Figuring out taxes can be hard for everyone—perhaps especially for pastors.
“Every year it was an exhausting, frustrating, stressful time,” retired pastor and TGC Council member John Yates will tell you. Neither he nor his wife Susan “are particularly good at money matters, record keeping, direction following, or understanding government forms! . . . We both dreaded this time of ‘tax season’ more than any other time of the year.”
“Papers were spread out across various card tables set up in rooms that were already overcrowded, and my precious wife wasn’t happy. In fact, often she was frustrated not just with the enormity of the task, but also disappointed with me because I hadn’t kept this or that receipt or I had forgotten to take care of some important detail which meant much more work for her.”
But this year, John and Susan finished their taxes in February, and “without a single cross word.”
Yates has some good advice for couples in ministry: take responsibility to work together, be honest, and pray for wisdom and patience.
As a tax attorney, I have a different area of expertise. I hope my advice will also prove helpful.
1. Check Your Forms
This first question is foundational: Are you employed by a church or self-employed?
If you work for a single congregation or are assigned a church by your denomination, you are almost certainly an employee of the church. That means your church withholds taxes for you. In January or February each year, you’ll receive a W-2 form from your church, and you’ll report your income as wages on Form 1040.
A self-employed pastor has greater autonomy and is subject to less control by the elders or other governing authority. He also has to work harder on his taxes. If this is your situation, you’ll receive Form 1099-MISC from anyone who has hired you in the past year. You’ll report your income on Schedule C.
A tip for self-employed pastors (or self-employed anyone): It helps to track any expenses related to your work during the year. If you purchase books, drive to speak at another church, or buy a work laptop, be sure to track your expenses and mileage. You can deduct those on Schedule C.
2. Check Your Honoraria
It’s not unusual for pastors to perform duties outside of their normal work—for example, teaching classes, speaking at conferences, or officiating at weddings and funerals. If anyone hands you a check for your time or services, that is taxable income. If the amount is $600 or more, you’ll receive a 1099-MISC or 1099-NEC.
There are two possible places to report this income on your taxes. As a general rule, if it’s a one-time thing you don’t intend to repeat—and it’s for a minimal amount—it belongs on Schedule 1. If it’s more of a regular part of your job (such as performing a wedding), it belongs on Schedule C. Generally, it is safest to report anything you receive a 1099 for on Schedule C.
All honoraria are self-employment income for the self-employment tax—we’ll get to that in a minute.
3. Check Your Housing Allowance
Unlike honoraria, you do not pay income tax on the use of any church-owned home. The value it provides to you is equal to the fair market rental value of the home (this will be important later), but it’s not subject to income tax.
Instead of a parsonage, the church may give you a housing allowance to spend on housing of your choice. The housing allowance must be not exceed “reasonable compensation” for your services, but unless you’re receiving a truly spectacular housing allowance this test is unlikely to trouble you. You do not pay income tax on the housing allowance.
One caution: there are limits. The amount excluded from your income is the lowest of (1) the predetermined housing allowance, (2) the actual amount spent on housing, or (3) the fair market rental value of your home.
Figuring out taxes can be hard for everyone—perhaps especially for pastors.
For the first test: The amount of the housing allowance must be determined in advance and designated as a housing payment by the church. If you don’t already have a predetermined amount, ask the church leaders to address that as soon as possible. Because the test is the lowest of the three test values, if your church neglects to determine a housing allowance in advance, your exclusion is zero.
For the second test: The housing allowance can be used to pay for the rent, mortgage payments, utilities, home improvements, insurance, upkeep, maintenance, and other costs of home ownership. Items such as furniture and decorations should not be included. Appliances and similar items that are installed and would be left with the home if you moved are appropriately considered housing expenses.
For the third test: Fair market rental value of a home is best determined by reference to the rental value of similar homes near the parsonage. (If you’d like, you can use something like Zillow or Trulia to determine that number.)
So, for example, if your church agrees to pay you a $30,000 housing allowance but you only spend $20,000 of it on your mortgage, taxes, utilities, and upkeep, and the fair market rental value of the property is $15,000/year, you may exclude $15,000 of the payment as a housing allowance.
Because the housing allowance is a tax exclusion, it does not appear on your tax return as income. However, you will need to report it—because there’s more than one tax system. So far we have been discussing the income tax. We still need to consider the self-employment tax.
