If you are processing your payroll in-house, the twists and turns of payroll tax regulations can make it a confusing and frustrating endeavor. If your organization is a church, there are additional factors to consider, such as the clergy member’s employment status and housing allowance.
Clergy: Employees or Self-employed?
Under Federal law, most clergy members have what is called dual status. Dual status means that for Federal income tax purposes, clergy are considered employees; but for Social Security and Medicare purposes, they are considered self-employed. Based on this premise, Social Security and Medicare taxes are not deducted from the clergy member’s pay even if they have not elected out of contributing to Social Security and Medicare.
Instead, due to their self-employed status related to Social Security and Medicare, clergy are responsible for paying both the employee and employer portion of these taxes. Churches are relieved of the burden of paying the employer portion of Social Security and Medicare. A church might choose to pay clergy for the employer portion of these taxes, but it will need to be included in their taxable income.
Under Federal law, clergy members are entitled to claim a housing allowance which provides certain tax advantages. Housing allowances are not taxable for federal and local tax (except Philadelphia) purposes, but the allowances are taxable to the state of Pennsylvania.