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Question

Clergy, W2 and No holding

Forum|Forum|1 year ago
March 16, 2025
2 replies
0 views

Hi, my husband has two lines of work, primary line of work (part-time) He is an adjunct professor and is the school recruiter at the seminary. He receives a 1099, so he pays taxes during tax time. For his second line of work, he is a Sr Pastor and all work associated as a licensed clergy. He gets a W2 from the church. Now that you have the background, here are my questions:

1. As a licensed pastor is he considered dual status? Employed and self-employed how do I accurately represent this when filing taxes. Submitted W2 and submit SE form?

2. Are pastor’s exempt from paying federal tax if wages are below a certain amount? And if so, what is that limit amount?

3. When entering the pastor’s W2, we noticed that no federal taxes were withheld, is this because pastors are exempt?

4. We also noticed no social security or medicad taxes were withheld, I assumed this was a mistake and has been corrected for 2025. However, under the uncommon income section, do I mark the clergy employment, since taxes were not taken out? In the past we marked none of these apply.
- I assume we will have to pay taxes on a quarterly bases for social security and medicad?

5. When entering expenses for the Pastor line of work, under self-employment. I entered the home information, and all the associated expenses. Then it asked to enter the income so the home credit could be determined, but it looks for 1099s or other income rec’d from cash/checks. None of these options apply, since we have a W2 (Pastor line of work). What do I do in this case, do I remove this line of work now that we are getting a W2? In 2023 we did not get any wages since we were a new church plant, wages started in 2024, thus the W2.

Not A Product Question

MAK70

1. The 1099 he receives for teaching and recruiting is not considered clergy self-employment. He is not a dual status if this is his only self-employment income.

2. Pastors specifically are not exempt from federal income tax.

3. Pastors are not exempt from federal income tax. The employer is required to withhold unless you indicated otherwise on the W4.

4. If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax, even if you perform these services as an employee of that church. In TurboTax, if you indicate Religious employment, you will be given options to make the self-employment tax payments. You will have to make quarterly estimated taxes for the self-employment taxes.

5. The parsonage should not be included under the self-employment since it is associated with the W2 income. After you enter the W2, if you enter the Religious employment, it will also ask about the parsonage and expenses to determine the exclusion.

This is the IRS resource Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Please feel free to ask if you have additional questions.

krismanteuffel

I have a related but slightly different question. However, I think the responses will be along the sames lines, so I believe responding here and getting updated input is the most helpful for others looking into this thread.

My husband is a hospital chaplain. He has a housing allowance within his W2 that shows up under line 14. Medicare has been withheld but Social Security has not been withheld on his W2.

1. How to I respond to the TurboTax question below?

Again, he HAS had Medicare withheld but NOT social security this past year.

2. How should he appropriately adjust his w2 for next year with the hospital given this confusion?

Thank you!

From TurboTax Questionnaire:

Question: How should we calculate these taxes?

Options:

- Pay self-employment tax on my wages

- Pay self-employment tax on my housing allowance

- Pay self-employment tax on my wages and housing allowance

- Social Security and Medicare taxes have already been withheld

- This income is exempt from self-employment tax because I have an approved Form 4361

Opus 17

Employee

@krismanteuffel wrote:

I have a related but slightly different question. However, I think the responses will be along the sames lines, so I believe responding here and getting updated input is the most helpful for others looking into this thread.

My husband is a hospital chaplain. He has a housing allowance within his W2 that shows up under line 14. Medicare has been withheld but Social Security has not been withheld on his W2.

1. How to I respond to the TurboTax question below?

Again, he HAS had Medicare withheld but NOT social security this past year.

2. How should he appropriately adjust his w2 for next year with the hospital given this confusion?

Thank you!

From TurboTax Questionnaire:

Question: How should we calculate these taxes?

Options:

- Pay self-employment tax on my wages

- Pay self-employment tax on my housing allowance

- Pay self-employment tax on my wages and housing allowance

- Social Security and Medicare taxes have already been withheld

- This income is exempt from self-employment tax because I have an approved Form 4361

If the hospital withholds social security and medicare tax from his wages (box 4 and box 6 of his W-2), then you should

Enter the W-2 and check the box for religious wages.
Enter the amount of the parsonage allowance, and enter the amount of his qualified housing expenses (up to but not more than the housing allowance_)
Answer pay SS and Medicare taxes on the housing allowance only.

