Tax Free Housing

[Libbyinco]

It is my understanding that housing provided for an ordained minister in the US is not only part of their benefit package but also listed in box 14 of the W-2 so the "benefit-fair rental value" of housing provided can be subject to SE tax unless the minister has opted out of the SS system.

The fact that an association requires the minister to live in a specific house (not owned or controlled by the association but actually rented by the association) does not make the housing a tax free benefit in my opinion or research. My research indicates that housing provided for the benefit of the employer, on their property , controlled and owed by them is the only tax free housing allowed.

Who out there can comment and verify that my understanding is correct?

[JohnH]

Minister Housing

A minister can receive a housing & utilities allowance in the form of cash or in the form of a parsonage provided by the religious organization, or a combination of the two. I think the general understanding of a "parsonage" is a building owned by the religious organization, but I don't see any reason why a residence rented by the organization would not meet this test. I'd be interested in hearing if anyone disagrees with this view.

I disagree with the statement that the building must be "on their property". Many church-owned parsonages are located miles from the actual premises of the church. Further, I would also disagree with the contention that the housing being provided "for the benefit of the employer" is necessary for it to be excluded from income (but of course not from S/E earnings). The H&U allowance can be provided solely for the purpose of taking advantage of the favorable tax treatment afforded to ministers - there's nothing to prevent providing it for that reason alone..

Incidentally, there is no requirement that the H&U allowance be listed in Box 14 of the W-2. That's where IRS likes to see it, but not a requirement. This is an informational entry only, and the presence or absence of the entry on the W-2 has no significance with respect to the validity of the exclusion from income of the H&U allowance or benefit. Many churches provide this info in a separate letter or else just leave it up to the minister to keep his/her own records. Even when there's an entry, I generally see only cash H&U payments listed in Box 14, since FRV of a parsonage is not a determination the religious organization is expected to make. Of course, in your case it would seem that the FRV is easier to determine since it's a known amount.

[RLymanC]

Parsonage

The church does not have to own the property. As long as the minister is otherwise qualified to receive a parsonage allownce, it can be for a rental of property from any owner, or it can be a house that he has purchased.

In the case of ownership the minister gets a double tax saving.
1- Rent or principal payments, cost of buying a home and down payments.
2- Real estate taxes and motgage interest for the home. These expenses are deducatble againas itemized deductions. A DOUBLE DEDUCTION, but allowable by IRS
(Sec. 256 (a) (6)
3- Insurance
4- Improvements, repairs and upkeep
5- Furnishings and appliances
6- And on and on and on and on.

It is not unusal for a minister to receive his entire wage as "Parsonage Allownce," and if he has opted out of SocSec. no taxes in this amount.

[MAMalody]

While I do not disagree with the prior responses, you must remember that whatever is in the compensation package cannot exceed reasonable compensation for the position. And, while it was not explicitly stated in the prior responses, the housing allowance must be designated prior to receipt by the minister.

[Bees Knees]

The poster brings up an interesting point.

If we were talking about a regular employee living in housing provided by an employer for the convenience of the employer, the benefit would be tax free for BOTH income tax and FICA tax purposes. [IRC §119]

However, with a minister, living in employer (church) provided housing, the benefit is tax free for income tax purposes only. It is still subject to SE tax. [IRC §107 and §1402(a)(8)]

The differences between the two are as follows:

1) A minister by law is considered self-employed, even if he or she is paid on a W-2. That means the normal employer provided tax-free housing benefit under Section 119 cannot apply, since the minister is self-employed.

2) The housing allowance a minister can exclude from income tax is not contingent upon the minister living in church owned property. The housing exclusion can apply even if the minister owns the housing, or the minister rents the housing from a third party. An employee living under similar circumstances could not have the benefit excluded, unless the property is owned by the employer.

The poster is correct in concluding that the employer provided housing tax free benefit under Section 119 is the only true tax-free benefit. The minister parsonage allowance is only tax-free for income tax purposes, not SE tax purposes.

