In 1828, Muhlenberg moved to New York City and became principal of the General Protestant Episcopal School (later St. Paul's College). He was an innovative educator, introducing new pedagogical methods and insisting on the integration of spiritual formation with intellectual training. In 1832, while continuing as educator, he became rector of the Church of the Holy Communion in lower Manhattan (an old, declining parish). There he revolutionized parish life.

Most radically, in 1846 Muhlenberg abolished pew rents—the practice by which wealthy families purchased exclusive seating. This transformed the church into a genuinely free and open parish where rich and poor worshipped together at the Eucharist. The Church of the Holy Communion became known for its restored liturgical practice, frequent (weekly) communion, ornamental vestments, and sacramental piety—innovations that seemed radical to many Episcopalians but were grounded in ancient tradition. Muhlenberg pioneered the use of the full eucharistic liturgy in parish worship and encouraged ceremonial dignity. The church became a model of "Catholic revival" Anglicanism practiced in an urban, socially mixed context.

Muhlenberg's pastoral vision extended beyond worship. He saw that many poor parish members lacked access to healthcare; in 1850 he founded St. Luke's Hospital, attached to the church, as a ministry of healing modeled on Christ's example. The hospital cared for the destitute and working poor, staffed by clergy and laypeople united in apostolic purpose. St. Luke's became a pioneering institution for urban healthcare ministry.

In 1853, at age 57 and with the authority of a respected elder in the church, Muhlenberg submitted a "Memorial" to the General Convention of the Protestant Episcopal Church, proposing liturgical flexibility within a unified episcopate and core doctrinal commonground—essentially advocating for a broader church that could accommodate evangelical and reformed sensibilities alongside Catholic revival. The Memorial was controversial but influential, prefiguring debates that would occupy the church for generations. It demonstrated Muhlenberg's irenical theology and his conviction that apostolic Christianity transcended party divisions.

Later in life, Muhlenberg established other institutions including a community of deaconesses and various educational initiatives. He remained at the Church of the Holy Communion until 1877, when he died at age 81. His legacy included dozens of clergy trained in sacramental theology, a transformed parish model, and two major institutions (church and hospital) that embodied his vision of apostolic community in the modern city.

Muhlenberg's personal piety was evident in his published sermons (collected and reprinted) and in contemporaries' accounts. He combined intellectual seriousness with pastoral warmth, aristocratic bearing with genuine accessibility to the poor. He was never sentimental but profoundly committed to the incarnational principle that Christianity must transform actual social conditions and must be manifest in concrete institutions of healing and education.