Clergy are not paid regular “salary” or “hourly” earnings for their ministerial duties. Clerics are paid either “Clergy – Taxable” earnings if they elected to withhold federal and state income tax or “Clergy – No Tax Withheld” earnings if they have NOT elected to withhold FIT and SIT.
Clerics may also receive a “Housing Allowance,” which is non-taxable and exclusively toward the cost of mortgage/rent and upkeep of a residence in their name (not owned or provided by the religious organization).
Clergy earnings include the cleric’s salary/wages, income from offerings, fees received for services performed, and non-accountable travel and auto allowances. Clergy earnings should not include taxable non-accountable expenses, such as childcare.
By law, clerics cannot have social security or Medicare taxes withheld from their earnings. The cleric is responsible for paying these taxes themselves when they pay their self-employment taxes.
Paying a Cleric
If you enrolled as a “Church Payroll” industry type and specified during enrollment that you do pay ministers/clerics for their ministry services, clergy earnings are set up in the “Default Earnings” for your company, and when you added a minster/cleric to payroll, their regular salary (located on the employee’s Pay Rate page) was set to “$0.00” because ministers/clerics cannot be paid a regular salary. They also cannot be paid hourly wages.
If your cleric is only paid one of the three clergy earnings, select the clergy earning from the "Extra Pay Type" dropdown on your Payroll Entry page, and enter the dollar amount in the "Extra Pay Dollars" field.
If you need to pay the cleric more than one clergy earning, such as “Clergy – Taxable” earnings plus a Housing Allowance, on the Payroll Entry screen, click on the "Edit" button beside the cleric's name, and enter the amounts in the appropriate fields on the “Edit Employee Pay Detail” screen. To simplify this process every payroll, use our Default Payroll Setup.
Default Payroll allows you to set up several earnings for each employee, and the earnings prepopulate your Payroll Entry. You can also change them if necessary. Simply click on your “Company” tab and then the “Default Payroll Setup” link in the left navigation to set up Default Payroll.
How Clergy Earnings are Taxed and Reported
Clergy – No Tax Withheld is used to pay clerics who did NOT elect to withhold federal, state, or local income tax from their wages.* Social security and Medicare taxes are also not withheld from the cleric’s wages or collected from the religious organization. Clergy – No Tax Withheld earnings are reported in W-2 box 1.
Clergy – Taxable is used to pay clerics who voluntarily elected to withhold federal, state, and local income tax from their wages.* Social security and Medicare taxes are not withheld from the cleric’s wages or collected from the religious organization. Clergy – Taxable earnings are reported in W-2 box 1.Federal income taxes withheld appear in box 2. Wages subject to state income taxes appear in box 16. If local taxes exist, local taxable wages appear in box 18.
Housing Allowance is paid to a cleric toward the cost of retaining and maintaining a residence owned or rented in the cleric’s name. It is not to be used for a parsonage, which is a residence owned and provided by the church or religious organization.
Housing Allowance may be the fair rental value of the cleric’s residence or an allowance the cleric uses towards mortgage or rent. The amount may include utilities and other costs related to maintaining the residence. A religious organization may only pay a cleric a housing allowance, but a cleric cannot receive a housing allowance in addition to regular salary or hourly earnings.
Please reference Publication 517 for the IRS rules regarding Housing Allowance, IRC (Internal Revenue Code) Section 107, or contact an accountant specializing in tax regulations for 501(c)(3) organizations.
Housing Allowance is excluded from cleric’s gross income, thus reducing the clergy taxable wages in W-2 box 1. Housing Allowance reports in W-2 box 14.
*The religious organization may withhold FIT and SIT from the cleric’s earnings if the cleric elected to enter into a “voluntary withholding” arrangement with the organization and submitted a W-4 form to the IRS. Clerics are responsible for filing quarterly returns to pay their self-employment tax liability.