Understanding Pastor Payroll

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Houses of Worship:
Understanding Pastor Payroll
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Gregg S. Bossen, CPA
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Pastor Payroll – Agenda
 Classification of Workers
 Who can be a Pastor?
 What does “dual status” mean?
 Housing Allowances
 Reporting Pastor Compensation
 Concerns & Misconceptions about Pastor Taxes

Pastor
Treasurer/Board
Member/Leadership
Bookkeeper –
Employee of Church
Outside Bookkeeper
or Accountant
Other
What is your
role at your
House of
Worship?
POLL

Classification of Workers
EMPLOYEE
 Works for the HOW
 HOW hires (and can fire) the
employee
 Employment Agreement
 HOW controls schedule
 HOW trains/supervises
 HOW provides facilities,
equipment, tools
 HOW reimburses expenses
 HOW determines pay rates &
schedule
 Entitled to benefits
NON-EMPLOYEE
 NEC has their own business
 Independent biz owner offering
services to the public
 Contractual Agreement
 NEC controls schedule
 NEC knows what/how to do work
 NEC provides own tools; pays own
expenses
 NEC has potential profit & risk of loss
 NEC determines pricing & invoices for
work done
 NEC provides own insurance coverage

Key Factors = Employee or Non-EE?
CONTROL
FINANCIAL
TIME &
SUPERVISION
RELATIONSHIP

Reporting Payments
Employees Non-Employees
https://www.irs.gov/pub/irs-pdf/f1099nec.pdf
https://www.irs.gov/pub/irs-pdf/fw2.pdf

Who Can Be a Pastor?
https://www.irs.gov/pub/irs-utl/ministers.pdf
Licensed, ordained, or commissioned
by a church or denomination
Common law employee of a religious
body – church or denomination
• Administer sacerdotal functions
• Conduct religious worship
• Management responsibility in the control,
conduct, or maintenance of a church or
denomination
• Considered a religious leader by a church or
denomination
• Administer sacerdotal functions
• Conduct religious worship
• Management responsibility in the control,
conduct, or maintenance of a church or
denomination
• Considered a religious leader by a church or
denomination
Worker performs ministerial duties

Why being a Pastor is important?
Classification determines how a minister
prepares his/her tax return for income tax
and social security/Medicare purposes.
Potential double benefit of
mortgage interest & real estate
taxes as itemized deductions and
as excludable housing expenses
Exemption from
mandatory income
tax withholding
Voluntary
withholding of
income taxes
to cover Fed & SECA
Housing
Allowance is*
excluded from
income taxes
Exemption
from SE tax under
VERY LIMITED
circumstances
*Portion of housing
allowance may not
be excluded.

What does “dual status” mean?
 Status of EMPLOYEE
for Income Tax purposes
 Status of SELF-EMPLOYED
for Social Security & Medicare purposes

Which form does a Pastor get?
Employees
Non-Employees

W-2
1099-NEC
Both: W-2 for Salary;
1099 for Housing
Either one will work
No clue
Which form
should a
Pastor
receive?
POLL

 Who can be a Pastor – and why does it matter?
 Concerns & Misconceptions about Pastor Taxes

Pastor Compensation
Housing
Benefits
Salary
Excluded from federal
(and most state)
income tax; but
subject to SE tax
MAY be taxable for both
income tax and SE tax
Included in income
for income tax and
SE tax

Housing Allowances
A minister's housing allowance
(sometimes called a parsonage allowance or a rental allowance)
is excludable from gross income
for income tax purposes
but NOT excludable
for self-employment tax purposes.
https://www.irs.gov/faqs/interest-dividends-other-types-of-income/ministers-compensation-housing-allowance/ministers-compensation-housing-allowance

Housing - The Lesser of Three
Board
Designated
Fair
Rental
Value
Actual
Expenses
Mortgage
Principal &
Interest
RE Taxes
Home/Renter
Insurance
HOA Fees
Utilities
Repairs
Yard
Maintenance
Furniture
Appliances
Down Pmt in
Yr of
Purchase
Furnished
Utilities
Dollar
Amount
or
Percentage of
Income

Approval of Housing Allowance
Suggestions
Document approval in writing.
Include a safe harbor clause to continue
allowance beyond year.
Don’t become your Pastor’s tax advisor.
Seek guidance from a qualified realtor
regarding fair rental value.
Sign and date the form, and record in
Board minutes.
Make appropriate adjustments with your
payroll service.
tinyurl.com/GSCADownloads
FREE DOWNLOAD
Use code: PASTOR

REMINDERS
 Housing Allowances must be:
 Formally designated and
approved in advance
 May NOT be established or
changed retroactively

