Elaine Sommerville, CPA, explains The Two Most Confusing Aspects of Classifying Your Minister for Tax Purposes at Church Law & Tax.
A frequent source of confusion for handling ministers’compensation is Social Security and Medicare taxes. Federal law defines ministers of the gospel as being subject to the Employed Contributions Act (SECA) instead of the Federal Insurance Contributions Act (FICA), which is what all of us are most familiar with. The SECA rules usually come into play for self-employed people.
In one sentence, ministers of the gospel are subject to SECA instead of FICA. As a result churches should not be withholding the employees’ portion of FICA from the minister’s pay and permitting the employer’s portion of FICA. Instead, a minister of the gospel is responsible for the entire SECA payment.
If you know what that paragraph you just read means, you don’t need the rest of this post or Mrs. Sommerville’s article. If you didn’t quite get that paragraph, please read on.
The linked article explains in more detail the impact of SECA requirements on ministers of the gospel.
It goes on to explain and then break down two myths about minister’s compensation:
Myth #1. If the minister is self-employed, the wages should be reported on Form 1099-MISC.
Myth #2. If the minister does not have an approved Form 4361, the employer should allow the minister to have FICA/Medicare taxes withheld from his or her pay and matched by the employer.
Check out the article to explain why those myths are incorrect and the appropriate tax treatment.