Pastoral Compensation Mistakes
As I travel across the USA teaching Church Management and Tax Conferences, some of the most common mistakes I see are those involving Pastor’s compensation. Pastors are not the standard employee working for a standard employer. Pastors are unique in their position and therefore are unique in their compensation.
Churches make several mistakes when computing and reporting the compensation package. I want to focus on the three most common.
The Self-Employment Mistake
Pastors are categorized as dual-status employees. This makes them unique in that they are employees for income tax purposes, but self-employed for Social Security purposes. The most common mistake Churches make is that of reporting the minister’s income on a 1099-MISC rather than a W-2. Ironically, many of these Churches use local CPAs that do not know Church Tax and Accounting Law, which advise them to erroneously do this. This in turn creates problems for the local congregation with the IRS.
Pastors should not receive form 1099-MISC. They must receive the W-2. For tax returns, their payroll must not be reported on Schedule C. It is to be reported on the 1040.
The Social Security Mistake
Regardless of how a local CPA may instruct a Church, the Church must not withhold Social Security, nor can it pay matching amounts. Pastors are 100 percent responsible for their Social Security and the amount is 15.3 percent of their income (including Housing Allowance).
The Pastor was from a mainline denomination in West Virginia. He approached me privately because of his dilemma. His denomination and an IRS agent told him to have the Church withhold Social Security and report it on a 941. This had transpired for two years before another agent caught the violation and then began an audit.
Churches must never withhold Social Security from the Pastor’s pay, nor are they allowed to provide an offset. What the Church may call blessing the Pastor is a violation of IRS rules and regulations and may subject the Church and Pastor to huge penalties.
The Withholding Mistake
Another Pastor in North Carolina came to me on break to tell me she had never filed an income tax return on her ministerial income – she had been mistakenly informed that ministers’ income was tax-exempt.
A Pastor’s salary is subject to income tax – he or she is exempt from having it withheld from his or her pay. A Church should never withhold income tax from a Minister’s pay unless the Minister has signed a voluntary withholding agreement. This agreement is for INCOME TAX ONLY – not Self-Employment Tax. However, the minister that enters into a voluntary withholding agreement solely determines how much Income Tax he or she wants withheld. Those who desire this method should increase their withholding to offset the SE Tax or at least a portion of it.
We do not recommend this. We recommend that every minister opt out of Social Security by filing form 4361. However, do not attempt to file this form yourself. Get professional help so that you will not be denied. Regardless of how long you have been in ministry, we know how to get it approved.
How We Can Help
Ministerial Compensation is a complicated subject and should only be performed by outside, disinterested parties, qualified to compute it. We are that firm. We help thousands of Churches across the USA in this and other complicated Church/IRS issues.
We are the best firm in America to file the 4361 to opt all ministers out of Social Security and ease the strain it places on the Ministers’ tax return. You can handle your money better than the Government. Start today.
Contact us at www.cmtc.org or call 800-344-0076 to register for a Church Management Tax Conference nearest you, or contact us to help you get control of your compensation package, including opting out of Social Security. You will be glad you did.