[Grumpy]

No one has mentioned

the limitations that must be considered when determining the portion of the housing allowance that is income tax free. The exclusion (from income tax) is limited to the lower of the designated allowance, the actual cost of maintaining the home, or the fair rental value of the home, as furnished. I'm writing from memory, so my wording may not be a little off but not including these limitations in such a discussion often leaves the reader with the impression that whatever amount has been designated as a housing allowance is fully excludable from income tax, when often that is not the case.

[Grumpy]

Should have said

my wording may be a little off NOT "my wording may not be a little off". So much for poor proofreading.

[Luis Mopeo]

It is my understanding that housing provided for an ordained minister in the US is not only part of their benefit package but also listed in box 14 of the W-2 so the "benefit-fair rental value" of housing provided can be subject to SE tax unless the minister has opted out of the SS system.

The fact that an association requires the minister to live in a specific house (not owned or controlled by the association but actually rented by the association) does not make the housing a tax free benefit in my opinion or research. My research indicates that housing provided for the benefit of the employer, on their property , controlled and owed by them is the only tax free housing allowed.

Who out there can comment and verify that my understanding is correct?

IRC section 107, Rental value of parsonage.

"In the case of a minister of the gospel, gross income does not include -
(1) the rental value of a home furnished to him as part of his compensation; or
(2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities."

Nothing about the parsonage being owned by the church.

[RLymanC]

Dual Status Minister

All ministers are generally self-emplyed.

Hardly ever, most ministers are dual- status. W-2 for work preformed for the church, and Schedule C for personal services preformed. (Marraiges, Baptism, etc.)

There is no SE tax on any of the above income if they opted out of SS. Any moyet earned doing other work (paint a house, yard care, etc.) is subject to SE tax, or if he receives a W-2 from other non-church work it will be subject to SS & Medicare..

[JohnH]

Meaning of "Dual Status"

I basically agree with the facts you presented, but my understanding of the reference to ministers being "dual status" has always been slightly different. (I have also heard it referred to as a hybrid status).

Regardless of whether or not a Schedule C is involved, a minister is a "dual staus" employee. Most ministers are considered employees with respect to their salary, benefits, retirement, expenses, etc paid by the church, but regarded as self-employed with respect to the payment of Social Security and Medicare tax.

This is why the IRS prefers that they be issued a W-2 rather than a 1099, even though no SocSec/Medicare tax is withheld. I've had numerous church treasurers & bookkepers argue with me over the issuance of a W-2 in this type of situation, just because it doesn't "look right".

[MAMalody]

I basically agree with the facts you presented, but my understanding of the reference to ministers being "dual status" has always been slightly different. (I have also heard it referred to as a hybrid status).

Regardless of whether or not a Schedule C is involved, a minister is a "dual staus" employee. Most ministers are considered employees with respect to their salary, benefits, retirement, expenses, etc paid by the church, but regarded as self-employed with respect to the payment of Social Security and Medicare tax.

This is why the IRS prefers that they be issued a W-2 rather than a 1099, even though no SocSec/Medicare tax is withheld. I've had numerous church treasurers & bookkepers argue with me over the issuance of a W-2 in this type of situation, just because it doesn't "look right".

I agree with the above. It should be mentioned that the IRS not only prefers W-2s, they are fairly aggressive in moving ministers from Schedule Cs to W-2s, to the point that the IRS considers them employees per the common laws rules of Reg 31.3401(c)-1 (which I believe requires a W-2), but self-employed per IRC 1402(a)(8), therefore not allowing any deductions for Fica or Medicare and federal income tax - hence the "strange looking" W-2.

[joanmcq]

Also, when paid on W-2s, any biz expenses (not expenended in the Sch C weddings, baptisms, etc.) are on Sch A, subject to the 2%. You get to reduce SE tax by the biz expenses though, but AMT remains a problem. More tax to the gov.

[MAMalody]

Also, when paid on W-2s, any biz expenses (not expenended in the Sch C weddings, baptisms, etc.) are on Sch A, subject to the 2%. You get to reduce SE tax by the biz expenses though, but AMT remains a problem. More tax to the gov.

While this is true, generally speaking, remember there is a IRC 265 limitation to take into account prior to the 2% misc deduction haircut.

[JohnH]

Peeling the onion

When we start getting into the particulars of clergy taxation, it's a bit like peeling an onion isn't it? Every time you pull back a layer there's another one just underneath it.