Pastor Payroll Mistakes– Here's How to Fix Them
By Raul Rivera
Meet Pastor Tom. He leads a growing church that recently reached a point where it could provide him a full-time salary. Every other week, Pastor Tom receives a paycheck of $3,200. When he reviews his pay stub, he notices the following withholdings:
- Federal Tax (15%): $480
- Social Security Tax (6.2%): $198.40
- Medicare Tax (1.45%): $46.40
This totals $724.80 in deductions, leaving Pastor Tom with a take-home pay of $2,475.20.
At first glance, everything may appear correct. But when it comes to taxes for ministers, things are rarely that simple. Many churches unintentionally make mistakes that can create long-term issues with the IRS. Let’s examine what really should be happening.
Ministers Are Treated as Self-Employed
According to Section 3401(a)(9) of the Internal Revenue Code, a minister’s wages are excluded from the definition of wages subject to standard employee tax rules. This means that even though a church pays the minister, the IRS views the minister as self-employed for purposes of Social Security and Medicare.
Additionally, Section 3121(b)(8)(A) prohibits churches from withholding these taxes from a minister’s paycheck.
In other words, churches may not withhold Social Security or Medicare taxes from a minister’s pay. Ministers must pay these taxes directly through the self-employment tax system.
How Ministerial Taxes Work
Although ministers are self-employed for tax purposes, they still receive a W-2 form, not a 1099. However, their W-2 should reflect key differences:
W-2 Reporting Structure
- Box 1: Shows the minister’s taxable income
- Boxes 3 & 4: Should be left blank
- Boxes 5 & 6: Should be left blank
- Box 14: May include housing allowance (if applicable)
Ministers are required to pay 15.3% in self-employment taxes:
- 12.4% for Social Security
- 2.9% for Medicare
This tax applies to both salary and housing allowance. Ministers can make quarterly payments using Form 1040-ES or pay online at EFTPS.gov.
Applying for Exemption
Ministers who are opposed to participation in public insurance programs for religious reasons can apply for an exemption under Section 1402(e) by filing IRS Form 4361 on time.
In Pastor Tom’s case, a successful exemption could reduce his tax burden by $12,729.60 per year.
Voluntary Withholding of Federal Income Tax
Ministers may request that the church withhold federal income taxes voluntarily. If this arrangement is made, the amount withheld should be reported in Box 2 of the W-2.
Where Churches Often Go Wrong
A common error churches make is treating ministers like standard employees—deducting Social Security and Medicare taxes from their checks. This misstep can cause filing issues and even lead to penalties.
To avoid these problems, churches must apply the IRS rules specific to ministers.
How StartCHURCH Helps
At StartCHURCH, we understand the complexities of ministerial compensation. That’s why we provide the services and support you need to stay compliant:
- Compensation Structuring
We help churches build pay plans that follow IRS rules and protect the ministry. - Housing Allowance Setup
We walk you through the process of properly designating and documenting housing allowances. - Clergy Tax Support
Our experts guide churches and ministers through tax responsibilities and benefits. - Exemption Filing Assistance
We make it easy to apply for the self-employment tax exemption with full paperwork support. - Clerical Services
Every service we offer includes administrative help—we handle the forms, timelines, and documentation so you can stay focused on ministry.
Stay Compliant. Avoid Mistakes. Call Us Today.
Getting ministerial compensation right is critical for long-term protection and peace of mind. Ministers are treated as self-employed, and churches must not withhold Social Security or Medicare taxes from their paychecks.
If your church is unsure about how to structure compensation or comply with clergy tax rules, StartCHURCH is ready to help.
Call us at 770-638-3444 and speak with one of our specialists today. Let us take care of the details—so you can take care of the mission.
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1. For IRS purposes, “ministers” refers to individuals who are ordained, commissioned, or licensed by a religious body to perform ministerial duties. This includes not only lead pastors, but also worship leaders, children’s pastors, and teachers at church-affiliated schools who have been ordained to carry out religious instruction.
This understanding is supported by the Supreme Court case Hosanna-Tabor Evangelical Lutheran Church and School v. Equal Employment Opportunity Commission, 565 U.S. 171 (2012). In that decision, the Court unanimously ruled that the First Amendment prevents the government from interfering with a religious group’s decision to employ ministers. The Court concluded that a teacher at a religious school, who was formally commissioned and trained for ministry and who taught both religious and secular subjects, qualified as a “minister” under the ministerial exception. The ruling confirmed that employees performing vital religious functions can be classified as ministers, even if their roles include non-religious tasks.
2. Improper tax treatment of ministers can also expose a church to penalties under Section 4958 of the Internal Revenue Code. This occurs when compensation arrangements result in an excess benefit—such as when a church pays a minister’s self-employment tax or withholds FICA without properly reporting the payment as taxable income. If the IRS determines the minister received an unreported benefit, both the minister and church leadership may face excise taxes and penalties.
Section 4958 addresses “excess benefit transactions” within tax-exempt organizations, including churches. It allows the IRS to impose intermediate sanctions (penalties) on individuals who receive unreasonable benefits from a nonprofit and on organizational leaders who approve those benefits.
Here’s how this ties into misclassifying ministers:
1. If a Church Pays the Minister's SECA Taxes Without Proper Reporting
If a church improperly pays a minister’s self-employment taxes (SECA) or withholds FICA taxes and does not report that payment as taxable income, the IRS may treat this as an excess benefit. Why? Because the minister has received compensation beyond what was reported, creating a non-transparent financial benefit.
That hidden or mischaracterized payment could trigger Section 4958 penalties, including:
- A 25% excise tax on the excess benefit, payable by the minister.
- An additional 10% excise tax (up to $20,000) on any church leader who knowingly approved the transaction.