Should pastors pay income taxes? Yes they should. All working people should pay income taxes on all taxable income. There seems to be some misunderstanding concerning tax policy and religious clergy and institutions. Read further to get the true facts.
Everyone must pay income tax.
It is a misconception to think pastors, or other members of the clergy, do not have to pay income taxes. Although houses of worship are generally considered tax exempt, being 501 c 3 organizations according to the United States Tax Code that does not mean the people they employ do not need to pay income tax on any and all income received from that organization.
What about free housing?
Housing has been something houses of worship have provided to their clergy for hundreds of years. Many times clergy live on the same property as the house of worship. This benefit is no different than many benefits other secular workers get. The housing benefit has a dollar value not subject to federal income tax; however it is subject to Social Security Tax. If a member of the clergy owns their own home they may receive a housing allowance in lieu of a physical house to live in. A stipend designated as housing allowance by the house of worship, is treated the same as the value of a physical house. It is not subject to income tax but it is subject to Social Security or self employment tax.
What about Social Security Tax?
Social Security Tax is a payroll tax not an income tax. Social Security Tax is 6.2% of income up to $106,800 for tax year 2010. Another 1.45% is taxed on all income with no cap. That percentage is used for Medicare. These taxes are also paid by members of the clergy unless they claim an exemption.
Exceptions to Social Security Tax.
There are two conditions for members of clergy to be exempt from Social Security Tax. In order for a member of clergy to be exempt they need to apply for that exemption within the first two years of becoming clergy. The second condition is they must have a religious objection to the system of Social Security. They cannot opt out just because they want to keep their money. If they do opt out, they are not able to receive those benefits in the future either. Even if they have a religious objection to Social Security, if they do not make that known to the IRS within the first two years of becoming clergy, they still have to pay.
Understanding how the tax code deals with clergy is helpful when deciding if they should pay income taxes or not. As outlined above, it is clear clergy must pay income taxes. As to whether they should pay those taxes it is best to turn to Scripture and take the admonition Jesus gave when asked about taxes. He said, “Render unto Caesar the things that are Caesar’s” (Luke 20:25)