Compensation Planning - Part 6 of ?

Step #7 - Properly Classify the Employees Who are Ministers

There is no special time during this process to complete this particular step, so I have chosen to place it in this slot. It is a crucial step in the process and must be completed at some point in time. Ministers have different tax treatment than other employees and this treatment is mandated by law. It isn't optional, so it is important to know who qualifies as a minister for federal tax purposes. (At this time we are only dealing with defining ministers for federal tax purposes and not for other purposes such as for Department of Labor purposes.)

Minister's Tax Status
Ministers have what is commonly referred to as "dual tax status".

Federal Tax Purposes: For federal income tax purposes, a minister is generally treated as a common law employee. Additionally, while he/she is subject to paying federal income tax, a minister is exempt from the mandatory withholding of the federal income tax.

Social Security/Medicare Tax Purposes: For payments into Social Security, the minister is always self employed. This translates into the fact that a minister can never pay into the Social Security/Medicare system the way a regular employee does through the traditional employee payment with an employer matching payment better known as FICA/Medicare. This is defined by law under IRC Section 1402 and 3121.

If you have a minister working for your organization and he/she is considered a minister for purposes of receiving a housing allowance and the minister is participating in the FICA/Medicare program through withholding and matching, this practice should be stopped immediately. The only way that a minister can pay into the Social Security/Medicare system is through the Self Employed Contributions Act by paying SE tax on his/her personal tax return.

Who is A Minister?
In order to be considered a minister for federal income tax purposes, the employee must have been commissioned, licensed or ordained by a church (credentials issued by organizations that are not churches do not qualify.) Additionally, the minister must be performing ministerial duties. For a church, ministerial duties include 1) the preaching, teaching and conducting of religious worship services; 2) the control, conduct & maintenance of a religious organization and their integral agencies; 3) the teaching and administration in a theological seminary; and 4) the performance of sacerdotal functions. If the employer is not a church, then ministerial duties are limited to #1 and #4.

Documentation
The employer needs to document the ministerial duties being performed by the minister as well as maintain copies of the credentials in the minister's personnel files.

Conclusion
This is a very brief explanation of this particular area and is simply discussed just to bring attention to the important differences attributable to ministers in the area of payroll. If an employer has any concerns about the proper classification of its ministers, it should seek advice from a competent tax professional.