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Taxability of In-kind Payments by Church for Intern

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Question:

 An intern at a church receives as part of his compensation a direct payment by the church to reduce his school debt. If the church pays off his loans will that be considered income for tax purposes?

 Answer:

 The loan payments will be taxable as standard wages. If he is or should be treated as a licensed minister then he will have no withholding. However, he will be obligated for both income and self-employment tax. A housing allowance could reduce his income tax to the extent he pays for his own housing. Of course, he could also consider "opting out."

 If he is not a minister (not recognized by the church as called to the gospel Ministry and eligible to marry, bury and baptize) then both the cash and loan payments are subject to FICA withholding and matching by the church. His compensation will be classified as any other non-ministerial employee (e.g., administrative assistant, facilities manager). He would not qualify for a housing allowance since only ministers do.
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