Individuals who qualify for ministerial status for tax purposes are never subject to FICA-type (Federal Insurance Contributions Act) social security, and churches (and other employers) should never withhold FICA-type social security from a minister’s compensation. This is because qualified ministers are always subject to SECA-type (Self-Employment Contributions Act) social security, calculated on Schedule SE.
These unique rules for ministers in the tax law were highlighted in a recent federal district court case. During a pastor’s over 20-year tenure, the church classified him as an employee for income tax purposes and reported his compensation on Form W-2. The church did not withhold FICA social security from his compensation. Pastor Kuma did not pay SECA social security taxes with his annual Form 1040s. Neither did he opt out of paying SECA taxes.
Upon retiring from pastoral service, the pastor learned that he did not have any social security coverage relating to when he served the church. The pastor sued his former employer for negligence because they did not withhold FICA from his compensation. The court dismissed the lawsuit because withholding of FICA tax on ministerial compensation is not required under the tax law. Kuma v. Greater N.Y. Conference of Seventh-Day Adventist Church, District Court Southern District of New York, August 28, 2020.
Editorial note: While a church has no obligation to withhold FICA-type social security tax from the compensation of individuals qualifying as ministers under the tax law, neither should a church voluntarily withhold FICA tax from a minister’s pay. To do so results in a minister underpaying income and social security taxes because the church’s FICA match (7.65%) would be categorized as tax-free compensation when it is fully taxable.
For more information on the proper handling of social security for ministers, check out these resources on ECFA.org or ecfa.org: