A pastor is receiving a $20,000 renting (housing) allowance per year, and he is currently paying Self-Employment (SE) tax on it. Is there a way to exclude this compensation from SE income status?
He will not be able to exclude this amount from SE income. IRS Publication 517 states, "To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income: 1. ... 4. The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you."
Further, the IRS Minister's Audit Technique Guide offers IRS agents the following guidance:
"Computing Self-Employment Tax
- Salaries and fees for services, including offerings and honoraria received for marriages, funerals, baptisms, etc.. Include gifts which are considered income as discussed under the section on income.
- Any housing allowance or utility allowances.
- Fair Rental Value (FRV) of a parsonage, if provided, including the cost of utilities and furnishings provided.
- Any amounts received for business expenses treated as paid under a nonaccountable plan, such as an auto allowance.
- Income tax or self-employment tax obligation of the minister which is paid by the Church.
If an exemption from self-employment tax is not applied for, or is not granted, self-employment tax must be computed on ministerial earnings. To compute self-employment tax, allowable trade or business expenses are subtracted from gross ministerial earnings, then the appropriate rate is applied."
MinistryCPA.org provides a sample Housing Allowance Worksheet that may be helpful.