Effect of parsonage allowance on self-employment tax and on Sec. 265.

• Author: Whiteaker, Stephen C.
• Position: Brief Article

An individual is considered a "minister" if duly ordained, commissioned or licensed by a religious body constituting a "church" or church denomination (or, if appropriate, substituting comparable religious designations for minister and church). Sec. 3121(b)(8)(A) generally exempts ministers from FICA tax.

On the other hand, Sec. 1402(a)(8) treats ministers as self-employed for self-employment (SE) tax purposes - unless an irrevocable election is made on Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, to be exempt from SE tax because of religious beliefs (pursuant to Sec. 1402(e)). This exemption applies only to income derived from performing services as a minister. Thus, if a minister earns income from other endeavors, the exemption does not apply.

Sec. 107 allows ministers to exclude from gross income, for income tax purposes, a reasonable amount for the rental value of a home, including utilities, furnished to them as part of their compensation or the rental allowance (commonly called a parsonage allowance), to the extent this allowance is used by them to rent or otherwise provide a home. Regs. Sec. 1.107-1(b) requires parsonage allowances to be designated in advance...