Should Pastors Receive a W-2 or 1099?

By Raul Rivera

Tax season is upon us! During this time of year we receive hundreds of phone calls from pastors and church leaders who all have questions pertaining to ministers’ taxes and pastoral compensation.

Perhaps one of the most common questions we receive during tax season is, “Should pastors receive a Form W-2 or Form 1099-MISC from the church?”

This question is usually followed up with, “Does it even matter which tax form the pastor receives? As long as he pays his taxes, that’s all that matters, right?”

Well, yes, it is important that ministers pay taxes they owe, and, yes, it does matter that pastors receive the proper tax form from their churches.

But why? Why does it matter that which tax form a pastor receives from his/her church?

In this blog, I’ll provide the answer to which tax form ministers should receive from their churches and why. Additionally, I will address why it matters which tax form a minister receives from his/her church.

Which tax form should ministers receive from their churches?

Some churches give their pastors a Form W-2while others provide their pastors with a Form 1099-MISC.

So, which tax form is correct?

In short, pastors who are on staff at a church, either full-time or part-time, should receive a Form W-2.

If this is so, then why do some churches give their minister(s) a Form 1099-MISC?

The truth of the matter is that many churches mistakenly believe that determining which tax form to give their ministers is up to their discretion. In reality, such a decision is not up to the discretion of a church.

Instead, churches should consider common-law rules to help determine who receives a Form W-2 and who receives a Form 1099-MISC. Common-law rules are used to determine if an individual is an employee or contract worker.

To help deepen your understanding as to why pastors should receive a Form W-2, we’ll take a closer look at common-law rules next.

Why pastors should receive a Form W-2

To understand why pastors should receive a Form W-2 from his/her church, it helps to understand that pastors are considered employees of the church, whether part-time or full-time, and to do that we look to common-law rules.

IRS Publication 15-A states,

“Under common-law rules, anyone who performs services for you is generally your employee if you have the right to control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.”

Common-law rules are composed of three factors: behavioral control, financial control, and the relationship of the parties. Below is a brief explanation of each:

• Behavioral control: Does the church have the ability to dictate how and when the person performs his/her duties? If so, the individual is an employee.
• Financial control: Does the church control the business aspects of the person’s job? Is the individual able to seek other job opportunities? If the worker is not permitted to seek other job opportunities, then he/she is an employee of the church.
• Relationship of the parties: Does the individual provide duties/services that are vital to the church’s existence? If so, he/she is an employee.

(Recommended reading: "3 Ways Ministers Can Make the Most of Their Taxes")

Does it matter if churches give the right tax form to ministers?

At this point, we know that pastors on staff at a church should receive a Form W-2 because they are considered employees of the church according to common-law rules.

But does it really matter if your church distributes the right tax form to its pastor(s)?

The short answer to this question is, yes, it does matter that the correct tax form is distributed to pastors.

There are costly fines and penalties associated with distributing incorrect tax forms to ministers that can be upwards of $100,000. (See IRC section 6723 and IRC section 7202.)

Additionally, classifying a pastor properly as an employee as opposed to a contract worker affects the filing of related tax forms churches are responsible for submitting as an employer (e.g., Form 941).

For more information about Form 941, click here.

How to report a pastor’s income on Form W-2

We know that pastors are considered employees of the church according to common-law rules, but it doesn’t stop there.

Pastors have what is known as a “dual-tax status.”

In short, this means that pastors are employees for the purposes of federal income tax, and, at the same time, they are considered self-employed for Social Security tax purposes.

This means that pastors are responsible for withholding and reporting their own taxes. In other words, a church is not allowed to withhold taxes from a minister’s paycheck unless the two parties (i.e., the church and pastor) have entered into a voluntary withholding agreement. (See IRC section 3401 and Treasury Regulation 31.3402(p)-1.)

As a result, the reporting of a minister’s income on Form W-2 will look a little different from a Form W-2 of a non-ministerial employee.

Therefore, if a voluntary withholding agreement does not exist, a pastor’s income should be reported on Form W-2 as follows:

• Box 1 should indicate the pastor’s salary minus his/her qualifying housing allowance.
• Boxes 3, 4, 5, and 6 should be left blank since the pastor is responsible for withholding and paying his or her own taxes.
• Lastly, the housing allowance should be reported in Box 14 of Form W-2.

Please note that this example of how to report a minister’s income on Form W-2 is very general may vary depending on your specific situation.

If you have further questions, give us a call at 770-638-3444.

Don’t trip-up on what you think you know

I have seen it happen time and time again - the errors typically associated with ministers’ taxes are due to a simple mistake. And this simple mistake is generally due to the fact that the pastor or church simply did not know a mistake was being made.

Such mistakes can usually be avoided by simply asking for help.

As it says in Proverbs 13:10 - “Where there is strife, there is pride, but wisdom is found for those who take advice.” (NIV)

So my challenge and invitation to you is if you have questions and are in need of tax help, utilize the efficiency and expertise of our tax service that is tailored to minsters.

Give is a call at 770-638-3444 to sign-up for our Minister’s Tax Service or simply click on the link below!

Recommended blogs for you:

• "How Much Should Churches Pay Pastors?"
• "Does the Tax Reform Affect Ministers Taxes?"
• "6 Church Fundraising Ideas That Work"

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