A minister who hasn’t taken a vow of poverty is subject to self-employment tax on income from services as a minister. A clergy member may have the following sources of income from his occupation as a pastor:

W-2 from the Church – The income is subject to income tax but the church does not withhold FICA, and if the cleric has not taken the vow of poverty the income is also subject to SE tax.    

Schedule C – Typically this income would be for a cleric who does not work for a specific church, or for one that does but also receives income for presiding over weddings, funerals, etc. This income is taxable and subject to SE tax but based upon the Schedule C net profit after deducting the expenses. These expenses are specifically associated only with the Schedule C income.

Housing Allowance from the Church – To the extent allowed by law, this income is not subject to income tax but is subject to SE tax. Prior to tax reform (i.e., the TCJA), members of the clergy could deduct their business expenses on Schedule A. However, the expenses had to be prorated between taxable income and non-taxable housing allowance with only the proration attributable to taxable income being deductible. In addition, those expenses attributable to taxable income could be used in offsetting the income subject to SE tax.

Retired Clergy - Parsonage/rental allowances paid to retired members of the clergy are not subject to SE tax. (IRC Sec 1402(a)(8))

Although TCJA suspended the deduction for employee business expenses as an itemized deduction, they are still allowed as a deduction against a member of the clergy’s income subject to SE tax. Reg 1.1402(a)-11(a) says “In general.—For each taxable year ending after 1954 in which a minister or member of a religious order is engaged in a trade or business, within the meaning of Section 1402(c) and § 1.1402(c)-5, with respect to service performed in the exercise of his ministry or in the exercise of duties required by such order, net earnings from self-employment from such trade or business include the gross income derived during the taxable year from any such service, less the deductions attributable to such gross income.”

In addition, the instructions for Schedule SE for 2021 say “If you were a duly ordained minister who was an employee of a church and you must pay SE tax, the unreimbursed business expenses that you incurred as a church employee are not deductible as an itemized deduction for income tax purposes. However, when figuring SE tax, subtract on line 2 [of Sch. SE] the allowable expenses from your self-employment earnings and attach an explanation.”