Housing allowance and self employment tax. Please help.

(Chattanooga, TN)

If the pastor only receives housing allowance and no salary does he have to pay self employment tax on the housing allowance? What is the benefit of paying housing allowance rather than salary if the self employment tax applies to both? We are a small congregation and want to help the pastor have the best tax break but are unsure of which would benefit him the most.

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Apr 15, 2014

Housingallowance and self employment taxes. . .
by: Lewis in NC

Congregations of churches cannot give tax breaks as that is strictly government's business. Though, I really don't think you meant for it to sound like they did.

Internal Revenue Code 107 (Minister's Housing Allowance) is the only federal and state tax benefit we are talking about here (most states recognize this benefit of income exclusion from taxation). . The congregation of your church can enhance the benefit of the housing allowance IRC 107 by approving an adequately large enough housing allowance to covered all qualifying (actual)housing expenses that the minister expects to incur during a particular year. This, then, had to be approved by the end of the year 2013 to be an effective allowance for the year 2014 (in other words, proactively applied.

Your minister reaps a benefit because the housing allowance (if properly set up) is excluded from federal and state income tax liability. Yes, he/she will have to add the housing allowance back into his/her other income to calculate the self-employment tax liability on all the income, which will in the end of the minister's life during retirement (hopefully) benefit him/her again as retirement income.

Ministers (by law) are classified as dual status taxpayers, that is, they are both employees of the church and self-employed taxpayers. Churches have no control over this aspect. Think about it. . . ministers can receive fees, gratuities, income for weddings, funerals, speaking engagements, etc.

The main thing a congregation can do to help their minister is to encourage an ample and adequate salary expense for his/her services and set their housing allowance as a calculation within that salary.

Apr 16, 2014

Housingallowance and self employment taxes. . .
by: Anonymous MN

Very good and complete answer. The Housing allowance is helpful to reduce income and therefore the amount of income tax

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Join in and write your own page! It's easy to do. How? Simply click here to return to Minister's W-2.

If you want to DIY your payroll, I highly recommend you look at using Gusto! It is very user friendly and their support is awesome! Plus they know how to set up and maintain payrolls for churches and nonprofit organizations.

Note: I am a "partner" of Gusto, but as I have told you before ... I never recommend anything that we or our clients have not tried and love =)

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