30 Oct Why Are Clergy Subject To Self-Employment Tax
Clergy are subject to self-employment tax because their earnings from ministerial services are considered self-employment income under the Self-Employment Contributions Act (SECA). This classification is based on several key provisions and interpretations of the Internal Revenue Code and related regulations.
- Definition of Net Earnings from Self-Employment:
- According to § 1402(a) of the Internal Revenue Code, “net earnings from self-employment” include the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by the subtitle which are attributable to such trade or business.
- Inclusion of Ministerial Services:
- Subsection 1402(c)(4) specifically includes the performance of service by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry as part of the definition of a trade or business for self-employment tax purposes.
- Exclusion from Employment for FICA Purposes:
- Services performed by a minister in the exercise of their ministry are excluded from the definition of “employment” under the Federal Insurance Contributions Act (FICA), which means they are not subject to FICA taxes. However, these services are considered a trade or business for SECA purposes, making them subject to self-employment tax .
- Regulatory Guidance:
- IRS regulations and revenue rulings provide further clarification. For example, Rev. Rul. 74-609 states that all clergymen performing ministerial duties are covered by social security as self-employed individuals unless they have received an exemption from such coverage and the self-employment tax attributable to it.
- Exemption Provisions:
- Clergy can apply for an exemption from self-employment tax if they are conscientiously opposed to public insurance based on religious principles. This exemption is granted under § 1402(e) of the Internal Revenue Code, but it is not automatic and requires filing Form 4361 within specific time limits.
- Irrevocability of Exemption:
- Once granted, the exemption from self-employment tax is irrevocable. If a minister has previously elected coverage under the social security system, they cannot later opt out by filing for an exemption.
In summary, clergy are subject to self-employment tax because their earnings from ministerial services are classified as self-employment income under SECA. This classification is supported by specific provisions in the Internal Revenue Code and reinforced by IRS regulations and rulings.
Original content by clergyfinancial.com. This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.