September 29, 2009

Parsonage as Only Compensation

Question:

A church is looking to bring on a youth minister but is unable to offer compensation other than living arrangements in a church home. The minister is not ordained. Can housing be offered as the sole compensation? Would the person need to be hired as a regular employee or as an independent contractor? How would the church and the youth minister report this?

Answer:

Regardless of the ordination, licensure or other formal recognition of the minister, he will qualify for ministerial status as long as he is providing what the IRS calls sacerdotal (ministerial) duties for a qualifying church. Licensure, at a minimum, certainly helps to establish (or document, if necessary) his call to the gospel ministry. Generally, an ordained minister performing solely non-ministerial duties does not qualify for clergy tax status.

While the minister in this case will most likely be properly classified as an employee, he will not be issued Form W-2 because he has received no taxable compensation. He will be responsible to report the fair rental value of the parsonage as self-employment income on Schedule SE. He will be able to reduce this amount by any unreimbursed employee business expenses he incurred.

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