Tax Considerations for Ministers Receiving 1099-NEC Income
Updated July 30, 2025
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Consulting with an experienced tax professional is always a prudent choice. Servant Solutions specializes in retirement and financial planning to support ministers and other servants of the Church in their calling to share the gospel of Jesus Christ. In our work, we address a variety of relevant issues related to regulatory aspects of our retirement plan.
But please note, Servant Solutions does not advise plan members on tax matters, nor do we assist in the preparation of income tax returns. So, once again we advise:
Consult with an experienced tax professional. Seeking good tax advice is especially important for credentialed ministers given the complex tax laws associated with their varied sources of income and expenses. But be prepared for some ambiguity. Even among tax professionals, interpretations and opinions on provisions within the tax code can vary widely. You may find that two experienced clergy tax experts offer differing and sometimes even conflicting advice regarding a given issue.
So, where can you find tax advisors with experience in clergy issues? We’ve asked our members for suggestions. Click here to see a list of tax professionals recommended by those in the Servant Solutions Retirement Plan. This list is not an endorsement, but all have been recommended by one or more of our members.
Keep in mind that what is presented below may not fit your specific situation. This is merely a summary of information from the IRS, the Internal Revenue Code, and other sources. Take the issues raised here to your own chosen tax professional to determine how they might apply to your unique circumstances.
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1. Ministers Are “Dual Status” Taxpayers: Both Employee and Self-Employed
To begin any examination of clergy taxes, it must first be understood that in the eyes of the IRS, ministers are a rare breed. They are considered to be “dual status” taxpayers. IRS Publication 517 begins by stating that “Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination.”
It goes on to explain that ministers are deemed to be employees of their church or other recognized ministry organizations. But this employee status is only applied for income tax purposes. In contrast, for their payroll taxes—the Social Security and Medicare taxes identified as Federal Insurance Contributions Act or “FICA” on most paystubs—the IRS considers ministers to be self-employed.
This means that for payroll taxes churches or other organizations employing ministers do not withhold and pay the 7.65% FICA taxes as they must for their other employees. Nor do they pay the additional 7.65% employer’s portion of FICA to complete the required 15.3% total payroll tax due for all workers. So, to be clear, because ministers are considered self-employed for payroll tax purposes, none of this required 15.3% is withheld from wages and paid on their behalf by the employer.
Instead, ministers must report all earnings, including their designated housing allowance amount, on the Schedule SE Self-Employment Tax pages of the Form 1040 tax return when calculating what are known as Self-Employed Contributions Act or “SECA” payroll taxes. (Please note: The housing allowance amount of their compensation is excluded from taxable income when calculating income taxes, but it is included when calculating these SECA payroll taxes.)
Because ministers are considered as self-employed for these payroll taxes, they must pay both the employer and the employee portions of these SECA payroll taxes. And as noted above, this combination adds up to a total tax of 15.3% of their compensation.
There is some relief for this higher tax amount. The Form 1040 Schedule SE provides a business expense deduction for one-half of the self-employment SECA tax amount when calculating your taxable income for income tax purposes. So, the net cost is a bit less than the full 15.3% of your earnings, but still more than non-minister workers must pay.
2. Are you a W-2 Employee or a 1099-NEC Self-Employed Independent Contractor?
When is a W-2 required? Anyone who is regularly compensated for their work and services to an organization, including a church or other ministry, should be considered an employee and receive a W-2 Wage and Tax Statement, even if only working part-time. The IRS notes in Publication 1779 and in these linked definitions that an independent contractor—think interim pastor here—becomes an employee when the employer has the right to control both the results and the means of achieving those results (i.e., the ‘right of control’ test), indicating economic dependence on the employer, rather than being in business for oneself.
As an employee, a minister’s compensation should be tracked over the year and reported to both the employee and the IRS using Form W-2. This allows for proper withholding of federal, state, and local taxes and clear reporting of any exclusions for things like the housing allowance and contributions to a retirement plan such as the Servant Solutions Retirement Plan.
When is a 1099-NEC required? For others whom the organization hires not as regular workers but rather as independent contractors (usually for a specific event or project), compensation of $600 or more in a tax year should be reported to both the contractor and to the IRS on Form 1099-NEC, Nonemployee Compensation. Here on the IRS website you can find these instructions for employers:
If the following four conditions are met, you must generally report a payment as non-employee compensation using Form 1099-NEC.
You made the payment to someone who is not your employee [remember the “right of control” test];]
You made the payment for services in the course of your trade or business (including nonprofit organizations such as a church or other ministry);
You made the payment to an individual, partnership, estate, or in some cases, a corporation; and
You made payments to the payee of at least $600 during the year.
3. May you deposit 1099-NEC earnings into your Servant Solutions Retirement Plan account?
As a 403(b)(9) church plan, the Servant Solutions Retirement Plan may only receive contributions into member accounts from qualified churches and church-related organizations approved by Servant Solutions. Missionaries and self-employed ministers of an Eligible Employer may also participate in the Plan.
Independent contractors who are being compensated as self-employed persons performing duties in the exercise of their ministry are considered by the IRS to be both employer and employee for retirement plan contribution purposes. Self-employed ministers may therefore make both employer and employee retirement plan contributions. Retirement plan contributions are reported on Schedule C of Form 1040 and will reduce a minister’s taxable income.
