When a church hires an employee, one of the initial decisions that must be made is whether to treat the worker as clergy, non-clergy employee or contractor. This decision may seem insignificant, but it has huge implications when it comes to payroll and taxes.

Ministers have what is commonly referred to as “dual tax status.” For federal income tax purposes, a minister is generally treated as a common law employee. For payments into Social Security, the minister is always self-employed. This is an IRS regulation and not an election.

To qualify for the special tax provisions available to ministers, an individual must be a “minister” and must perform services “in the exercise of his ministry.” Treas. Reg. § 1.107-1(a)incorporates the rules of Treas. Reg. § 1.1402(c)-5 in determining whether the individual is performing the duties of a “minister of the gospel.”

Treas. Reg. § 1.1402(c)-5 requires that an individual be a “duly ordained, commissioned, or licensed minister of a church.” The Tax Court has interpreted this phrase to be disjunctive, finding the purpose is not to limit benefits to the ordained but is to prevent self-appointed ministers from benefiting. Salkov v. Commissioner, 46 T.C. 190, 197 (1966). The Tax Court in Salkov held that a Jewish cantor was a minister eligible for the IRC § 107 housing allowance. Id. at 198-99. It concluded that the petitioner qualified because he was commissioned by, and was a duly qualified member of the Cantors Assembly of America, which functions as the official cantorial body for the Conservative branch of the Jewish religion in America, and because he was selected by a representative Conservative congregation to perform the functions of cantor. Id. at 197.

Treas. Reg. § 1.1402(c)-5(b)(2) provides that service performed by a minister in the exercise of the ministry includes:

a. Ministration of sacerdotal functions;
b. Conduct of religious worship;
c. Control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body, constituting a church or denomination.

Treas. Reg. § 1.1402(c)-5(b)(2) also provides that whether service performed by a minister constitutes the conduct of religious worship or ministration of sacerdotal functions depends on the tenets and practices of the particular religious body constituting the church or denomination.

Treas. Reg. § 1.107-1(a) also provides examples of specific services considered duties of a
minister, including:

a. Performance of sacerdotal functions;
b. Conduct of religious worship;
c. Administration and maintenance of religious organizations and their integral agencies;
d. Performance of teaching and administrative duties at theological seminaries.

The duties performed by the individual are also important to the initial determination whether he or she is a duly ordained, commissioned, or licensed minister. Because religious disciplines vary in their formal procedures for these designations, whether an individual is “duly ordained, commissioned, or licensed” depends on these facts and circumstances

Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

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