4. Check Your Social Security
Now we come to the bugaboo of pastors’ taxation. Recall that for income tax purposes there’s a distinction between self-employed pastors and pastors who are employees of a church. However, for the social insurance programs (Social Security, Medicare, and Medicaid), all pastors are considered self-employed.
This means that even if you’re an employee for the income tax and have had income tax withheld, you’re self-employed for the various insurance taxes (e.g., Social Security, Medicare, Medicaid). Instead of the FICA withholding that you might remember from a previous job, you pay SECA, or self-employment tax.
That makes a big difference on your taxes. For most employees, the cost is split with their employer. Of the 15.3 percent that’s owed on each salary, an employer sends the government 7.65 percent, while another 7.65 percent is withheld from the employee’s paycheck.
Pastors (and any other self-employed person) pay the entire 15.3 percent tax directly. This tax is calculated and reported on IRS Schedule SE.
Pastors are allowed to claim a full exemption from the self-employment tax—both for social insurance and for the housing allowance—if they have a “religious or conscientious objection to the acceptance . . . of any public insurance.” The exemption is claimed on Form 4361 and must be filed within the first two years of a pastor’s employment as a minister. If this sounds tempting (and it probably does), be cautious here: does your denomination or theological training truly compel religious or conscientious objection to social insurance? That’s a matter for personal integrity and theological reflection.
5. Check Your Housing Allowance (Again)
Regardless of whether you’re a church employee or not, the self-employment tax is going to take another bite from your income through your housing allowance. Your housing allowance is fully excluded from income taxes but is fully included in self-employment taxes.
The same is true for a church-owned parsonage; the benefit of the housing is worth what you would’ve paid to live there and that fair market rent is treated as income for self-employment taxes only. The housing value or housing allowance must be added to your other income on Schedule SE to property calculate and pay the self-employment tax.
Some churches include an additional payment to their pastors to help offset the self-employment tax on the housing allowance. This is perfectly legal and appropriate, but the entirety of that payment is also taxable income (for both income and self-employment tax purposes).
Heads up: All of these tips apply to filing your 2021 taxes, but going forward you should consider making quarterly payments of your estimated self-employment taxes. The IRS will assess penalties for underpayment of your taxes if you fall too far behind. (Estimated taxes can be paid online at https://www.irs.gov/etpay.)
Bonus Point: How to Help Your Congregation
Your congregants are filing their taxes too, and may be looking to take the charitable contribution deduction for the donations they’ve given to your church. Your staff can help them out by maintaining good records and providing clear giving statements to your donors.
The written statements must show the name of the church, the date of the gift, the amount received (or a description if the contribution is something other than cash), and a statement that no goods or services (other than “intangible religious benefits”) were received by the donor. If a gift is partly a contribution and partly in exchange for goods (such as a purchase at a charity auction) then the receipt must also include an estimate of the value of the goods received by the donor.
Providing timely receipts and statements will help your congregants to file their taxes with integrity, and will allow them to prove their donations if the IRS ever comes knocking with an audit.
Render to Caesar
Paying taxes is never fun. It’s often discouraging and frustrating to see in stark numbers how much we’re giving to the government each year.
It can help to remember we aren’t the first ones who felt this way. In Mark 12:14, the Pharisees ask Jesus, “Is it lawful to pay taxes to Caesar or not?” At this time, Jews were paying all types of taxes—including but not limited to a water tax, city tax, meat tax, salt tax, road tax, and house tax. So our income tax, self-employment tax, property tax, sales tax, estate and gift tax, and excise taxes on outboard motors and tackle boxes are in good company.
Their taxes weren’t collected by a creaky bureaucracy, but through tax collectors whose methods were so corrupt that their money wasn’t even accepted at the synagogue.
And yet Jesus, who knew all this, told them to “Render to Caesar the things that are Caesar’s, and to God the things that are God’s” (Mark 12:17). Elsewhere, he provides temple tax money for both himself and Peter (Matt. 17:24–27).
Here in 21st century America, we enjoy a largely peaceful civic order and tremendous material blessings, notwithstanding state corruption and other disturbing troubles of social, political, and legal realms.
Paying taxes with integrity is both a witness to the world and a means of loving our neighbor.