Clergy tax rules extend beyond churches.

• Author: Schloemer, Paul

EXECUTIVE SUMMARY

* Whether an individual qualifies as a minister for tax purposes is determined based on who employs the individual and the duties the individual performs. An individual does not have to work for a church or denomination to be considered a minister but must perform the duties of a minister as specified in the regulations to be treated as a minister.

* Ministers are subject to special tax rules, including eligibility for a tax-free parsonage or housing allowance, being treated as self-employed for Social Security tax purposes, and being exempt from federal income tax withholding.

* If an employer provides the minister a housing allowance, the exclusion is limited to the lesser of the amount designated in advance by the employer as a housing allowance, the fair rental value of the residence, or the actual expenses incurred.

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Changes in society have prompted significant changes in the religious and charitable organizations carry out their missions. As a result, ministers now work in a variety of organizations, and their duties extend beyond those associated with traditional church pastors. These changes have made determining who meets the definition of a "minister of the gospel" a complex decision. (1)

Those who qualify as ministers are subject to a unique set of tax rules. These rules include the benefit of a tax-free housing allowance and the detriment of being self-employed for Social Security tax purposes. Thus, clarity on the definition of minister is an important issue for these taxpayers and their advisers. The first part of this article provides guidelines to help determine who qualifies as a minister subject to these rules.

The second part summarizes tax rules applicable to ministers. Failure to comply with these rules can result in significant additional taxes and penalties for the minister and the employer. Anyone employing ministers should have an internal specialist address compliance in this area or solicit assistance from a tax adviser who is well versed in the rules. Those advising ministers should also be familiar with these rules to ensure compliance and to help their clients take full advantage of the available tax benefits.

Definition of Minister Under the Regulations

The regulations under Secs. 107 and 1402 provide guidelines for determining who qualifies as a minister. Both sections state that a minister is distinguished by the duties he or she performs. The regulations state that the duties of a minister include

the ministration of sacerdotal functions and the conduct of religious worship, and the control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body constituting a church or church denomination. (2) Regs. Sec. 1.107-1(a) provides a similar definition. The duties of a minister

include the performance of sacerdotal functions, the conduct of religious worship, the administration and maintenance of religious organizations and their integral agencies, and the performance of teaching and administrative duties at theological seminaries. The definitions above identify the following categories of people who qualify as ministers:

* Those in traditional clergy roles (e.g., priests, pastors, rabbis) who typically perform sacerdotal functions and conduct worship;

* Those who work for secular organizations to the extent they perform sacerdotal functions and conduct worship;

* Those who control and maintain religious organizations at the local church or denomination level; and

* Teachers and administrators at seminaries.

Two key issues arise in defining those who qualify as ministers: whether their service is conducted under the authority of a church or denomination and whether their duties are encompassed by the regulations above. Those under the control of a church or denomination whose predominant duties are specified in the regulations have the strongest positions.

The more crucial of the two issues is the duties performed by the minister. Individuals performing minister duties outside the auspices of a church or denomination can qualify as ministers based on duties performed. For example, chaplains employed by secular organizations have successfully qualified as ministers because they conducted worship and administered sacraments. (3)

Regs. Sec. 1.1402(c)-5 provides the following examples that help identify those outside traditional minister roles who qualify as ministers. In these examples, either the specific duties of the minister or the assignment of duties by the religious organization determine whether the person qualifies as a minister.

* An ordained chaplain at a university who teaches a religion class, provides spiritual counseling, and conducts worship services is considered a minister. (4) In this example, the duties of the chaplain qualify him or her as a minister even though he or she is not working at a religious organization.

* A person performs the duties of a minister while conducting religious worship and performing sacerdotal functions even if other employment is not ministry related. (5) In effect, a person can have two careers simultaneously, one as a minister and another in a secular position.

* An...