Churches pay their employees through a regular payroll system: hiring paperwork, tax withholding, periodic tax deposits, and year-end W-2s. What makes church payroll different is that ordained ministers are taxed under a separate set of rules from everyone else on the staff. So the practical answer to how churches pay their employees is that there are really two payrolls running side by side: standard employer payroll for lay staff, and a modified system for ministers that skips mandatory income tax withholding, shifts Social Security and Medicare onto the minister, and allows part of the pay to be designated as a tax-free housing allowance.
Getting the classifications right matters. Misclassifying a worker or mishandling withheld taxes can leave board members and treasurers personally on the hook for unpaid amounts under the Trust Fund Recovery Penalty.1Internal Revenue Service. Employment Taxes and the Trust Fund Recovery Penalty (TFRP)
Who Counts as a Minister for Payroll Purposes
The first decision the church makes for every staff member is whether that person is a minister or a lay employee. The IRS does not go by job title. A worker qualifies as a minister if they are ordained, commissioned, or licensed by a religious body and perform duties such as conducting worship, administering sacraments, or directing a congregation’s spiritual affairs.2Internal Revenue Service. Topic No. 417, Earnings for Clergy Someone called “pastor” who only handles finances would not qualify. An ordained youth minister who leads worship and offers spiritual counseling likely would.
Everyone else is a lay employee: administrative assistants, bookkeepers, custodians, staff musicians, childcare workers. They are treated as ordinary employees for every federal tax purpose. The church withholds their income tax, pays its share of Social Security and Medicare, and reports their wages the same way a secular employer would.
Written job descriptions for each position make the classification defensible if the IRS asks. Treating a lay worker as a minister when they aren’t can produce back taxes, interest, and penalties, because the minister rules cut the church’s tax obligations in ways the lay rules don’t.
Employee or Independent Contractor
A separate question runs alongside the minister/lay decision: is the person an employee at all, or a contractor? A guest speaker, a freelance musician who plays at several churches, or an outside IT consultant is typically a contractor. A choir director who works a regular schedule, uses church equipment, and follows the church’s direction on how to do the work is likely an employee.
The IRS looks at behavioral control, financial control, and the nature of the relationship — contracts, benefits, permanence — with no single factor deciding it.3Internal Revenue Service. SS-8 Determination for Public Inspection Serving multiple unrelated organizations, providing your own tools, and setting your own schedule points toward contractor. Integration into the church’s routine operations points toward employee.
For contractors, the church pays the agreed fee, withholds nothing, and files Form 1099-NEC if payments to that contractor reach $2,000 or more in a calendar year. For tax years beginning in 2026 the threshold rose from $600 to $2,000.4Internal Revenue Service. Publication 1099, General Instructions for Certain Information Returns (2026) All employment taxes are the contractor’s own problem.
Paying Lay Employees
Lay-employee payroll looks like any small employer’s payroll. Each new hire completes Form W-4, and the church withholds federal income tax from every paycheck based on that form.5Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate Wages are also subject to FICA: the church pays 6.2% for Social Security and 1.45% for Medicare, the employee pays a matching 7.65%, and the combined rate is 15.3%.6Social Security Administration. Social Security and Medicare Tax Rates
The Social Security portion applies only to the first $184,500 in wages for 2026; there is no cap on the Medicare portion.7Social Security Administration. Contribution and Benefit Base For employees earning above $200,000, an additional 0.9% Medicare tax applies to wages above that threshold, and the church must withhold it from the employee’s pay.8Internal Revenue Service. Social Security and Medicare Withholding Rates
The church deposits the withheld income tax, both shares of FICA, and any Additional Medicare Tax on the schedule the IRS assigns, then reports the totals on Form 941 each quarter and issues Form W-2 to each employee by January 31.9Internal Revenue Service. Forms 941, 944, 940, W-2 and W-3
Smaller congregations can file annually instead of quarterly. If total annual liability for withheld income tax and both shares of FICA is $1,000 or less, the church can ask the IRS to let it file Form 944 once a year. Total wages of $5,000 or less will generally put the church under that threshold. To use Form 944 for 2026, the church must contact the IRS between January 1 and April 1, 2026.10Internal Revenue Service. Instructions for Form 944
Paying Ministers
Ministers are paid on the same paycheck cycle as anyone else, but the tax treatment is different in three important ways.
No Mandatory Income Tax Withholding
Wages a church pays to an ordained, commissioned, or licensed minister for services in the exercise of ministry are exempt from mandatory federal income tax withholding.11Office of the Law Revision Counsel. 26 USC 3401 – Definitions The church is not required to deduct any income tax from a minister’s paycheck. The minister covers their federal income tax by making quarterly estimated payments directly to the IRS.
Many ministers find quarterly estimates awkward, so the tax code allows a voluntary withholding agreement. In writing, the minister asks the church to withhold income tax as if the minister were a regular employee, and the church reports those voluntary withholdings on the minister’s W-2.12eCFR. 26 CFR 31.3401(a)(9)-1 – Remuneration for Services Performed by a Minister of a Church The arrangement is entirely optional.
