Clergy payroll: how to pay your pastor

Setting up pastor payroll

First, confirm that your pastor qualifies as a minister for tax purposes: someone a church or denomination has ordained, commissioned or licensed, with authority to lead worship, perform priestly duties and administer sacraments (IRS Publication 517). Anyone else on staff, like a secretary or caretaker, gets paid in the usual way.

A minister sits in an unusual spot. When it comes to income tax, the minister is usually an employee of the church, yet for Social Security and Medicare that very same pastor counts as self-employed (IRS Topic 417). Most of the special handling you'll do comes from that combination.

What payroll taxes does the church take care of for a minister?

Usually none at all. No income tax is withheld, and the church neither withholds nor pays the employer portion of Social Security and Medicare. Your pastor pays self-employment tax instead, which is the full Social Security and Medicare amount that people who work for themselves cover on their own.

That rate comes to 15.3%: 12.4% for Social Security plus 2.9% for Medicare (IRS Publication 517). It's charged on 92.35% of what the pastor earns, and that includes the housing allowance or a parsonage's value. For 2026, the Social Security portion applies to net self-employment earnings up to $184,500 (Social Security wage base table). Medicare has no ceiling.

To give you a feel for the 2026 numbers, here's what the tax looks like at a few pay levels, counting salary plus housing before ministry expenses:

Because no tax is taken out during the year, your pastor might have to send in estimated payments each quarter so they don't get penalized (IRS Publication 517). Half of that self-employment tax can be deducted on Form 1040 Schedule 1, line 15 (IRS Publication 517).

Plenty of churches go with voluntary withholding instead. Under this setup, the church and pastor agree that tax comes out of each paycheck. What's withheld can be enough to take care of income tax and self-employment tax alike (IRS Publication 517). If enough is withheld to cover both, your pastor may not need to make quarterly estimated payments.

Housing allowance for your pastor

The housing allowance is the slice of a pastor's pay the church designates for their home. Up to a limit, it's free of income tax. The allowance has to be formally approved ahead of any payment, with a specific dollar figure named (IRS Publication 517). It can be written into a contract of employment, captured in the minutes of a church meeting, set out in the budget or handled through some other official step taken in advance. Casual chats don't count.

When a pastor owns their home, the tax-free portion is whichever of these 3 figures is smallest (IRS Publication 517):

• the amount the church designated
• what the pastor actually spent on the home
• the home's fair rental value, furnishings included, plus utilities

Fair rental value means what a similar furnished home nearby would rent for. If the pastor rents, that same fair rental value limit applies.

Say the church designated $20,000, actual housing costs were $18,500 and rental value plus utilities came to $24,000. In that case, $18,500 comes out tax-free while the remaining $1,500 is taxable. That extra piece gets reported as wages on Form 1040 line 1h, labeled "Excess allowance" (IRS housing allowance FAQ). The allowance has to be used in the year it arrives.

When a parsonage is provided, its fair rental value escapes income tax, and any allowance for utilities escapes tax up to whatever the pastor really spent on them (IRS Publication 517). Remember, though, the allowance escapes income tax only. It still counts toward self-employment tax.

Completing your pastor's W-2

Box 1 gets the pastor's taxable pay, without the tax-free portion of the housing allowance (IRS Publication 15-A). Under a voluntary withholding agreement, the tax withheld during the year belongs in box 2. The designated housing allowance can appear in box 14, or you can give it in a separate statement.

The Social Security and Medicare boxes stay blank. Since your pastor handles those taxes on their own return, no Social Security or Medicare wages show up on the W-2 or Form 941. When part of the pastor's salary goes into a 403(b) retirement plan, report it in box 12 using code E (IRS Form W-2 instructions).