Clergy payroll can be complicated. One of the more challenging topics for clergy payroll is the relationship of clergy with the local church and how that relationship affects tax withholdings, especially Social Security and Medicare.
- Churches can not withhold Social Security and Medicare from a Clergy’s compensation.
- Churches can not pay Social Security and Medicare for a Clergy.
- Churches can provide additional taxable income to provide Social Security and Medicare support.
Church employees are given a W2 at year-end by the church. For these W2 employees, the costs associated with Social Security and Medicare are split 50/50 between the church and the employee. These costs for Social Security and Medicare are governed by the Federal Insurance Contributions Act, so these costs are often referred to as FICA.
For self-employed contractors, the church does not withhold or pay FICA. Instead of a W2, contractors receive a 1099 at the end of the year to report their compensation. While the cost of Social Security and Medicare are not split with the church for contractors, contractors still must pay into Social Security and Medicare through their own tax filing at year-end. Instead of FICA, the Social Security and Medicare costs for contractors are governed by the Self-Employment Contributions Act, also known as SECA.
Clergy fall into a unique category related to the IRS with a dual tax status. They are considered employees for the sake of federal tax withholding, but are considered self-employed as it relates to Social Security and Medicare. This means that instead of filing a 1099 for clergy like you would for other self-employed contractors, clergy compensation is reported on a W2.
DO NOT Withhold Social Security and Medicare
Because of this unique dual tax status, unlike with other W2 employees, churches may not withhold Social Security or Medicare from a clergy’s paycheck and churches may not pay Social Security and Medicare as an employer for the clergy. Please read this carefully: churches do not / should not / may not withhold Social Security or Medicare from clergy compensation, and churches do not / should not / may not pay FICA for clergy.
Clergy do have other tax benefits related to housing. So as a helpful tip, just remember clergy cannot receive both the housing tax benefit and the benefit of the employer paying half of FICA on their behalf.
SECA Allowances
While clergy do not benefit from the church paying 50% of FICA to the IRS on their behalf, churches are allowed to provide additional income to assist with a clergy’s Social Security and Medicare costs. This kind of additional compensation is often called a SECA Benefit, related to the Self-Employment Contributions Act. Please note, while SECA Benefits are intended to help off-set SECA costs, they must be paid out to clergy as taxable income in the normal payroll process and the amount paid as a SECA Benefits should be included in box 1 of the W2 at the end of the year as taxable income.
SECA Withholdings
While the church may not withhold Social Security and Medicare from a Clergy’s compensation like they do for other employees, clergy may elect to have additional federal taxes withheld from their payroll to help cover SECA costs. If (and only if) a clergy person requests additional federal withholdings, the church is required to increase the federal tax withholding as directed by the clergy person. This request should be made by the clergy through the completion of a Federal W-4 form. As with all federal withholdings, any federal withholdings for clergy should be submitted to the IRS as part of your regular federal payments and should be included in your church’s quarterly 941 payroll filings.
If your church has been withholding and covering FICA costs for your clergy, you should work with a CPA or certified tax specialist to correct your past payroll filings. These corrections can be time-consuming as they require filing amended 941x forms with the IRS and often require reimbursing the clergy for FICA taxes previously withheld.
Struggling to figure out clergy compensation? Take a look at these other upcoming topics related to clergy compensation!
- Types of Compensation
- Housing Allowances / Housing Exclusions
- Medical Benefits
- Pension Contributions
- Group Term and Other Life Insurance
- End of Year W2s
- Payroll Systems To Make Clergy Payroll Easy
