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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Federal Tax Dual Status for pastors

Resolved Question:

My son is a 26 year old pastor that did not exempt out of social security. For his first four years as a pastor there was no problem, but now, there is confusion. We have checked with different tax people as well as other churches and have different answers. The question is concerning "dual status". He never has been until this year. He has always been a paid employee, with the church withholding all taxs, FICA, Medcare. Some one in the church said no, he had to be "dual status". We have been told by several tax preparers that he does not have to be, that the church can continue to withhold. PLEASE HELP.
Submitted: 9 years ago.
Category: Tax
Expert:  Christopher Phelps replied 9 years ago.
Ordained ministers and pastors are considered employees for tax & legal purposes assuming their work situation does not qualify them for independent contractor status. Thus, if they are working for one church or organization, generally working in the same location, are under supervision (by a superior or the board) then they will likely be considered as employees.

However, they are treated differently for certain reporting and withholding purposes than other employees. Clergy compensation packages typically consist of a base compensation or wage and a housing allowance. For reporting purposes the employer will prepare and submit a Form W-2 for the clergy showing the base compensation or wage in box 1 and will report nothing in the FICA or Medicare boxes. The housing allowance may be reported as a separate item in box 14, but not necessarily.
Customer: replied 9 years ago.
Reply to Christopher Phelps's Post: Can the church still pay its' part of the FICA and my son pay his half, or does my son the youth pastor have to pay the entire amount.
Expert:  Christopher Phelps replied 9 years ago.
Clergy are considered "dual status" because for tax purposes they are considered employees for "regular income tax" purposes but are considered "self-employed" for social security and medicare purposes. Clergy compensation generally consists of a base salary or wage and a housing allowance. The housing allowance (if properly declared and paid) is not taxable for regular tax purposes but is for self-employment purposes (unless you exempt out of social security).

Thus, when clergy employers report on a W-2 they show just the salary portion in box 1. Nothing is reported for social security or medicare in boxes 3-8. The housing allowance may show up in box 14.

Your son needs to fill out schedule SE and report both his salary and housing allowance as compensation for figuring the self-employment taxes. He may reduce this compensation by the amount of any expenses he reasonably incurred in the performance of his duties that will not be reimbursed by his employer.

He can request that his employer withhold Federal income tax from his regular paychecks. The trick is to request enough withholding to cover both the income tax liability and the self-employment tax liability.

If his church is switching him over from employee status to this "dual status" I would recommend he speak with his supervisor or the board (whoever sets his compensation) about increasing his salary by at least the amount the church is going to save from not having to pay in its share of the FICA/Medicare matching contribution. If you are able to get them to agree to this then his take-home pay will not change much if at all. Its just the manner in how its being reported that’s changing.
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience: CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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