I am getting a lot of questions about ministerial compensation. I thought I would try and explain it in a more detailed manner.
I am not an accountant, but I have found that many accountants have no clue about how to handle clergy compensation. The tax law affecting ordained clergy and Churches is complex and, at times, contradictory.
For example, I pastored 3 Churches that, in the past, had given their minister a 1099 instead of a W-2 at the end of the year. In two of the Churches it was their accountant that told them to do this. The accountant was wrong. In most every instance a pastor should be getting a W-2 from the Church. One accountant argued over and over with me about this. I refused to take the 1099 he provided. Finally, he educated himself on the matter and found out he had been for years erroneously giving the ministers a 1099. As I said, the tax law for ordained clergy and Churches can be complicated .
Take a 40,000.00 pile of money. If the money is wages then it will be taxed as wages. The 40,000.00 will show up on the person’s 1040 tax form as income. If the person is married, with two children, his taxable income would be 14,000.00 (minus 11,400.00 standard deduction14,600.00 personal exemptions) The person would owe 1,398.00 tax.
Give that same 40,000.00 to an ordained minister. With a few magical, but legal, tricks the ordained minister can turn 40,000.00 into zero tax liability. Using the tax code the pastor can deduct, deduct, deduct, until his tax liability disappears.
- 16,000.00 housing allowance
- 7,000.00 automobile allowance (car used strictly for ministry use)
- 3,000.00 books, education expenses, vestments, taking Church members out for dinner, computers,cell phones. (additional exemptions)
Without any trouble the pastor has reduced his taxable income (before exemptions) to 14,000.00
The pastor is married with two children. Using the standard deduction and personal exemptions, the pastor’s income is reduced to zero. Now this may not be to his benefit when it comes to the Earned Income Credit, so he may need to adjust his deductions to give him the maximum refund.
The pastor can also opt out of social security, and by doing so save himself an additional 15.3%. (ministers are generally taxed as self-employed) Only religious workers have the option of opting out of social security.
This is legal and is done by thousands upon thousands of ministers every year. It is what the tax code allows.
Is it moral? Is it ethical?
I’ll leave that discussion for another day.
At the very least, every Church member should know how their pastor is compensated. (and I suspect most don’t)