you know if the IRS imposes actual penalties on a church that has withheld and collected FICA and Medicare for a member of the Clergy? I know that is going to be the next question that is asked. Don't go to the trouble to research it, even briefly. I just want to know if you have observed it at all.

I have to admit that I find it surprising and a bit illogical that Congress would have made a law that required the Clergy to pay self employment taxes instead of having their employer share in the cost, but if that is the law, then it's the law.

 

[LdiJ]

LdiJ, I don't know for sure, but I have a passing acquaintance (not much of a one, but some) of the back of the house with churches. Do you know what denomination the pastor is with? The heirarchy differs with the denomination and whether the pastor is an employee of the church, or the conference, can vary.

He is definitely an employee...the question was whether or not the church was permitted to withhold 1/2 of SS and Medicare from the employee, and pay the other 1/2 themselves. It appears that it is not permitted.

 

[Taxing Matters]

Thanks TM. Do you know if the IRS imposes actual penalties on a church that has withheld and collected FICA and Medicare for a member of the Clergy?

I'm not aware of any penalties that would be imposed on the church for doing it. However, I can see that if the church did that it would potentially get a bit messy, and may end up costing more in tax in the end.

I have to admit that I find it surprising and a bit illogical that Congress would have made a law that required the Clergy to pay self employment taxes instead of having their employer share in the cost, but if that is the law, then it's the law.

The reason for it has to do with imposing tax on religious organizations for the ministerial work that it does. Since the church pays half the cost of the FICA, that ends up being a tax on the religious organizations. In short, it's separation of church and state issue.

 

[Taxing Matters]

One thought did occur me. They could have the church simply hold back some pay and send in estimated tax payments for him instead of doing income tax and FICA withholding, assuming the church is willing and the minister trusts the church to do it right. It still means the minister is paying the full SECA tax and not getting the employer contribution, of course, but if the minister is upset at having to do this himself maybe having the church do it would help him.

 

[cbg]

He is definitely an employee...the question was whether or not the church was permitted to withhold 1/2 of SS and Medicare from the employee, and pay the other 1/2 themselves. It appears that it is not permitted.

No, I get what the question was. In some denominations the pastor is employed by the church; in others it's more like the state conference is a staffing agency and "rents" the pastor out to the individual church. Which it is could affect the church's responsibilities. That's all.