Are You a Minister?

Clergy are different (the IRS says so)

The Internal Revenue Service (“IRS) has a long history of treating the income taxes of ordained clergy differently than other taxpayers.  These special income tax provisions which apply to ordained clergy recognize both the clergy’s often unique employment conditions as well as the many ways in which clergy serve, and thus are paid by, those they minister to. 

The flip side of the coin is that many people and business entities intentionally abuse these special provisions.  Recognizing both the scale of these abuses and the significant lost tax revenues, the IRS has stepped-up its review of clergy tax returns and the ways in which church entities use their funds. 

Clergy taxation is a specialized area and the best advice which can generally be given is for clergy to employ tax counsel experienced in this area.  Your “regular” CPA, accountant or income tax preparer may not be well-versed enough in this area to provide you with solid tax advice.  Be sure you ask your tax preparer to review with you in detail his or her experience and expertise in this area.

Who is a minister?

The Internal Revenue Service definition of who is a “minister” has been modified over the years through court decisions, private letter rulings, and changing regulatory and political tides.  The most-often cited case defining the term “minister” is the 1989 Knight v. Commissioner (92 TC. 199) case in which the court outlined a new set of tests for determining whether or not an individual should be considered a minister. 

The first test that must be met is that the individual is ordained, commissioned, or licensed.  Failure to meet this test automatically excludes an individual from being treated as a minister for income tax purposes.  The remaining four tests are:

1. Does the individual administer the “sacraments”?

2. Does the individual lead or conduct worship services?

3. Does the individual perform services in the “control, conduct, or maintenance of a religious organization” under the authority of a church or religious denomination?

4. Is the individual considered to be a spiritual leader by his or her religious body?

The Tax Court did not require that all four additional factors need be present for a person to be considered a minister.  Instead, they simply stated that “failure to meet one or more of these factors must be weighed…in each case.”  In the specific case of Knight v. Commissioner, the Tax Court concluded the taxpayer in question was a minister although only two of the additional four factors were present.

Below are some examples:

1. Pastor J is an ordained minister who serves as the minister of education at his church. He occasionally conducts worship services, but does not administer the sacraments. He does have management responsibility in his local church and at regional and national meetings of his denomination. His duties include overseeing the educational program of his church, occasional counseling, and hospital visitation. Pastor J is a minister for federal tax purposes.   TRUE.

2. Pastor B is minister of music at her church. She is not ordained, commissioned, or licensed. Because she is directly involved in worship services, the church can treat her as a minister for federal tax purposes.     FALSE

3. Pastor R is a licensed minister who serves as the youth pastor at his church. He regularly performs church-related duties and conducts religious worship. He is a minister for federal tax purposes.  TRUE

4. Pastor G is an ordained minister who resigned his pastoral position and temporarily is working for a "secular" employer. Since he is an ordained minister, he should be treated as a minister for tax purposes by his employer. This means that income taxes should not be withheld from his wages, and he should be treated as self-employed for Social Security.     FALSE

The best course-of-action when in doubt about whether or not an individual is a minister…ask an experienced income tax professional who specializes in clergy tax matters.