Question 181: Are members of the clergy self-employed individuals, even if they don't pay self-employment tax? I am assuming that they are not employees of their church.
Answer: Yes, they are, but the way one gets to that point is complex. As you point out, ministers can be employees or independent contractors, depending on the same kinds of common law factors used in other professions. Obviously, if they are employees, then they are not self-employed as to their income from the church. However, many employee clergy are allowed to charge for performing marriages and other services and to keep those fees personally. That would be a trade or business reportable on Schedule C, even though they have wages shown on a Form W-2.

Ministers can file a form with the IRS claiming exemption from self-employment taxes if their religious principles would be violated by participating in the Social Security system. If the form is approved, then according to IRC 1402(c)(4) the minister's earnings are not deemed to be from a "trade or business" for purposes of the self-employment tax. Thus, those earnings would not be "net earnings from self-employment."

Normally that would mean those earnings are not "earned income" for purposes of the retirement plan rules. But IRC 401(c)(2)(A)(ii) says that IRC 1402(c)(4) does not apply in determining earned income. So for retirement plan purposes the minister's income is earned income from a trade or business. Obviously, the minister materially participates in that business.

This means that whether or not the minister has filed for SE tax exemption, a member of the clergy is treated as a self-employed individual (except, obviously, with regard to his or her wages as an employee).

The rules for clergy members are discussed at length in IRS Publication 517. The rules for determining self-employed individuals and earned income are discussed in Chapter 1 of my book Who's the Employer.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.