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The Best Kept Secret in Clergy Taxes

By Billy Norden

If you’re a minister, you don’t have to pay quarterly taxes if you don’t want to. Yes, you read that correctly. I’m not saying that you don’t have to pay taxes. That is the not-so-joyful duty of U.S. citizens. But if you are used to paying quarterly taxes, life can get much easier with one simple change.

Paying estimated quarterly taxes is at best a chore, and at worst a task that can get pastors into hot water financially if neglected or done improperly. Because clergy have a dual tax status as both employees and self-employed people, a church does not withhold taxes like it would for a standard employee. Clergy are responsible for estimating their taxes, and paying them on their own as self-employed people.

It seems that I run into two types of clergy. Those who believe that the only way to pay your taxes is via estimated quarterly taxes, and those who missed the memo completely and discover that they owe the government a lot of money. I’m pleased to tell you that there is a third way which makes life much easier.

Ask for a W-4

When I first discovered that ministers could simply fill out a W-4 and voluntarily ask the church to withhold taxes, I thought it must be a mistake. It had been hammered home to me throughout seminary and in my early days in ministry that a church cannot withhold your taxes. But that’s not completely true.

Fact: It is illegal for a church to withhold FICA taxes for a minister (ministers pay SECA taxes, not FICA)

Fact: Churches do not automatically withhold taxes like it would for a standard employee.

Myth: Ministers cannot ask the church to voluntarily withhold their Federal and State taxes.

A minister may ask the church to withhold a dollar amount from their paycheck to be paid towards their federal and local taxes. The process is quite simple after you’ve done it a few times. Estimate what your federal income, Social Security, and Medicare taxes will be for the year, divide that amount by the number of paychecks you receive annually, and put that number in the box that asks for additional taxes to be withheld. You can also calculate your state and other local taxes, and withhold them through a similar process on a different form provided by the local agency.

Here’s where it gets confusing. At first glance, it seems like you can only ask the church to withhold your federal income tax, and not your self employment tax. However, if you calculate your social security and medicare tax, and add it to your federal income withholding, everything will go to the right place at the end of the day.

In their guide for treasurers, “Church Reporting Made Easy,” our friends at ECFA (Evangelical Council for Financial Accountability) write this:

Ministers are always subject to social security under the Self-Employment Contributions Act (SECA). Therefore, social security taxes (FICA) should never be withheld from the salary of a minister. But under the voluntary withholding agreement for federal income taxes, additional federal income tax may be withheld sufficient to cover the minister’s self-employment tax liability. When these withheld amounts are paid to the IRS, they must be identified as federal income tax withheld and not social security taxes withheld.

Make paying taxes less stressful

For ministers, voluntarily asking your church to withhold taxes makes life a lot easier. No more quarterly deadlines to meet, and no more organizing records of those payments in preparation for tax time.

If you like to manage your money closely, maybe you’re thinking “I could put my money to work if I hold onto it myself and keep it in a high yield savings account before I need to pay them out.” I certainly wondered about that myself. I ran a rough calculation of how much I’d make annually if I chose to manage those funds myself and pay quarterly taxes. The whopping amount I’d earn in interest was about $26 for the year. So I think I’ll let the church withhold my taxes and not deal with the chore of paying quarterly taxes.

New W-4

Please note that in 2020, the IRS redesigned the W-4 form. If you’re filling one out for the first time, make sure your church treasurer or administrator has the most up-to-date information on the new W-4from the IRS.