If the hospital withholds no social security and medicare tax from his wages (box 4 and box 6 of his W-2 are blank) then you should

Enter the W-2 and check the box for religious wages.
Enter the amount of the parsonage allowance, and enter the amount of his qualified housing expenses (up to but not more than the housing allowance_)
Answer pay SS and Medicare taxes on the both wages and housing allowance.

There are no mistakes here and no corrections are needed. You can read about clergy tax issues here,

https://www.irs.gov/taxtopics/tc417

Brief summary:

For most workers, if the employer provides a place to live, that must be included in taxable wages. There is a longstanding common law exception for clergy who were given the right to live in a parsonage associated with the church tax-free. That has been extended to the concept of a "housing allowance" -- clergy who do not live in a parsonage can be given part of their salary as a tax-free housing allowance to use for their own housing arrangements. However, even though the housing allowance is exempt from income tax, it is subject to self-employment tax (medicare and social security). Pastors in general are considered self-employed for certain income tax purposes, and usually do not have medicare and social security tax withheld from their wages, and must pay 15% self employment tax on all their compensation (wages, plus housing allowance or the rental value of a parsonage). In your case, the hospital is allowed to designate part of the chaplain's salary as a housing allowance, and leave it out of their box 1 taxable wages. But it must still be reported to the IRS because it is subject to self-employment tax. The interview answers above will put the housing allowance in the right place and tax it appropriately.

This is normal for clergy and the hospital is doing it right, no changes need to be made.

Opus 17

Employee

@aprcox20

1. I don't understand what you think you mean by dual status. His pastor income is taxed according to those rules, and non-religious income is taxed according to the rules appropriate for that income. Your spouse has a job and a side-gig and reports like anyone else in the same situation.

2. There is no general tax exemption for pastors. However, a pastor can receive a housing allowance that is excluded from income tax (but still subject to self-employment tax). The church must designate this in advance an in writing. It is a great benefit that you should read more about, and ask the church about. This is an excellent ecumenical resource, your denomination may already be a member.

https://www.ecfa.org/ProductDownload.aspx?ProductID=361

3. For clergy, federal and state income tax withholding is optional. You can discuss with the church treasurer if you want withholding.

4. This is correct. Pastors are considered "Self employed" for some income tax purposes and are exempt from social security and medicare withholding. Instead, they pay self-employment tax on their income. When entering the W-2, you need to check the box for religious wages, and answer that you need to pay SE tax on both wages and housing allowance or parsonage. Because a secular employee pays 7.65% FICA which is matched by the employer, but pastors pay 15% SECA, churches often "gross up" a pastor's salary. You should discuss this with the church along with the housing allowance.

For example, if a secular employee's salary is $50,000, the employer actually pays $53,800 (because of the SS match) and the employee takes home $46,200 (because of mandatory ss and medicare tax). To pay a pastor the equivalent wages, the church should offer to pay $53,800, and the pastor will net the same $46,200 after paying SE tax.

5. You would deduct only expenses related to his adjust job on his schedule C. For unreimbursed pastoral expenses, you list them as work-related expenses on form 2016. However, there are 3 key points you need to know.

Employee expenses are not deductible on a federal tax return for 2025. You can enter them, and they might be deductible on your state return, but they aren't deductible on the federal return.
Pastor employee expenses must be adjusted according to the Deason rule. This relates to a parsonage or housing allowance. Suppose his overall compensation is $50,000, with $30,000 wages and $20,000 as a housing allowance or the value of a parsonage. Because 60% of his compensation is taxable wages, he can only deduct 60% of his expenses. Turbotax does not make this adjustment, you must do it.
Even though expenses are not deductible itemized deductions for 2024, they can still be deducted from his income subject to SE tax. This adjustment must be made on the Schedule SE Adjustment Worksheet, which is only accessible in Forms mode in Turbotax Desktop installed on your own Mac or PC. It is not available with Turbotax Online. Put the expenses on line 5c of the worksheet. Enter the net amount of expenses after the Deason rule adjustment.