Ministers Pay Their Own Social Security and Medicare
For Social Security and Medicare, ministers are treated as self-employed, even though they are employees for income tax purposes. The church does not withhold FICA from a minister’s pay and does not pay the employer’s share. Instead, the minister pays the full 15.3% self-employment tax through Schedule SE on their personal return, covering both halves of Social Security and Medicare.13Internal Revenue Service. Publication 517 (2025), Social Security and Other Information for Members of the Clergy and Religious Workers
No earnings are covered by both systems at once. A worker is either FICA-covered (lay employee) or SECA-covered (minister), never both.14Internal Revenue Service. Members of the Clergy
The Housing Allowance
Ministers may exclude from gross income either the rental value of a church-provided parsonage or a cash housing allowance paid as part of their compensation, under IRC Section 107.15Office of the Law Revision Counsel. 26 USC 107 – Rental Value of Parsonages For a cash allowance, the excludable amount is the lowest of three figures: the amount the church officially designated, the amount the minister actually spent on housing (mortgage or rent, utilities, furnishings, insurance, repairs), and the fair rental value of the home including furnishings and utilities.16Internal Revenue Service. Ministers’ Compensation and Housing Allowance
The designation has to happen in writing, in advance. That usually means a formal vote of the church board with the amount and effective date recorded in the minutes before the minister receives the pay. Retroactive designations don’t work; if no advance designation exists, the whole amount is taxable.
One trap catches ministers every year: the housing allowance is excluded from federal income tax but is not excluded from self-employment tax. On Schedule SE, the minister has to add the housing allowance (or the fair rental value of a parsonage) back into self-employment earnings.16Internal Revenue Service. Ministers’ Compensation and Housing Allowance Records of mortgage payments, rent, utilities, and other housing costs matter for justifying the exclusion if the IRS asks.
Hiring Paperwork and Year-End Reporting
Every church that hires a paid employee must complete Form I-9 to verify employment eligibility. The new hire fills out Section 1 no later than their first day, and the church must examine original identity and work-authorization documents and complete Section 2 within three business days.17USCIS. Instructions for Form I-9, Employment Eligibility Verification The church keeps the form for as long as the person works there and then for one year after employment ends or three years after the hire date, whichever is later. Volunteers and independent contractors are not subject to I-9.
Churches are exempt from filing Form 990, the annual information return other tax-exempt organizations file.18Internal Revenue Service. Filing Requirements for Churches and Religious Organizations They still file employment tax returns (Form 941 or Form 944), furnish each employee a W-2 by January 31, and issue Form 1099-NEC to any contractor paid $2,000 or more in the year.9Internal Revenue Service. Forms 941, 944, 940, W-2 and W-3
Unemployment, Wage Rules, and Volunteers
Churches described under Section 501(c)(3) are exempt from the Federal Unemployment Tax Act. The church pays no FUTA tax on wages to either ministers or lay staff.19Internal Revenue Service. Section 501(c)(3) Organizations – FUTA Exemption As a practical matter, church employees who lose their jobs are generally not eligible for federal unemployment benefits based on that employment. State unemployment rules vary; some states follow the federal exemption automatically, and others require or allow the church to participate.
The Fair Labor Standards Act reaches many churches through their lay employees. If the church engages in interstate commerce — even something as routine as processing out-of-state donations or ordering supplies from out-of-state vendors — covered lay staff must be paid at least the federal minimum wage of $7.25 per hour and overtime at one and a half times the regular rate for hours over 40 in a week. Ministers are generally outside FLSA coverage under the ministerial exception, and Department of Labor guidance treats ministers, priests, nuns, monks, and similar members of religious orders serving under religious obligation as not being “employees” for FLSA purposes.20U.S. Department of Labor. FLSA2018-29, Opinion Letter Overtime and hour-tracking rules don’t apply to them. They do apply to non-exempt lay staff, and unpaid overtime can produce back-wage orders and liquidated damages equal to the wages owed.
Volunteers are permitted and common. A volunteer must serve freely, without expectation of compensation, for religious or humanitarian purposes.21U.S. Department of Labor. Fact Sheet 14A – Non-Profit Organizations and the Fair Labor Standards Act (FLSA) Two limits are worth knowing. A paid employee can’t also volunteer for the same type of work they’re paid to do — the paid custodian can’t be the unpaid weekend custodian. And volunteers generally can’t staff commercial activities the church runs for the public, like a bookstore or coffee shop. In either case, the person is owed minimum wage and overtime.
State-Level Payroll Obligations
Federal rules cover most of the payroll picture, but state rules vary and can add real obligations. Most states require employers, including churches, to carry workers’ compensation insurance, though some exempt clergy or very small employers. State income tax withholding also differs: some states follow the federal exemption that lets ministers skip mandatory withholding, and others require the church to withhold state income tax from ministerial wages anyway. Any church running payroll should check with its state’s department of labor and department of revenue to confirm workers’ compensation, state income tax withholding, and state unemployment obligations.