Ministers, compensation and the IRS

Ministers in most churches wear many hats. Their roles vary from presenting sermons, watching over and counseling members, to making sure the facility and grounds are maintained. So when it comes to their compensation, it should be no surprise that the rules and regulations are also not clearly defined. Income taxes, social security and medicare contributions are under special requirements that only ministers are required to follow. Careful scrutiny is needed to stay legal. Whether the minister is an employee or a self-employed individual seems to be determined based on the minister's responsibility in the church organization, however even though the minister may consider self-employment the best option, the IRS considers ministers as church employees. Compensation should always be processed and documented using a W-2 form. Even though the IRS has assigned a "church employee" status to the minister, the church is not allowed to make matching Social Security and Medicare contributions like a normal company does for their employees. It is not clear why this is the case. Nevertheless, the IRS does consider the minister have “dual status”: The minister is required to take on the role as being self-employed and pay the entire contribution for both these contributions. Compensation value is also an important consideration in the overall employment of a minister. Reasonable pay for services rendered seems to be the best description of what a church should use. A percentage of the overall church income is one possible approach to compensation, however this can be too small in some situations and too large in others. So "reasonable" appears to be best to pass the IRS scrutiny tests. Whatever approach is used, it certainly should be clearly documented, signed and there should be some limits on the upper bounds of pay.