For income tax purposes, a licensed, commissioned, or ordained minister is generally treated as a common law employee of his or her church, denomination, or sect. There are, however, some exceptions such as traveling evangelists who may be treated as independent contractors. If you are an employee you are taxed on the wages you receive for performing ministerial services, and the offerings and fees you may receive for performing marriages, baptismals, or funerals.

The employer will report the wages to you on Form W-2. If you itemize your deductions, you may be able to deduct certain business expenses related to your services for which you are not reimbursed. You may need to fill out Form 2106, Employee Business Expenses, and attach it to your Form 1040. See Topic 514 for information on Employee Business Expenses, and Topic 508 for information on the 2% of adjusted gross income limitation. If you are an independent contractor, use Schedule C or Schedule C-EZ Profit or Loss from Business to report these earnings and expenses, and see Topic 408 for income and business deductions for a self-employed person.

The gross income of a licensed, commissioned. or ordained minister does not include the fair rental value of a home (a parsonage provided), or a housing allowance paid, as part of the minister's compensation for services performed that are ordinarily the duties of the minister. If you own your home, you may still claim deductions for mortgage interest and property taxes. If your housing allowance exceeds your actual expenses, you must include this amount as other income.

A minister who is furnished a parsonage may exclude from income the fair rental value of the parsonage, including utilities. However, the amount excluded cannot be more than the reasonable pay for the minister's services.

A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. Generally, those expenses include rent, mortgage payments, utilities, repairs, and other expenses directly relating to providing a home.

The minister's employing organization officially designate the allowance as a housing allowance before paying it to the minister.

The fair rental value of a parsonage or the housing allowance is excludable from income tax purposes. It does not apply for self-employment tax purposes. For Social Security purposes, a duly ordained, licensed or commissioned minister is self-employed. This means that your salary on Form W-2, the net profit on Schedule C or C-EZ, and your housing allowance, less your employee business expenses are subject to self-employment tax on Schedule SE, Form 1040. However, you can request an exemption from self-employment tax, if you are conscientiously opposed to public insurance because of your religious principle. You cannot request exemption solely for economic reasons. You request the exemption by filing Form 4361 with the IRS. You must file it by the due date of your income tax return (including extensions) for the second tax year in which you have self-employment net earnings of at least $400.00 from the performance of ministerial services.

If you previously elected exemption from social security coverage and self-employment tax, you now have a limited period of time to revoke that exemption. Once you revoke the exemption, you can NEVER AGAIN elect exemption from social security coverage. You must file Form 2031, Revocation of Exemption From Social Security Coverage by Certain Members of the Clergy, to revoke the exemption.

Special rules apply to members of religious orders who have taken a vow of poverty.

For more information, refer to Publication 517, Social Security for Members of the Clergy and Religious Workers, Publication 17, Your Federal Income Tax, Chapter 6, and Publication 525, Taxable and Nontaxable Income. Publications and forms may be downloaded from this site, or ordered by calling 1-800-829-3676.

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