You use aForm W-4to determine how much federal tax withholding you need from your paycheck. Form W-4 tells an employer the amount to withhold from an employee’s paycheck for federal tax purposes.
When you fileas exemptfrom withholding with your employer forfederaltaxwithholding, youdon’t make any federal income tax payments during the year. (A taxpayer is still subject to FICA tax.)
And without paying tax throughout the year, youwon’t qualify for a tax refund unless you qualify to claim a refundable tax credit.
To be exempt from withholding, both of the following must be true:
- You owed no federal income tax in the prior tax year, and
- You expect to owe no federal income tax in the current tax year.
So, if your total tax on Form 1040 is smaller than your refundable credits, you owed no income tax. If you expect the same result in the current tax year, you might qualify for exemption from withholding. You’ll still need to complete the W-4. It’s important to remember that if you withhold too little, you may owe tax and a penalty when you file your return.
If an employee wants to claim exemption, they must write “Exempt” on Form W-4 in the space below Step 4(c) and complete Steps 1 and 5.
An employee who wants an exemption for a year must give you the new W-4 by February 15 of that year. If an employee who is currently getting a tax exemption expects to owe tax for the next year, they must change their W-4 by December 10th of the current year.
You can only change withholding based on the documentation the employee gives you. Until the employee gives you the correct form or forms, you must continue to withhold federal, state, and local income taxes based on the most recent forms completed by the employee. You can’t take the employee’s word on the claim of exemption.
If you claim exempt on your Form W-4 without actually being eligible, anticipate a large tax bill and possible penalties after you file your tax return. If both of the following statements apply, you could face a tax penalty:
- You declarewithholding allowanceson your W-4 that reduces the amount of tax withheld from your paycheck.
- You have no justifiable reason for those statements at the time you completed your W-4.
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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FAQs
Regardless of whether you're a minister performing ministerial services as an employee or a self-employed person, all of your earnings, including wages, offerings, and fees you receive for performing marriages, baptisms, funerals, etc., are subject to income tax.
How should clergy fill out a W4? ›
Because ministers are exempt from federal income tax withholding, they are not required to complete a Form W-4 at all.
Are church employees exempt from FICA? ›
Social Security and Medicare taxes: Both employees and employers, including churches, are usually required to contribute to Social Security and Medicare. This is done through the Federal Insurance Contributions Act (FICA). The church must withhold the employee's share and contribute the employer's share.
Is clergy housing allowance considered taxable income? ›
A minister's housing allowance (sometimes called a parsonage allowance or a rental allowance) is excludable from gross income for income tax purposes but not for self-employment tax purposes.
What is the IRS form for clergy exemption? ›
File Form 4361 to apply for an exemption from self-employment tax if you have ministerial earnings and are: An ordained, commissioned, or licensed minister of a church; A member of a religious order who has not taken a vow of poverty; or.
Are clergy statutory employees? ›
As far as general federal income taxes are concerned, a pastor is a common-law employee. However, pastors are considered self-employed in multiple areas of their income. The IRS makes it clear that when considering SECA taxes (Social Security and Medicare taxes), a pastor is a self-employed individual.
Are religious employees tax-exempt? ›
If you work for a church, do you pay taxes? The simple answer is yes; paid church employees are considered employees by the IRS for income tax purposes.
Can an employee be exempt from FICA tax? ›
U.S. Social Security and Medicare taxes apply to wages paid to U.S. citizens and resident aliens for work outside the United States for an American employer. If your employees working abroad are nonresident aliens, their wages are not subject to FICA taxes.
What is a religious exemption from FICA? ›
Churches and qualified church-controlled organizations can elect exemption from employer FICA taxes by filing Form 8274, Certification by Churches and Qualified Church-Controlled Organizations Electing Exemption from Employer Social Security and Medicare TaxesPDF.
Why do pastors not pay taxes? ›
For the most part, churches are tax-exempt and viewed as employers. That's why they don't withhold income tax from a pastor's wages (unless you've requested differently). However, they are responsible for payroll taxes for other church employees. And they should issue pastors a W-2.
Clergy housing allowance
Generally, the housing allowance is reported in Box 14 of the W-2 and is not included in Boxes 1, 3, or 5. The fair rental value of a parsonage or the housing allowance can be excluded from income only for income tax purposes. > No exclusion applies for self-employment tax purposes.
Does toilet paper count as housing allowance? ›
Generally, any expense to provide or maintain the home can be used to justify the housing exclusion. Regulations do specifically state that expenses for groceries, paper products, personal toiletries, personal clothing, and maid service cannot be used.
Are pastors exempt from Social Security tax? ›
Clergy pay social security tax under the Self-Employment Contributions Act (SECA), not under the Federal Insurance Contributions Act (FICA). Clergy engaged in the exercise of ministry are always treated as self-employed for social security tax purposes.
Is clergy pension taxable? ›
If you are clergy, your pension benefit is taxable in most cases, but you may exclude the portion of your pension that you use for housing expenses from your taxable income (subject to IRS requirements).
Should a pastor receive a 1099 or W-2? ›
More In File
For services in the exercise of the ministry, members of the clergy receive a Form W-2 but do not have social security or Medicare taxes withheld. They must pay social security and Medicare by filing Schedule SE (Form 1040), Self-Employment Tax.
Are gifts to ministers taxable income? ›
It is not safe to assume that occasional gifts to pastors or other church employees are tax-free. Depending on the process used to collect and distribute the funds, these gifts may need to be reported to the Internal Revenue Service (IRS) as a part of the recipient's taxable income.