4. May the earnings of a self-employed minister working as an independent contractor be designated as a housing allowance?
Richard Hammar’s 2025 Church & Clergy Tax Guide notes:
Ministers who own (or rent) their home do not pay federal income taxes on the amount of their compensation that their employing church designates in advance as a housing allowance to the extent that the allowance represents compensation for ministerial services, is used to pay housing expenses, and does not exceed the fair rental value of the home (furnished, plus utilities). Housing-related expenses include mortgage (or rent) payments, utilities, repairs, furnishings, insurance, property taxes, additions, and maintenance.
Additionally, from Section 107 of the Internal Revenue Code, you’ll find these considerations:
· The housing allowance is available only to a minister of the gospel.
· A housing allowance must represent compensation for services performed in the exercise of ministry.
· The housing allowance is an exclusion from gross income rather than a deduction in computing or reducing adjusted gross income. As a result, it is not reported on Form 1040. In effect, the housing allowance is claimed by not reporting it as income.
Note again, a housing allowance may be excluded from a minister’s federal income only if the allowance is designated in advance by official action of the church board or congregation.
So, prior to beginning their work for the church or ministry, the self-employed minister working as an independent contractor should request in writing that all (or some specified portion) of the agreed upon compensation will be designated as a housing allowance. They should also keep a copy of written confirmation of this housing allowance designation from the appropriate ministry leadership. And most importantly, the portion of their compensation designated as housing allowance should not be reported as income on the 1099-NEC form.
Now, and this is important, if the independent contractor-status minister has requested that all compensation be designated as a housing allowance, and if the ministry leadership has confirmed that designation in advance of payment, then no 1099-NEC statement would even be necessary because no taxable income was paid by the ministry nor received by the independent contractor minister.
But please note, if the minister has no taxable compensation, generally no contributions can be made to a retirement plan. If all compensation is received under the designation of the housing allowance, those funds have been excluded from taxable income up to the limits of the lesser of actual housing expenses or fair market rental value of the home. Those same funds may not then also be contributed into a retirement plan.
What about SECA, the payroll taxes due for the self-employed minister? Both the W-2 employee and the 1099-NEC independent contractor minister must report and include the housing allowance amount as income on Form 1040 Schedule SE when calculating payroll taxes.
But this housing allowance treatment changes in retirement. As explained next, in section 1402(a)(8) of the Internal Revenue Code, the IRS states that the requirement to include the housing allowance amount when calculating SECA does not apply for “retired ministers.”
5. One more important taxpayer status for ministers: are you retired or non-retired?
It is important to understand that the IRS has not defined when a minister is considered to be retired. What constitutes “retirement” for tax purposes is determined by individual facts and circumstances.
Consulting with a qualified tax advisor specializing in clergy taxes is highly recommended.
Summarizing Richard Hammar’s 2025 Church & Clergy Tax Guide on this issue, assuming the church has reduced the minister’s Form W-2 or 1099-NEC reported income by the amount of the designated housing allowance, the housing allowance amount which was excluded for income tax calculations must still be reported as self-employment earnings on a non-retired minister’s Form 1040 Schedule SE when computing the SECA taxes due.
But for retired ministers, according to the Internal Revenue Code Section 1402 discussion of SECA taxes, self-employment tax does not apply to “the rental value of any parsonage or any parsonage allowance (whether or not excludable under section 107) provided after the individual retires…”
And further, from IRS Publication 517, “If you are a retired minister, you can exclude from your gross income the rental value of a home (plus utilities) furnished to you by your church as a part of your pay for past services, or the part of your pension that was designated as a rental allowance. However, a minister’s surviving spouse can’t exclude the rental value unless the rental value is for ministerial services he or she performs or performed.”
Retirees must exercise caution when excluding income designated as housing allowance from their SECA calculation if they are still making contributions to a retirement plan or are still working on a part-time basis because the IRS may not consider them to be retired.
For example, if a retired minister serves as an interim pastor for a ministry and, while helping this church search for a new pastor, performs the duties of preaching, pastoral care, weddings and funerals, etc., are they really “retired” for tax purposes? Have they had a “meaningful break in service?” Does it matter if they are receiving Social Security benefits or distributions from a retirement account? These are just some of the relevant questions for which the IRS has not provided clear answers.
So, to repeat our caveat from the opening of this white paper, ministers and their tax advisors should work together to address the relevant facts and circumstances of each individual case as they determine tax strategy and the structure of employment income during working years and into retirement.
6. The Bottom Line
In conclusion, there may be limited circumstances in which independent contractor income reported on a 1099-NEC form is advantageous, especially for retirees. But in far more situations, Form W-2 provides better reporting and tax planning opportunities. Form W-2 has clear guidelines and designated spaces for reporting exclusions like the housing allowance and retirement plan contributions. It simplifies the tax work for you, your tax preparer, and, perhaps, those reviewing your return at the IRS.
Remember, as a Servant Solutions member you are always welcome to contact us with questions about your retirement plan and overall financial plans. Just email us at info@servantsolutions.org or call 800.844.8983.