TAX WITHHOLDING FOR CLERGY
Ministers working for churches are treated differently than other employees when it comes to tax withholding.
The first major difference is Social Security and Medicare taxes. Ministers are required to pay Social Security Self-Employment tax rather than being subject to the 7.65% Social Security and Medicare tax withholding (IRC 3121 (b)(8)(A)).
Therefore, Social Security and Medicare taxes should not be withheld from the ministers pay. The Social Security and Medicare boxes on the ministers W-2 Form should then be left blank (boxes 3, 4, 5 and 6). Instead, minister’s are responsible for paying 15.3% Social Security Self-Employment tax on their salary and housing allowance, in addition to whatever State and Federal income taxes apply.
Also, minister’s are exempt from state and federal income tax withholdings from their pay (IRC 3401 (a)(9)). However, the minister may enter into a voluntary withholding agreement with the church, whereby federal income tax is withheld in an amount that could ultimately cover the Self-Employment tax obligation. The Federal income tax can be withheld in whatever amount the minister requests.
For voluntary withholding of Federal Income Tax:
Tax withheld is reported to the IRS on Form 941 (line 3).
The minister’s wages must be excluded from lines 5a and 5c of Form 941.
The tax withheld is also reported on the minister’s W-2 Form (box 2).
Boxes 3, 4, 5 and 6 of the minister’s W-2 Form should be blank.
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