Pastors can claim exemptions from income taxes when certain conditions apply. Generally, a pastor can deduct the cost of living quarters from his federal income taxes. A pastor can also claim an exemption from Social Security and Medicare under certain conditions, and he may be able to pay no federal taxes if he donates all of the money he earns.
Living Quarters Rules
The living quarters exemption applies both to the rent that the church would earn from the pastor's residence if the church decided to rent her residence out to a paying tenant, and to checks that the church writes to the pastor so that she can pay an independent landlord. This deduction is still available if the pastor owns her own apartment, and still receives a check to cover housing costs from her church. The living quarters exemption also covers water, gas, trash, and other utilities, but it does not include grocery bills.
The living quarters exemption only applies to the pastor's federal income taxes. He still has to pay Social Security and Medicare on the value of her living quarters. The Internal Revenue Service may classify a portion of the pastor's income as independent contractor income, which means that the pastor also has to send in the employer's portion of her Social Security and Medicare earnings.
The Internal Revenue Service allows a pastor to opt out of Social Security and Medicare entirely if she thinks that these programs are incompatible with her faith. To claim this exemption, the pastor does not need to belong to a church that requires all of its members to opt out of Social Security and Medicare for religious reasons, as long as she tells the church body that grants her pastoral credential that she is rejecting membership in these programs because of her religious beliefs.
To qualify for a religious exemption from all federal taxes, the pastor must perform her work duties under the supervision of the church, and keep no money for herself. According to the Internal Revenue Service, if a carpenter decides to work for a construction contractor, and then asks the construction contractor to send his pay checks to the church, the carpenter's income is still subject to taxes because the construction contractor is not part of his church. However, if the pastor provides carpentry services as a direct employee of her church, and returns the checks the church gives her for her carpentry work, federal taxes do not apply.