Copyright © 2002, United States Conference of Catholic Bishops, Inc. All rights reserved.
Order Copies of This Statement
V. Compensation of Religious
Members of religious orders1 who provide services to a diocesan employer (defined here to include the diocese and any affiliated entities that are listed in The Official Catholic Directory [OCD], i.e., the Kenedy Directory) are subject to distinct tax and reporting rules, primarily as a result of their vows of poverty.
Employment ClassificationStatus as a member of a religious order does not automatically determine employment classification. Rather, classification of a religious as an employee of a diocesan employer or as an independent contractor should be made by applying the common law tests as interpreted by the Internal Revenue Service (IRS). (See the section on "Compensation of Lay Employees of the Church.")
Taxation of CompensationAn individual religious is not "tax-exempt." Tax exemption applies, if at all, to the religious order qualifying under section 501(c) (3) of the Internal Revenue Code. Further, status as a member of a religious order does not automatically immunize from federal income and employment taxation the compensation paid to a religious who is performing services for a diocesan employer. Rather, the taxability of such compensation, including employee fringe benefits, if any, provided by the diocesan employer, is determined in accordance with the principles set forth in Revenue Ruling (Rev. Rul.) 77-290, 1977-2 C.B. 26.
Rev. Rul. 77-290
Under Rev. Rul. 77-290, a religious providing services to a diocesan employer will be considered an agent of his or her order and will not be liable individually for federal income or employment taxes2 on compensation paid by the diocesan employer, provided three criteria are met: (1) the religious must be subject to a vow of poverty; (2) the religious must be providing services for a diocesan employer listed in the OCD3 at the direction of his or her ecclesiastical superiors; and (3) the religious must remit the compensation to his or her religious order, which must be exempt from federal income tax under section 501(c)(3) of the Code. If the religious fails to meet any of these Rev. Rul. 77-290 criteria, the religious is taxable individually on compensation received.
Rev. Rul. 77-290 does not purport to determine the employment status of a religious providing services for a diocesan employer, and in no way does it preclude classification of a religious as an employee of a diocesan employer4 or the provision of customary employee benefits to religious who are employees.
Verifying Rev. Rul. 77-290 Requirements
It is incumbent on the diocesan employer to determine whether a member of a religious order meets all three criteria of Rev. Rul. 77-290 before suspending its general withholding and reporting obligations. The diocesan employer should verify that the individual is a member of a section 501(c)(3) religious order subject to a vow of poverty recognized by the Church.5 The diocesan employer should then verify that the individual's services have been authorized by his or her religious superior. These first two issues can be resolved in any reasonable manner, e.g., by correspondence with the member's religious superior. Section 501(c)(3) status should be verified by reference to the OCD. The diocesan employer should also verify that the compensation paid will be remitted to the religious order. This can be accomplished in one of several ways, listed below in order of preference: (1) by direct deposit to the bank account of the religious order; (2) by check payable to the religious order; or (3) by check payable jointly to the religious order and the individual religious.
As a general rule, compensation paid directly to an individual religious will be taxable to the individual religious. However, in limited circumstances, diocesan employers may treat such compensation as qualifying under Rev. Rul. 77-290. In these circumstances, the diocesan employer should be convinced that there exists some legitimate impediment to the payment of compensation to the religious order directly as outlined above.6 In addition, the diocesan employer should obtain appropriate written documentation from the superior of the religious order certifying that compensation paid directly to the individual religious will be remitted to the religious order in accordance with the requirements of Rev. Rul. 77-290. This supporting documentation should be updated annually.
Reporting CompensationThe manner of reporting compensation of religious performing services for diocesan employers depends on its taxability. If the criteria of Rev. Rul. 77-290 are satisfied and compensation is not taxable to the individual religious, no reporting on Form W-2 or Form 1099 is required.7
On the other hand, if the criteria of Rev. Rul. 77-290 have not been satisfied—e.g., if the diocesan employer has been unable to verify that compensation will be remitted to the religious order—then compensation is taxable to the individual religious and should be reported in the ordinary course. Thus, if the religious is taxable and is classified as an employee (see above) of the diocesan employer, compensation must be reported on Form W-2.8 If the religious is taxable and is classified as an independent contractor of the diocesan employer, compensation must be reported on Form 1099. No withholding is required with respect to independent contractors.
- The term "religious order" as used herein refers to the IRS understanding of the term, as described in Rev. Proc. 91-20, 1991-1 C.B. 524. This would include both religious priests and lay men and women religious.
- For purposes of Rev. Rul. 77-290, "employment taxes" refers to FICA and Medicare taxes.
- This also includes asterisked (domestic non-Group Ruling) listings in the OCD, since these are subject to the same standards of relationship to the Church as are ordinary Group Ruling listings in the OCD.
