Clergy Tax Issues – Vol 1 of 8: Pastor’s Pay — a complicated issue.
Clergy Tax Issues – Vol 1 of 8: Pastor’s Pay — a complicated issue.
The Internal Revenue Service has been concerned for years about the problem of persons reporting their income taxes as self-employed (1099 contractor) when in fact they are more properly classified as W-2 employees. Why is this an issue? It’s all about the taxes.
Prior to 2021, self-employed persons (commonly called contractors) had their salary reported on a Form 1099-MISC. This form contained about seven different reasons that an organization might be paying out monies to an individual. However, as of tax-year 2020, organizations must now submit to the IRS the compensation amounts paid to contractors on a form 1099-NEC (Non-employee Compensation) form. A big part of this change has to do with the IRS being able to more readily identify those persons being paid as contractors when they indeed should perhaps be considered W-2 employees.
This is a significant issue for clergy and for churches. For clergy, because many of them are reporting their federal income taxes as self-employed via the 1099 received from their church and then completing a Schedule C for their business expenses. This may mean inappropriately reporting earnings and/or expenses. These pastors are probably even receiving “benefits” (i.e. 403(b) annuity, housing allowances, etc.) that ONLY W-2 employees are permitted to receive.
For the church, the issue is — are you improperly paying the pastor FICA and Medicare portions and withholding the same from the clergy pay? This is not the choice of the Pastor. Most Pastor’s are considered dual-status employees and do NOT pay into the FICA system. It is the church’s responsibility to properly classify the pastor as a W-2 employee or 1099 contractor.
Given the IRS’ attention to this issue, it may be a good time for clergy to re-evaluate their status for federal income tax reporting purposes.
Look for my next blog on how to determine if clergy are W-2 or 1099?
GoodBooks and Bellwether Church Solutions are always available to help you pay your pastors correctly and answer your other questions about church finances. Contact us today.