An employee for income tax.
Self-employed for Social Security.
Paid partly in a housing allowance that is excluded from one and not the other.
No other taxpayer is built like this.
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A minister’s return is the one place in the code where the same paycheck is treated two different ways at once. For income tax, a minister serving a congregation is almost always an employee, with a W-2. For Social Security and Medicare, the same minister is self-employed by statute, pays the full 15.3% through Schedule SE, and has no FICA withheld. On top of that, part of the pay can be designated as a housing allowance that is excluded from income tax but not from self-employment tax. And the church is not required to withhold any income tax at all, so a minister who doesn’t make estimated payments arrives in April owing income tax and SE tax on the whole year.
This page is written from both sides of the desk: I am an ordained minister and have prepared these returns for years. Below is who qualifies, how the housing allowance works and where it is limited, the one-time election out of Social Security and what it costs, and the places these returns go wrong.
The rules on this page apply to a person who is ordained, commissioned or licensed by a church or denomination and is performing ministerial services: conducting worship, administering sacraments or ordinances, performing sacerdotal functions (weddings, funerals, baptisms), or controlling, conducting and maintaining a religious organization or its integral agency, or teaching and administration at a seminary. The courts apply a five-factor test from Knight and Wingo: ordination or the equivalent, administering sacraments, conducting worship, management in the church, and being considered a spiritual leader by the body. Not all five are required; the weight is on the first three.
Who is covered: pastors, associate pastors, rabbis, imams, chaplains employed by a church or performing sacerdotal functions, ordained ministers serving as denominational executives or seminary faculty, and ministers assigned by their church to serve an outside organization. Who is usually not: a youth director or music director who is not ordained or licensed, a church administrator, a licensed minister who works as a school teacher (the services are not ministerial), and a hospital chaplain employed by a secular hospital unless the church assigned them there. Traveling evangelists and ministers serving several congregations are self-employed for both purposes and file Schedule C.
↑ Back to top| Income tax | Social Security and Medicare | |
|---|---|---|
| Status | Employee under the common-law test (Rev. Rul. 87-41 factors); the church issues a W-2 | Self-employed by statute, regardless of the W-2 |
| Withholding | Not required (§3401(a)(9)); voluntary by agreement | None; no FICA in boxes 3–6 of the W-2 |
| Tax computed on | Box 1 wages (salary, taxable fringe benefits), excluding the housing allowance | Salary plus the housing allowance or parsonage rental value, plus net honoraria, less unreimbursed expenses, on Schedule SE |
| Rate | Regular brackets | 15.3% to the wage base, 2.9% above; half deductible above the line |
| Retirement plan | 403(b)(9) church plan on W-2 compensation | SE earnings are the base for a SEP/solo 401(k) only for Schedule C income |
The W-2 should show box 1 wages, nothing in boxes 3 through 6 (a W-2 with FICA withheld is wrong and the church owes a correction), and the housing allowance in box 14 or in a separate letter, not in box 1. A minister who receives a 1099-NEC from the congregation is usually misclassified; the income tax answer doesn’t change much (Schedule C instead of W-2, with expenses deductible), but the church’s reporting is wrong and the minister loses the ability to request withholding.
↑ Back to topA minister may exclude from income tax either the fair rental value of a church-provided home (the parsonage), including utilities the church pays, or a cash housing allowance the church designates in advance for the minister to rent or own a home. The exclusion was upheld against a constitutional challenge in Gaylor v. Mnuchin (7th Cir. 2019). It is the most valuable provision on this page and the most often mishandled.
Designation first. The allowance must be designated by the church (a board resolution, a budget line, an employment contract) before it is paid. A designation adopted in December for the whole year covers only payments after the adoption. The resolution should designate a specific dollar amount or percentage and may run until amended; a “safe harbor” resolution that designates the allowance for all future years until changed avoids the annual lapse. Retroactive designation is not permitted (Reg. §1.107-1(b)).
