One confusing area of church payroll is how to handle Social Security & Medicare taxes for Ordained/Licensed ministers. Ordained/Licensed ministers are considered to be self-employed when it comes to their income from the church. This means that churches are not permitted to withhold Social Security & Medicare tax from their ordained ministers, or pay the employer’s portion.
The minister is solely responsible for the entire Social Security & Medicare liability, regardless of whether the minister has opted-out of self employment tax. Ministers cannot opt-in to having Social Security & Medicare taxes withheld.
But ministers, don’t worry! You’re not doomed to a big tax bill in April! We recommend that if ministers choose not to opt-out of self employment tax (by filing Form 4361 with the IRS), that you elect to have an additional amount of income withheld above the regular federal income tax withholding to make up for the shortfall – you can indicate an additional flat amount on box 6 on Form W-4. Keep in mind the self employment tax rate is 13.3% for 2011.
Also, church administrators, if you’re not sure if you’re handling Social Security & Medicare taxes for ministers correctly, give us a call. We’d be happy to review your records and get you heading in the right direction! Also, a great resource is Publication 15-A from the IRS (http://www.irs.gov/pub/irs-pdf/p15a.pdf) which gives guidance on this and many other employment tax matters.