The criteria the Internal Revenue Service (IRS) uses to determine who is a minister are not necessarily the same as those used by churches and denominations. Whether or not one qualifies as a minister for tax purposes is a very important question, since special tax and reporting rules apply to ministers under federal tax law. These rules includes: (1) eligibility for housing allowances; (2) self-employed status for Social Security; (3) exemption of wages from income tax withholding (ministers use the quarterly estimated tax procedures to pay their taxes, unless they elect voluntary withholding); (4) eligibility under very limited circumstances to exempt themselves from self-employment taxes.
These special rules only apply only with respect to services performed in the exercise of ministry. For example: Pastor J is an ordained minister at his church. In addition, he works a second job for a secular employer. Assume that Pastor J qualifies as a minister for federal tax purposes. Since his church duties constitute services performed in the exercise of ministry, the church can designate a portion of his compensation as a housing allowance. However, the secular employer cannot designate any portion of Pastor J's compensation as a housing allowance, since his work would not be service in the exercise of ministry.
According to the IRS, ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. They are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the tenets and practices of that church or denomination. If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for Social Security purposes.
See IRS Publication 517.