The exclusion is the lowest of three amounts (Reg. §1.107-1(c); Rev. Rul. 71-280):
Any designated amount above the lowest of the three is taxable income, reported on the 1040 as additional wages (line 1h, “excess allowance”). A minister who owns a paid-off house is limited by actual expenses (taxes, insurance, utilities, repairs), which can be far below the designation; the excess is taxable. Designate generously and report the excess; a designation that is too low cannot be fixed after the year ends.
Double benefit preserved. Mortgage interest and property taxes paid with the excluded allowance are still deductible on Schedule A if the minister itemizes (§265(a)(6)). This is one of two places in the code where a taxpayer deducts an expense paid with tax-free money.
Two homes, one allowance: only one home qualifies. Spouses who are both ministers: each may have an allowance for the same home, limited by their combined actual expenses and the single fair rental value.
↑ Back to topNet earnings from self-employment for a minister include the W-2 salary, the housing allowance (the full excluded amount), the fair rental value of a parsonage plus utilities paid by the church, honoraria for weddings and funerals, and any other ministerial income, less unreimbursed ministerial business expenses (which remain deductible for SE purposes even though they are no longer deductible for income tax; see the Deason section). The result is multiplied by 92.35% and taxed at 15.3% up to the 2026 wage base ($184,500 (verify)) and 2.9% above, with the 0.9% additional Medicare tax above $200,000 / $250,000. Half of the SE tax is deductible on Schedule 1.
The housing allowance inclusion is the surprise. A minister with a $60,000 salary and a $24,000 allowance pays income tax on $60,000 and SE tax on $84,000, about $11,900 of SE tax, none of it withheld. The church can help by paying a “Social Security offset” (an additional salary amount intended to cover the SE tax), which is simply more taxable salary; the church cannot pay the employer half of FICA because there is no FICA.
↑ Back to topA minister may apply for exemption from self-employment tax on ministerial earnings, but only on one ground: the minister is conscientiously opposed, or opposed because of religious principles, to the acceptance of public insurance (Social Security and Medicare benefits) with respect to services as a minister. Not because it is expensive; not because the minister has a better plan. The form requires the minister to certify the objection and to have informed the ordaining body of it.
The church gave me a housing allowance, which is excluded from income tax but not from Social Security tax, unless I file a form saying I object to Social Security on religious grounds, in which case I pay neither, and get nothing. I have preached on simpler mysteries.
↑ Back to topA church is not required to withhold income tax from a minister’s pay, and cannot withhold FICA. Left alone, a minister with $84,000 of total compensation owes roughly $6,000 of income tax and $11,900 of SE tax in April with nothing paid in. The underpayment penalty follows. Two fixes:
Colorado withholding can be requested the same way, or covered with DR 0104EP estimates.
↑ Back to topSince 2018, unreimbursed employee business expenses are not deductible for income tax, and the 2025 act made that permanent. For an employed minister, the mileage to the hospital, the books, the vestments, and the continuing education are deductible only if the church reimburses them under an accountable plan (receipts, business purpose, excess returned), in which case the reimbursement is tax-free. Every church should have one; most small churches don’t until someone asks. A minister on Schedule C (evangelist, supply preacher, 1099 income) still deducts expenses there.
The Deason rule still matters in two places. Because part of a minister’s compensation (the housing allowance) is tax-exempt, the portion of business expenses attributable to that exempt income is nondeductible under §265: if 28% of total ministerial compensation is excluded housing allowance, 28% of the Schedule C expenses (or of the expenses used to reduce SE income) is disallowed for income tax. The allocation applies to Schedule C ministers and to the income-tax computation; for self-employment tax, the full expenses are deductible without the Deason reduction, because the housing allowance is included in SE income (Pub 517). The two computations run separately, and the software needs both numbers.
↑ Back to topChurch compensation: $62,000 salary plus $24,000 designated housing allowance, adopted by the board in December of the prior year. She owns her home: mortgage payments $19,800, property tax $3,100, insurance $1,400, utilities $3,900, repairs $1,200, total $29,400. Fair rental value furnished with utilities: $33,000. Weddings and funerals: $3,200, with $600 of expenses. Her spouse earns $55,000 W-2. No Form 4361. She requested $900 a month of voluntary withholding.
