Clergy (that is, ministers and pastors considered as such by the IRS) receive special tax treatment in the US, but not all churches are aware of this difference. Below are the main points clergy need to know about what the IRS considers taxable and what they don’t:
1. Housing Allowance
The housing allowance (a.k.a., parsonage/rental allowance) can be received in place of, or along with, church-provided housing. The allowance amount, actual rent or fair market rental value of the home (whichever is lesser) can be excluded from your gross income. However, keep in mind that this value is still subject to self-employment tax.
2. Self-employment Tax
The clergy are in the unique position of being both employees and self-employed. While considered employees for federal tax purposes, they are considered self-employed when it comes to SS and Medicare.
What does being self-employed (for SS and Medicare) entail?
Being taxed through the SECA (Self-Employment Contributions Act) instead of FICA, thus,
Not having the church pay half of SS/Medicare tax or match FICA tax.
Being solely responsible to pay self-employment tax (of 12.4% for SS and 2.9% for Medicare) apart from income tax.
Having to pay more SS/Medicare than under FICA.
Having to include housing allowance in calculation of self-employment tax.
Thus, self-employment tax is calculated generally on base salary + housing allowance.
3. Exemption of Tax Withholding
Finally, make sure that the church is not withholding any tax, because they cannot withhold your income tax if you report your income taxes as self-employed, and ONLY with your consent if you report your taxes as an employee (through filing a W-4).
To learn more about housing allowances or get tax filing help from the professionals, visit Landmark Tax today.