Ministers' Compensation & Housing Allowance: An Introduction

Overview:

 

Services that a duly ordained, commissioned or licensed minister performs in the exercise of his or her ministry are generally covered under the Self-Employment Contributions Act (SECA). This means the minister is exempt from Social Security and Medicare withholding, but the minister is responsible for paying self-employment tax on his or her net earnings from self-employment. Clergy can withhold income withholding by request, but FICA wages and taxes will not be withheld or included on their form W2.

 

W2 Implications:

 

Box 1: Minister’s salary (does not include Housing Allowance)

Box 2: Should be blank unless minister requests the church to withhold FIT

Boxes 3-6: FICA wages & taxes should be blank

Box 14: Housing Allowance amount paid to minister

Box 16: *Note: Some states (Pennsylvania) are taxable for Housing Allowance- check state taxability chart on Z:\ for complete list

 

Items to Note:

 

The Minister’s Housing Allowance for the year cannot exceed the fair rental value of the home or the amount of reasonable compensation for services performed.

Amount spent on housing and reasonable compensation can include:

  • Rent
  • Mortgage payments
  • Real estate taxes
  • Furnishings
  • Weddings
  • Funerals

 

Example:

 

John is a minister who receives a designated housing allowance of $36,000.He spends $28,000 for qualified mortgage interest and real estate taxes on his personal residence. He spends more than $8,000 for principal payments on his home mortgage, utilities, and furniture. The sum of his $36,000 housing allowance and his other compensation does not exceed the fair market value of his services. The $36,000 housing allowance does not exceed the fair rental value of his home and utilities. John may exclude all $36,000 of his housing allowance from his gross income. If the $36,000 had not been designated as a housing allowance, John would not be able to exclude the amount from gross income.

 

Link for reference:

 

http://www.aicpa.org/publications/taxadviser/2015/june/pages/campbell_june2015.aspx

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