The Basic Reality: You're Not Like Everyone Else

Alright, I’m going to set the stage with some frank truth: When it comes to compensation and taxation, pastors are special.  And I don’t mean in a “my mom thinks I’m special” kind of way – I mean the real kind.  No other profession on earth has the same financial situation as pastors do.  

So if you’ve ever felt overwhelmed by your financial situation as a pastor, and even if you find your anxiety building as you read sections of this book, I want you to know: You’re not crazy.  You’re not unintelligent.  It’s not your fault – the system is unintuitive, uniquely complicated, and downright unfair.  Even some business owners don’t have to contend with all the complications that you, as a minister, have to face.  So if you feel like you’re in a bit over your head, that’s the most natural response in the world.

And now, I’m here with you, to walk you through this mess the IRS has placed in your lap and, by the grace of God, turn it into something peace-giving.  It may be complicated, it may be unfair – but you can master it.  You just need the right guidance.

So let's start with the basics: understanding just how different your situation really is.

Multiple Income Sources (And Multiple Tax Treatments)

Pastoral income operates under a fundamentally different set of rules than traditional employment.  While your neighbor who works at the bank gets a straightforward W-2 and hums a merry tune as he files his own taxes online, you might have:

• Regular salary (W-2 income, but with special ministerial tax rules) 

• Strategic 1099 income from your church (allows expense deductions – more on this in Chapter 5) 

• Housing allowance (tax-free for income tax, but subject to self-employment tax) 

• Speaking fees (1099 income that may or may not qualify for housing allowance) 

• Book royalties (which could be passive or active income depending on your involvement) 

• Denominational benefits (which may or may not show up on your W-2) 

• Love offerings (yes, these count as income too – sorry) 

If reading that list makes you want to throw this book away and dive into some A. W. Tozer instead, you're in excellent company.  I've never met a pastor (or even a financial professional) who intuitively understood all of this without some help.

Understanding Your Dual Tax Status

The most important concept to grasp is your dual tax status.  Unlike virtually every other profession, ministers are considered:

• Employees for income tax purposes (you get a W-2) 

• Self-employed for Social Security and Medicare tax purposes (you pay SECA tax instead of having FICA withheld) 

Why, you may ask?  It’s a good question.  We’ll cover it in Chapter 6, I promise.  But for now, drill this into your brain: You may be an employee of your church – but as far as the IRS is concerned, you’re self-employed.  Everything will make more sense once you make peace with this aggravating paradox.

But What If I’ve Opted Out of SECA Taxes?

As if things weren’t complicated enough already, pastors also have the unique opportunity to opt out of Social Security and Medicare.  There’s a two-year window to do so (starting with your first ministerial compensation after getting licensed or ordained), and once it’s done it’s irrevocable.  If you’ve already made this decision, just keep in mind that all the talk about SECA or self-employment taxes does not apply to you.

If you’re reading this and are seriously considering opting out, I highly encourage you to read Chapter 16 before you make your decision.  If you have opted out already, Chapter 17 is a must-read so you can prudently replace the benefits you’ve given up.