I promised some time ago that I would comment on whether or not you should speak to your church leaders about the possibility of giving you the “minister” status so you can be eligible for the special tax provisions. I want to summarize the various issues and tax provisions below for your own reference. It is important that you understand these issues before deciding whether or not to pursue the matter further.
SPECIAL TAX PROVISIONS FOR MINISTERS
There are a few special tax rules that ministers are eligible for with respect to income they receive from services they perform as a minister:
- They can exclude, for federal income tax purposes, a portion of their compensation which the church has designated as a housing allowance. This means their federally taxable income is reduced by the amount of the housing allowance. There is technically no “limit” on the amount of the allowance, but there are some guidelines. If a minister owns a home, the allowance can be the amount of mortgage payments plus all housing-related expenses (such as the cost of utilities, repairs, furnishings, insurance, property taxes, and maintenance). However, the total amount of allowance may not exceed the “fair rental value” of their home (furnished, include utilities). If a minister rents a home, the allowance can simply be the rent plus the aforementioned housing-related expenses. Before a minister can use this allowance, the church’s board or congregation must approve the allowance in writing before the beginning of a calendar year (or as soon as a new calendar year starts).
- A minister who is eligible for the housing allowance is always considered “self-employed” when it comes to social security taxes. This is true even though the minister is an employee of the church and receives W-2 wages. This means the church should not deduct the social security and medicare taxes (7.65%) from the minister’s paycheck. More importantly, the church does not the employer’s share of 7.65%. Instead, the minister is to pay the entire tax – in this case called self-employment tax instead of social security tax – of 15.3% by using a Schedule SE. The Minister’s social security income (on which the 15.3% tax is being computed on) is the entire gross income (subject to some minor adjustments), not just the taxable income (after excluding the housing allowance). So the housing allowance exclusion has no effect on the calculation of this self-employment tax.
- A minister is exempted from income tax withholding.
IS GETTING A HOUSING ALLOWANCE REALLY BENEFICIAL TO YOU?
Not always. Before you even consider whether or not you want to go through the trouble of discussing with your church about your eligibility for the allowance, you need to do some calculations to see if the tax savings from the allowance (item 1 above) is more than the additional cost of the self-employment tax (item 2 above). The result would depend on the amount of your earnings from the church, the amount of the housing allowance and your family’s income tax bracket. On your tax savings, you need to compute the amount of your housing allowance (as if it is approved by the church). Then, depending on your family’s income and deductions, you can easily calculate how much this allowance will save you in federal taxes. Next you need to calculate your additional social security and medicare costs. Currently you pay only 7.65%, of which 6.2% is for social security, and is computed on income up to $128,400 in 2018 ($127,200 in 2017). The remaining 1.45% is for medicare and is on your income (without limit). As a minister, you will pay 12.4% on 92.35% of your income up to $128,400 in 2018 and 2.9% on your income (without limit). If the former is less than the latter, then obviously you have no tax advantage to try to qualify for a housing allowance. You can then ignore everything below.
There is a way a minister can choose to forego social security benefits, and will therefore be exempted from paying self-employment tax. However, this option is available only for a limited period (the deadline is the due date of the federal tax return for the second year in which a minister has over $400 in net earnings from a ministry). I am not sure if you would be able to make this election. Even if you could, you may not want to forego your social security and medicare benefits. So my suggestion is for you to do the calculations as if you will be paying the self-employment tax.