Church employees are divided into two categories: Ministers and Lay Employees.

Ministers are considered dual status employees. That means they receive a W2 and pay regular income tax on their wages but instead of paying FICA and Medicare taxes on the income it is reported on Form SE and pay Self employment tax. In order to be considered a Minister, the individual must be ordained or licensed by a Church body and perform ministerial functions such as administering of the Sacraments, baptisms, funerals, etc. A portion up to 100 percent of their income may be designated as housing allowance and not be reported on the W2 as wages. This designation must be made and recorded in the minutes of the church directors or trustees. It is up to the individual to determine proper housing expenses and report any unused amounts as other income on their tax returns. Housing allowing is still considered income for self employment and must be added to the schedule SE. If the minister lives in a church owned parsonage a rental value must be included as housing allowance. Income paid to a minister by the church must be reported on a W2 and not a 1099. Monies received from individuals for funerals and baptisms etc. are reported on a schedule C. Health insurance and retirement contributions are not considered income to the minister.

Lay employees are considered regular employees for the purposes of withholding and FICA and Medicare taxes.

EXPENSES

Expenses such as vehicle mileage, supplies, books etc.. are deducted on Schedule A in proportion to the taxable vs. non taxable income on the W2. If the Minister is reimbursed under an accountable plan then none of the monies received are considered income.

HOUSING ALLOWANCE

A minister may designate up to 100 percent of his income as housing allowance. However it is up to him or her to keep track of actual expenses and subtract them from the total received for the year. Any unused housing allowance must be reported as other income. Any housing expenses over and above the housing allowance are not deductible.

Items to be included but not limited to housing allowance are; rent or mortgage payments, property taxes, Insurance, repairs and maintenance, furniture and appliances, decorator items, utilities and miscellaneous supplies. Please note that even though the mortgage payment is deducted from taxable income as a housing expense that the mortgage interest as well as the property taxes are still deductible as an itemized deduction on schedule A

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