Housing exclusion: lowest of $24,000 designated, $29,400 spent, $33,000 FRV = $24,000, fully excluded. (Had the board designated $32,000, the exclusion would have been $29,400 and $2,600 taxable; the higher designation costs nothing and would have excluded $5,400 more.) She still deducts the mortgage interest and property tax on Schedule A if they itemize.
Income tax: W-2 box 1 $62,000; Schedule C net $2,600 (Deason allocation of the $600 of expenses: 28% nondeductible for income tax, so $432 deductible, net $2,768 for income tax purposes); spouse $55,000.
SE tax: $62,000 + $24,000 + $3,200 − $600 = $88,600 × 92.35% = $81,822 × 15.3% = $12,519. Half, $6,260, deducted on Schedule 1.
Payments: $10,800 of voluntary withholding covers the SE tax and most of her share of the income tax; the spouse’s W-4 is adjusted for the rest. Without the voluntary withholding, the couple would owe about $18,000 in April with a penalty.
Next year: the church adopts an accountable plan for her mileage and books (about $2,400 a year, currently unreimbursed and nondeductible), and the board raises the designation to $32,000 so her actual expenses set the limit rather than the resolution.
Colorado starts from federal taxable income, so the housing allowance exclusion carries through and the Colorado return taxes the same amount the federal return does, at 4.40%. There is no Colorado self-employment tax, so the dual-status complication is federal only; the half-of-SE-tax deduction reduces Colorado taxable income through federal AGI. Voluntary Colorado withholding can be arranged with the church in the same way as federal, or covered by DR 0104EP estimates. A retired minister’s pension, to the extent it is not excluded as a housing allowance, is retirement income for Colorado’s pension and annuity subtraction ($24,000 at 65, $20,000 at 55–64); the excluded housing portion is already out of federal taxable income and doesn’t need the subtraction. Churches are exempt from Colorado unemployment insurance for ministers and most church employees, which means a minister who leaves a position generally cannot claim unemployment benefits.
↑ Back to topNo. A minister’s wages are exempt from FICA; boxes 3 through 6 should be empty, and you pay self-employment tax on Schedule SE instead. Ask the church to issue a corrected W-2c and refund the withheld FICA; if it won’t, Form 843 can recover the employee share, and the SE tax is still due.
Payments made before the designation are taxable salary; payments after it can be excluded. Designate now for the rest of the year, and adopt a resolution that continues until amended so it never lapses again. Retroactive designation is not permitted.
Only if you are in fact conscientiously or religiously opposed to receiving Social Security and Medicare benefits for your ministry; the form requires you to certify that. Cost is not a permitted reason. If you do qualify and file, you give up Social Security credits and possibly Medicare Part A for every year of ministry, permanently.
It is excluded up to the lowest of the designation, what you actually spend on housing, and the home’s fair rental value; anything above that is taxable pension income. The excluded portion is not subject to self-employment tax in retirement. Keep the housing receipts; the limit is tested every year.
For the Tax Shop desk · forms, code sections, and the things that get missed
If you are a minister, bring the designation, the housing bills, and the W-2, and we will run the three limits, both expense computations and the self-employment tax, and set up voluntary withholding so next April is uneventful. If you serve on a church board, the two things that help your pastor most cost nothing: a housing allowance resolution that designates generously and continues until amended, and an accountable plan for expenses. And if a young minister asks about Form 4361, send them to someone who will explain what it costs at 65 before they sign it. I am happy to be that person; I have been on both sides of this return.
Call 303-734-1040 or stop by the office in Lone Tree. We’ve been reading the footnotes for Douglas County and the Denver area since 1969.
Figures reflect the 2026 tax year as currently published and are rounded for readability. Items marked (verify) are to be confirmed against IRS or Colorado DOR sources before the figures freeze in December. Last updated October 15, 2026.
