Clergy Tax Issues – Vol 3 of 8: What are the advantages of classifying clergy as W-2 employees?
Clergy Tax Issues – Vol 3 of 8: What are the advantages of classifying clergy as W-2 employees?
There are huge advantages for clergy to be classified as W-2 employees. Clergy are actually a “hybrid” tax status that allows them to be a W-2 employee while also enjoying the benefit of being “self-employed” – how can that be you are probably asking?
As a W-2 employee, clergy are entitled to employee benefits that are provided as non-taxable income. These benefits are NOT tax-free to 1099-contractors. These tax=free benefits include benefits such as:
- Employer paid retirement/ annuity compensation to a qualified plan
- Insurance premiums paid by the church (usually)
- Work related expenses handled through an Accountable Reimbursement Plan
In addition, W-2 clergy have the benefit of
- Refusing mandatory federal income tax withholding (FIT) – BUT they can request the church voluntarily withhold their FIT
- Only having salary reported in Box 1 of their W-2, while housing allowance remains FIT-free and is reported in Box 14 of the W-2 – so no FIT on their housing allowance
- Paying in estimated taxes quarterly, if they choose to, and
- Possibly taking advantage, if they can itemize deductions on Schedule A, of a double dip of deductions from FIT by claiming clergy-owned housing mortgage and interest on Schedule A as well as taking the housing allowance!
Look for my next blog on what some of the disadvantages are for clergy in being a dual-status taxpayer.
If you need more information or would like to discuss your church’s clergy payroll, contact us today and we’ll talk!
Here is the list of blogs from the “Clergy Tax Issues” series:
Clergy Tax Issues – Vol 1 of 8: Is your Pastor a 1099 or W-2 Employee?
Clergy Tax Issues – Vol 2 of 8: How do we classify our Pastor as W-2 or 1099-NEC (Contractor)