Classification of Ministers, Employees and Contractors

Minister Compensation

Minister CompensationThe first step in complying with the Internal Revenue Code is to understand how the code classifies ministers, employees and contractors. The proper classification is very important because of the different tax laws that affect each category. Most churches will have at least some personnel in each of three separate categories: Minister Compensation.

1. Minister employees
2. Non-minister employees
3. Independent contractors

The book answers each of these questions:

  • Do minister’s receive special tax treatment?
  • Who is considered a minister for tax purposes?
  • Is a part-time youth/music minister considered a minister for tax purposes?
  • Do non-minister church employees receive special tax treatment?
  • Can the church choose to treat an employee as an independent contractor?
  • What determines if someone is an employee or an independent contractor?

Minister’s Housing Allowance

The tax code provides a tremendous tax benefit to ministers in the form of a pre-tax housing allowance. Similarly, the church provided parsonage receives special tax treatment.

The book answers each of the following questions:

  • What is a ministers housing allowance?
  • Can non-minister employees receive a housing allowance?
  • What types of expenses are included in the housing allowance?
  • What are the tax implications of a church provided parsonage?
  • Who determines the fair rental value of a church provided parsonage?
  • What if the minister does not spend all of the allowance on housing?
  • How does the church report the minister’s housing allowance/parsonage to the IRS?

Minister’s Self-Employment Tax

One unique aspect of the tax code is that although ministers are frequently considered employees their income is subject to the self-employment tax. This aspect frequently catches new ministers by surprise.

The book answers each of the following questions:

  • What is ministers self-employment tax?
  • Can a minister opt out of social security?
  • Should a minister make quarterly estimated tax payments?
  • Can the church withhold income tax for the minister?
  • Can the church pay for or reimburse a minister’s self employment tax?

Minister’s Compensation

There are a number of issues to consider to properly structure a minister’s compensation package.

  • Base salary
  • Housing allowance
  • Expense reimbursement budgets
  • Health insurance
  • Retirement benefits
It is important that the minister and the church understand the tax implications of each component of the package. This book contains a step-by-step guide of how to structure the package as well as an example. It can be used by pastors, youth ministers, music ministers and any other ministers who qualify for treatment as a minister under the tax code.