Ministers, housing allowances, and FICA

[Dowist]

Are ministers who are eligible for the 107 exclusion for housing allowances (parsonage allowance) always treated as self-employed for self-employment tax purposes? Or could they be treated as employees subject to FICA?

I'm confused. It seems that the housing allowance is only available if the minister is performing religious functions, and that seems to make him or her self-employed (or at least subject to self-employment taxes). But I've also seen information that says that a minister can be an "employee." Is the idea that the minister can be an employee, but will nonetheless be treated as self-employed.

I have an unusual situation - a 403(B) plan defines compensation for purposes of contributions as FICA compensation. I have a minister who gets a housing allowance. My ultimate question is whether the housing allowance is included in compensation for purposes of the 403(B) plan.

[Guest Danny Miller]

Well, I can understand why you're confused. You've raised several issues, so let me try to deal with them in the following fashion:

1. Clergy who are performing the services of their ministry are ALWAYS treated as self-employed for Social Security purposes. That is, they pay Social Security taxes under SECA and not FICA.

2. For income tax purposes, clergy can be either employees or self-employed. Usually, they are employees under the IRS tests for that status because of the control that the church exercises over the terms of their employment. However, a couple of years ago, the Tax Court ruled that Assemblies of God ministers are self-employed for income tax purposes.

3. Now for housing allowance. The availability of housing allowance under Code section 107 relates solely to whether the minister is performing services as a minister of the gospel. Thus, both self-employed clergy and clergy who are employees for income tax purposes can exclude housing allowance from their income.

4. Finally, under your 403(B), plan it is clearly permitted to include housing allowance in your plan's definition of compensation. However, because clergy technically do not have any FICA compensation, your plan's definition of this term should probably be tied to net earnings from self-employment under SECA in their case, with the definition expressly stating that it includes tax excludible housing allowance. Remember, however, that housing allowance cannot be counted as compensation when you are doing your limits testing under section 403(B) of the Code.

Hope this helps.

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Danny Miller

Conner & Winters

1050 17th St., N.W.

Suite 810

Washington, D.C. 20036

(202) 783-5711

dmiller@cwlaw.com

[Dowist]

Danny Miller - Thank you. You are very kind to help me work through these confusing rules.

Question: you say that the minister will generally be treated as an employee for income tax purposes. what is the significance of this? Is it significant under the tax rules that limit certain employee benefits (health insurance, group term life insurance, cafeteria plans) to employees? Is there other significance?

[Guest Danny Miller]

There at least a couple of significant points: First, as employees, ministers can't file a Schedule C with respect to their professional expenses, but must instead deduct them on Schedule A with its floor above which expenses must rise before they are deductible. Of course, an accountable reimbursment expense plan can help here.

Second, you are correct that there are employee benefit implications. A self-employed individual must claim a credit for health care coverage, while an employee is entitled to an exclusion. Other benefit exclusions may also not be available to self-employed individuals. You have to review the provisions of each type of exclusion to determine this. There is, however, a special rule in Code section 414(e)(5) that allows self-employed clergy to participate in their church's 403(B) retirement plan. Hope his helps.

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Danny Miller

Conner & Winters

1050 17th St., N.W.

Suite 810

Washington, D.C. 20036

(202) 783-5711

dmiller@cwlaw.com

[BeckyMiller]

Danny - But isn't the parsonage allowance excluded in measuring income under Section 415, so there might still be a limit. See PLR 8416003.

Also, not all Assemblies of God pastors are classified as self-employed. It depends upon the structure of the church, itself. (A/G pastor's daughter, here.)

[This message has been edited by BeckyMiller (edited 03-31-2000).]

[This message has been edited by BeckyMiller (edited 03-31-2000).]

[Guest Danny Miller]

Yes, you're correct that housing allowance cannot be counted as compensation for section 415 limit purposes. I should have also mentioned section 415 in the housing allowance discussion in the fourth paragraph of my initial response to this series of questions. I'm also glad you noted that some Assemblies of God pastors are not treated as self-employed for income tax purposes. On the same day the Weber case involving a United Methodist minister was handed down (determining that the Methodist minister was an employee for federal income tax purposes) the Tax Court decided a similar case involving a Pentecostal Holiness pastor (the Shelley case--I thought the minister there was an Assemblies pastor, but I went back and checked, and that was not the case--another senior moment for me). The two cases are very interestng in terms of how a minister's tax status is so dependent on the form of the respective denomination's polity. Thanks for your input.

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Danny Miller

Conner & Winters

1050 17th St., N.W.

Suite 810

Washington, D.C. 20036

(202) 783-5711

dmiller@cwlaw.com