Pastoral Compensation – Reporting and Withholding
Structuring compensation packages and employer taxing/withholding of clergy/pastoral staff can be a bit tricky since there are several rules that apply to only them and no other employee in the US. First of all; clergy have a dual tax status which flies in the face of employment tax rules since no person/entity can be both a self-employed contractor and employee at the same time (receiving a 1099 & W-2). Well; that is exactly the case with clergy in that they are considered a self-employed contractor for tax purposes and yet an employee for reporting purposes. What exactly does that mean?
“Self-employed contractor for tax purposes” means that an employer does not withhold income taxes (federal or state)/FICA from wages nor does an employer pay matching FICA taxes as they do with every other employee. In short; clergy are treated as 1099 self-employed contractors for tax purposes which means that taxes are the responsibility of the self-employed contractor – not the employer. So how then can clergy be considered an employee for reporting purposes?
Being treated as an “employee for reporting purposes” means that clergy are provided with a W-2 for wages for tax purposes just as every other employee of the ministry. However; the W-2 looks a bit different than other employees in that Box 1 “Wage, tips, and other compensation” is typically the only box filled in, besides Box 14 “Other” where housing allowance paid is listed. This makes sense from the stand point that wages were treated as if the clergy member was a self-employed contractor, so wages were not subject to Social security/Medicare (Boxes 3 & 5) while no withholdings were made (Boxes 2, 4 & 6).
There is one caveat to this article that I would like to mention regarding withholding of payroll taxes for clergy. There is the option for a clergy member to ask the ministry to withhold taxes from wages and submit them to the IRS on behalf of the clergy member through a written Voluntary Withholding Agreement or other written document. Under this circumstance; a ministry could remit withheld funds (no matching FICA or FICA) using a tax table or specific requested amount to the IRS in a similar fashion to other employees. Please note that social security and Medicare (FICA) is not withheld and remitted under a Voluntary Withholding Agreement since self-employed contractors do not pay FICA (Federal Insurance Contributions Act) but rather SECA (Self-Employed Contributions Act). Social security and Medicare payments should be remitted to the IRS by the clergy member on a quarterly basis using the IRS Form 1040-ES or another appropriate method.
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