Exception to Housing Exclusion
If your housing allowance
exceeds the lesser of
your reasonable compensation,
the fair rental value of the home,
or your actual expenses directly relating
to providing the home,
you must include the
amount of the excess in income.
https://www.irs.gov/taxtopics/tc417 Note: It is ultimately the Pastor’s responsibility
to determine any excess housing allowance.
Housing
Allowance is*
excluded from
income taxes

Pastor’s W2
Boxes 3, 4, 5 & 6
Blank (or $0) for pastors
Box 14 = Housing Allowance
Box 16 = Generally the same
as Box 1 unless housing
allowance is taxable for state
income taxes
Box 1 = Total Compensation,
NOT including housing allowance
Exemption from
mandatory income
tax withholding

What’s included in Box 1 income?
Salary &
Bonuses
Cash &
Gift Cards
Reimbursed
FICA/Pers Ins
Non-Accountable
Allowances
Moving
Expenses
Honorariums
Pastor Appreciation
Love Offerings
Des
Fund

No
Yes, a
few
Yes, a
bunch
Way too
many
Does your
House of
Worship
collect
Designated/
Restricted
Funds?
POLL

 Who can be a Pastor?
 Common Misconceptions about Pastor Taxes

Common Misconceptions about
Pastor Taxes
Churches Can Pay (or Reimburse) Pastor’s FICA
Pastors Cannot Have Any Taxes Withheld
Pastor Must File a Form 4361; otherwise, Soc Sec &
Medicare Taxes Will Be Withheld

Pastor Taxes
• “Reimbursements” are always considered additional compensation to the
Pastor and show up on W2 – Box 1
• Pastors must pay SECA taxes personally

What’s included in Box 1 income?
Salary &
Bonuses
Cash &
Gift Cards
Reimbursed
FICA/Pers Ins
Non-Accountable
Allowances
Moving
Expenses
Honorariums
Pastor Appreciation
Love Offerings

Pastor Taxes
• If no withholdings, Pastors make quarterly estimated tax payments
• Pastors CAN have Extra FWT to cover both sides of SS & Medicare tax (SE
Tax) – but all taxes appear in Box 2 - never shown in Box 3,4,5,6

Estimated Taxes Due “Quarterly”
Pay online at
www.irs.gov/etpay

Pastors CAN Have Extra FWT
States have a similar form that
will allow Pastors to withhold
state taxes as well.
Voluntary
withholding of
income taxes
to cover Fed & SECA

Pastor Taxes
Pastor Must File a Form 4361; otherwise, Soc Sec & Medicare
Taxes Will Be Withheld
• Form 4361 has no bearing on withholding; SS & Medicare are never
withheld from a Pastor’s payroll check
• Form 4361 is about conscientious objection to the acceptance of public
insurance; cannot be filed for economic reasons; is irrevocable

Form 4361 – Exemption from SE Tax
Can NOT opt out for economic reasons.
Exemption
from SE tax under
VERY LIMITED
circumstances
This form creates an IRREVOCABLE election between the Pastor & the IRS.

Filing for Exemption of SE Tax
Receive Receive approved copy of Form 4361 from IRS
Verify Verify grounds for exemption, under penalties of perjury.
Can NOT be for economic reasons.
Inform Inform your church/licensing body of church of conscientious opposition.
File File IRS Form 4361 prior to timing deadline
Certify
Conscientious opposition to the ACCEPTANCE of any public insurance
that makes payments in the event of death, disability, old age, or
retirement; or that makes payments toward the cost of, or provides
services for, medical care (includes Social Security & Medicare)

Pastor Taxes
• “Reimbursements” are always considered additional compensation to the
Pastor
• Pastors must pay SECA taxes personally
• If no withholdings, Pastors make quarterly estimated tax payments
• Pastors CAN have Extra FWT to cover both sides of SS & Medicare tax (SE
Tax) – but all taxes appear in Box 2 - never shown in Box 3,4,5,6
Pastor Must File a Form 4361; otherwise, Soc Sec & Medicare
Taxes Will Be Withheld
• Form 4361 has no bearing on withholding; SS & Medicare are never
withheld from a Pastor’s payroll check
• Form 4361 is about conscientious objection to the acceptance of public
insurance; cannot be filed for economic reasons; is irrevocable

Useful Resources
Ministers Audit Techniques Guide
Publication 517
https://www.irs.gov/pub/irs-pdf/p517.pdf

Special Offer!
Ends 8/19/2023 at 11:59PM PT
• QuickBooks for Houses of Worship $269
The material covers both basic and advanced topics of using
QuickBooks for houses of worship and churches.
Normally: $299
Code: TS30OFF
 Tech Support for 1 Year $299
Normally: $499.00
Code: TSTS299

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