January 06, 2010

Minister's Only Compensation--Living in the Parsonage

Question:

A youth minister (non-ordained) is being compensated solely by housing in the parsonage. Is the youth minister taxed on the value of living in the parsonage?

Answer:

I'm assuming that even though he's not ordained, he's still a minister as defined by the IRS. The posting right before this one somewhat defined a minister. It says in part, "...licensed, ordained, performing what the IRS defines as "sacerdotal duties" (baptisms, communion, weddings, funerals), or conducting religious worship ... (Source: IRS Minister Audit Technique Guide, April 2009).

This is important. If he is not a minister, the value of the employer provided housing would likely be taxable for income tax purposes as well as for social security and Medicare purposes. Exception: "housing for the convenience of the employer" but I won't get into that one in this posting.

Back to the question, the minister is not subject to income tax on the fair rental value of the parsonage. However, he is subject to self-employment tax (Form 1040, Schedule SE).

Question:

If he is subject to SE tax is the church responsible for a paying a portion of his self-employment tax?

Answer:

He is considered self-employed and responsible for his own SE tax. Many churches choose to voluntarily help with this tax--a blessing! But this payment is considered taxable income as well. Yet, the youth minister is obviously better off for the help.

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