Church Admin & Finance, Pastors
Quarterly Estimated Self Employment Tax Payments for Pastors
March 1, 2021
3 comments 409 views
As the ominous date of April 15th approaches, I'm painfully aware once again of the truth in that age-old adage, "Two things you can count on with complete certainty in this life—Death. . . and Taxes!"
In my case, I can also count on one more thing—being utterly confused by all the rules to determine my tax liability. But after 13 years as an official member of the clergy, at least I have figured out that we pastors fall into a very unique category according to the IRS in that we are considered Self Employed for all tax purposes related to Social Security & Medicaid.
We also fall under the rules of SECA. And thus we are expected to pay the SECA tax rate (15.3%) on all salary, wages, and other taxable benefits we receive from our role as ministers including the fair market rental value of any parsonage, or any housing and utilities allowances (even though these housing benefits are excluded from our gross income for federal income tax purposes.) It's like having a split identity within the tax code. For federal income tax purposes, I'm basically treated as a regular employee; but in the eyes of SECA, I'm strictly self-employed.
I doubt anyone knows when this dual treatment for clergy evolved in the realm of the IRS, but over the years churches have tried their best to help ensure that their pastors are not left holding the bag for a big unexpected tax liability since none of us consider ourselves as being self-employed, and few of us would ever imagine that we need to be saving and planning to pay 15.3% of our gross salary and housing allowance come April 15th.
Thankfully, the first two churches I served either had a professional accountant or used the services of an accounting firm to guide them in setting up a system within their payroll program to deduct an amount from each of my paychecks sufficient to cover half of my estimated SECA tax liability. They then held these amounts in a separate holding account and matched that amount to cover the usual employer's half of this tax liability. They then submitted quarterly estimated payments to the IRS on my behalf using their special vouchers for this as a standard practice (*IRS Form 1040-ES.)
I should note that according to tax law, it is completely optional for churches to make such an employer contribution toward these taxes because clergy are under the rules of SECA, not FICA like all regular employees. However, practically every church today understands this distinction by the IRS does not reflect their true sense of responsibility and care for their pastors. Thus, they willingly determine how to cover the usual employer's share of this tax and submit those quarterly payments on their behalf.
It should also be noted that since churches are not required to pay this half-share of our SECA taxes, when they do so it actually becomes a taxable benefit to pastors for income tax purposes. (This is why it has become lovingly referred to by most CRC's in our listed benefits as the "social security offset.")
But what I have now come to understand is that not every church actually collects this social security offset amount from their pastor's paycheck in order to make quarterly payments on their behalf. Some churches, like mine, just add this offset amount to the pastor's pay as a separate line item on their paystub with the expectation that we will then set this money aside in a savings account along with an equal portion of our own funds so that we can then make these quarterly payments to the IRS ourselves.
I'm very curious if any other churches handle this benefit this way. And if so, was there some clear explanation of the process either before you began your role, or afterwards, along with any support or accountability? I'm afraid that when it is handled in this manner, it is crucial for the church's leadership to convey what is all entailed so that the pastor will have a clear understanding that this extra component of his or her paycheck is not available for living expenses. It would also be beneficial to give clear instructions that the pastor should also be saving an equal amount to this S.S. offset benefit in order to have the necessary funds for making the required quarterly SECA payments to the IRS.
I'm sharing this in the hopes of sparing anyone else from experiencing the shock and pain of such an unexpected surprise in an already painful time for most of us. By God's grace, and the grace of an extension and agreed upon payment plan, we will be able to cover this unexpected tax bill.
And while I will continue singing with praise and thanksgiving throughout this Lenten season with my hope secure in the new life I have in Christ because of His victory over the grave, I am also striving to be obedient to His much less popular instruction to render unto Caesar what is Caesar's.
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My church doesn't withhold any funds, nor is there any S.S. offset in my call letter/support package, just my annual salary. However, taxes were mentioned in my final year at CTS, and so I was aware that it would be something to work out from day one, and built it into our monthly budget. Thankfully, I've estimated high enough, and we have enough kids, so we have never had a large bill at the end of the year.
One fun kicker, instead of traditional insurance, my family started participating in a Christian Health Sharing ministry. Because of that, the money that the church gives us towards insurance, is now also taxable both as income and for self employment tax. Ceaser is getting his cut!!!
I'm in the same boat as Lloyd. My church doesn't withhold any funds, nor is there any S.S. offset in my call letter/support package. I was not aware that it is common practice for churches to help pastors cover their self employment tax. I calculate it on my own and pay it on my own. There was no discussion about this during my seminary education or during the call process.
FYI, the denomination's annual Minister's Compensation Survey has asked churches about their 'Social Security Reimbursement'. It doesn't list how many churches do this, but it shows the average amount for those that do and, at least in the 2018 version, it says "Most churches reimburse their pastors for a portion of their self-employment tax."
The 2020 version uses a different method and so no longer itemizes this amount. But you can still see the 2018 and 2017 versions at: crcna.org/research
To me, it seems reasonable for a church to reimburse for the same amount as they would pay for any other church employee (I believe FICA would be 7.65% for the employer portion). But that's just my opinion.
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