A PASTOR AND HIS TAXES

 What is the difference between federal income tax and the self-employment tax?

Pastors are considered dual-status employees, which means they are treated as an employee for federal income tax purposes, and self-employed for Social Security/Medicare purposes.  Being an employee, they do receive a W-2.

Self-employment tax is simply the vehicle a self-employed individual uses to pay his Social Security/Medicare tax (SECA).  Income (whether you are an employee or self-employed) is subject to both federal income tax and Social Security/Medicare tax. 

Employees pay their taxes throughout the year as their employers withhold taxes from their pay.  The amount withheld for federal tax is figured based on the W-4 an employee fills out when employment begins.  For Social Security/Medicare the employer withholds 7.65% (6.2% for Social Security tax and 1.45% for Medicare) from the employees salary, then the employer matches that amount (pays an additional 7.65% which is not considered income to the employee).

Self-employed individuals pay their taxes throughout the year by making quarterly estimated payments.  This amount covers both their federal tax and self-employment tax (Social Security/Medicare).  The amount they pay is only an estimate; they figure the actual amount when they file their yearly tax return.

 How does a pastor pay his taxes?

 A pastor’s options in paying taxes during the year are:

1.     Your treasurer can withhold enough FIT (Federal income tax) to cover both the FIT and Social Security/Medicare taxes.

2.     Your treasurer can withhold FIT and you can file Social Security/Medicare taxes quarterly on Form 1040-ES.

3.     You can file quarterly on 1040-ES for all taxes.

4.     Prepaying your state taxes by withholding or quarterly estimates may also be required.

What is included in a pastor's income for federal income tax purposes? 

The pastor pays federal taxes on the amount of his salary not including the actual expenses incurred for his designated housing allowance, and any tax free fringe benefits.*

 What is included in a pastor's income for for self-employment tax purposes? 

The pastor pays self-employment tax on his salary, his housing allowance, the fair market rental value of any church owned parsonage, including any church paid utilities.  Other outside income, such as honorariums, would be included on Schedule C of the tax return and subject to self-employment tax.*

 *Additional church income such as Christmas gift, bonuses, etc. are to be include for all federal and state taxes.