- In fact, Rev. Rul. 77-290 presumes that the religious are employees of the entities described therein, since neither FICA nor income tax withholding would be at issue in the absence of status as an employee.
- Any questions that arise concerning the nature or validity of the vow of poverty taken by a particular individual can be referred to a canon lawyer specializing in the field of religious life.
- In practice, such situations will be rare. Mere insistence, without justification, that compensation be paid directly to the individual religious does not meet this standard.
- Some diocesan employers may currently report compensation paid to nontaxable religious, generally in one of two ways: (1) issuance of a Form 1099 bearing the religious order's employer identification number (EIN); or (2) issuance of a Form W-2 bearing the Social Security number (SSN) of the religious employee. The first practice is unnecessary, particularly when the religious order is a corporation. The second practice is also unnecessary and may trigger IRS scrutiny. Although commercial payroll services may initially require issuance of a Form W-2 or Form 1099, with persistence and insistence they can be persuaded to modify their computer programs to accommodate the special needs of diocesan employers with respect to Rev. Rul. 77-290.
- Reporting and tax withholding with respect to taxable religious will differ for religious priests and lay religious. The compensation of a taxable religious priest who is performing ministerial services should be reported in the same manner as that of diocesan priest employees. Under Treas. Reg. § 1.107-1(a), ministerial services include (1) performance of sacerdotal functions; (2) conduct of religious worship; (3) administration and maintenance of religious organizations and their integral agencies; and (4) performance of teaching and administrative duties at theological seminaries. Note that taxable priests performing ministerial services are treated as self-employed for Social Security tax purposes even though they are classified as employees for income tax purposes (see "Compensation of Priests and the Dual Tax Status of Priests" for further discussion). They are liable for SECA tax under section 1402 of the Code. No FICA taxes should be withheld. The compensation of a taxable religious priest who is not performing ministerial services, or of a religious who is not a priest, should be reported in the same manner as that of diocesan lay employees, with income and FICA tax withheld.
Medicare Secondary Payer50.1 - Clarification of Current Employment Status for Specific Groups1 (Rev. 1, 10-01-03) A - Member of Religious Order B3-3329.3.D-E, A3-3491, A3-IM 3491, HO-263, SNF-336, HH-253, A3-3492.B.3.e (section d was deleted with a comment)
A member of a religious order whose members are required to take a vow of poverty is not considered to have current employment status with the religious order if the services he/she performs as a member of the order are considered employment by the order for Social Security purposes only. This is because the religious order elected Social Security coverage for its members under section 3121(r) of the Internal Revenue Member of Religious Order Code. Thus, Medicare is primary payer to any group health coverage provided by the religious order.
This exception applies only to members of religious orders who have taken a vow of poverty. It does not apply to clergy or to any member of a religious order who has not taken a vow of poverty or to lay employees of the order. This exception applies not only to services performed for the order itself (such as administrative, housekeeping, and religious services), but also to services performed at the direction of the order for employers outside of the order provided that the outside employer does not provide the member of the religious order with its own group health plan coverage. A member of a religious order has current employment status with the outside employer as a result of providing services on behalf of the outside employer (an ongoing business relationship exists). If the outside employer provides group health plan coverage to the member of the religious order on the basis of that current employment status relationship, the usual Medicare Secondary Payer rules apply.
Medicare is the secondary payer to the group health plan of the outside employer if the outside employer has the requisite number of employees.
Sister Mary Agnes is a member of a religious order where members are required to take a vow of poverty. Sister Mary Agnes was assigned to teach at a church school in the Diocese of the Metropolis. The Diocese does not provide group health plan coverage to Sister Mary Agnes. The only group health coverage available to Sister Mary Agnes is provided by the religious order. Medicare is the primary payer for services provided to Sister Mary Agnes.
Sister Mary Teresa is a member of a religious order whose members are required to take a vow of poverty. Sister Mary Teresa was assigned to teach at a church school in the Diocese of Smallville. On the basis of her teaching relationship with the Diocese of Smallville, the Diocese provides group health plan coverage to Sister Mary Teresa. The group health plan provided by the Diocese of Smallville is the primary payer and Medicare is the secondary payer for services provided to Sister Mary Teresa.
Carriers should note that the exemption only applies to the working aged and disability provisions that base a group health plan's obligation to be a primary payer on a current employment status relationship. The exception does not apply to the End Stage Renal Disease (ESRD), workers compensation or liability and no-fault provisions.
- Excerpted from the Medicare Secondary Payer (MSP) Manual which is published by the Center for Medicare and Medicaid Services, a federal agency within the U.S. Department of Health and Human Services.