My daughter is about half way through obtaining a Masters of Divinity and being ordained. This past summer, as part of the MDiv curriculum, she was assigned to an internship at a church and worked as an associate pastor. Her room and board was provided by the church.
She received a W-2 from her university, and they deducted Federal and State taxes, but not Social Security or Medicare. When she asked the school about it, they told her that she “was exempt” from those withholdings.
I help her prepare her tax return and I’m stumped….If they paid her as a 1099 contractor, I’d know what to do, but how does she account for not having SS and Medicare taxes not taken out and not run afoul of the IRS? Does she need to fill out the self-employment forms?
Thanks for your help and advice.

Pastors have special exemptions

http://www.irs.gov/pub/irs-pdf/p1828.pdf

Special EITC Rules (http://www.irs.gov/individuals/article/0,,id=150708,00.html)

She IS exempt from FICA (Social Security and Medicare) taxes, but not because of her status as a pastor, but rather because of her status as a student.

College students who work for the university are normally exempt from FICA taxes.