Taxes and Ministry
As ministers work to serve God and their congregations, they need to be aware of special tax laws and provisions that can help safeguard their livelihood now and in the future. It is important to understand:
- Self-employment taxes and if/how they may qualify for an exemption
- What special provisions are in place for parsonage expenses
- Tools that may help clergy members save for and safeguard their retirement, such as rabbi trusts
Parsonage Expenses
Ordained, commissioned, or licensed ministers may be able to exclude as income, the "rental allowance or "fair rental value" of a parsonage provided to them as pay for their services. This exclusion only applies with respect to income taxes and does not apply for self-employment tax purposes. It is important that the church or employing organization officially designates the housing allowance. Furthermore, the amount of the allowance must be defined or named by the payment as a housing allowance before the payment has been made.
Social Security
The services performed as a minister are subject to social security and Medicare taxes. These taxes are collected via self-employment tax. Earnings for ministerial services are subject to self-employment tax unless:
- You have taken a vow of poverty
- You ask for and receive an exemption from the Internal Revenue Service
- You are only subject to the social security laws of a foreign country
Self-Employment Tax
As a minister of a church, your earnings for services performed in your capacity as a minister are subject to self-employment tax unless you have requested and received an exemption from the IRS. Earnings are subject to self-employment tax whether you are considered an employee of your church or a self-employed person. It is important to realize that even though for social security purposes you may be considered a self-employed individual in performing ministerial services for the church, you may be considered an employee for income tax or retirement plan purposes.
You can request an exemption from the self-employment tax if you are:
- A minister
- A member of a religious order who has not taken a vow of poverty
- A Christian Science practitioner
- A member of a recognized religious sect
There are certain circumstances in which you cannot be exempt from the self-employment tax. You may wish to consult a tax professional to ensure you are in compliance with the law.
Retirement Planning (Rabbi Trusts)
A rabbi trust is a popular way of deferring compensation for ministers. The trust is a type of non-qualified deferred compensation arrangement in which amounts are transferred to an irrevocable trust to be held for the benefit of the minister. It is designed to provide an assurance that future benefit obligations will be satisfied.
In order for a rabbi trust to be valid, it must meet three conditions:
- The trust's assets must be available to all general creditors if the employer files for bankruptcy
- There are no insolvency triggers that hasten payments to the minister
- The bankruptcy or financial hardship of the employer does not stop the assets of the trust from being used
*It is important to seek the appropriate legal and tax advice to ensure you are in compliance with the applicable laws.