Parsonage is a seemingly innocuous five line tax benefit in the
Code. This "innocent" provision of the Code, Section 107, appears to have befuddled many
ministers and their professional advisors, however.
About 90 years ago, Congress promulgated an
exclusion from income for the rental value of the
housing provided to a "minister of the
gospel," which includes priests, rabbis, imams and
any other duly ordained, commissioned or licensed member of the
clergy. Alternatively, the minister can exclude
the rental allowance paid as part of compensation, to the extent
actually used as rent or other costs of home ownership. Since 2002,
the allowance is capped at fair rental value, including furnishings
and appurtenances (such as a garage), plus the cost of
Ministers are effectively dual status
employees. Simply put, a minister is an employee for all
tax purposes except for withholding and
social security tax purposes, where he or she is
treated like a self-employed person.
The following are some of the
highlights of this unique status for the
employer and the minister:
An employerneed not withhold
any taxes from a minister's compensation.
There is no withholding of
FICA (Federal Insurance Contributions Act)
taxes from a minister's compensation. This
includes the parsonage
portionand the non-parsonage
A minister must pay
SECA (Self-Employment Contributions Act)
taxes on the entire compensation,
including the parsonage payment. For example, if the
minister receives $50,000 of compensation and half of that amount
($25,000) is designated as parsonage, SECA taxes must be paid on
the entire $50,000.
A minister must pay quarterly estimated taxes
to cover income tax and SECA tax
liability, unless he or she entered into a
voluntary withholding agreement with the employers.
The IRS takes the position in
Rev. Rul. 68-507 that if the employer pays
theemployerportion of FICA on behalf of a
minister, that amount is treated as additionaltaxable income to the minister for both
income and self-employment tax
The minister is given a Form W-2. There is
no need to set forth the parsonage amount on the W-2, but
the IRS writes that you may include the parsonage
allowance in Box 14. Including this amount is probably a good
What’s the Option? We’re all still waiting for a final decision in Gillette.1 In the meantime, taxpayers have an option for the returns due this fall. They may compute their apportionment using one of the following two methods:
In this era of corporate inversions, there seems to be a lot of mud-slinging going around. Congress and the current Presidential administration would like to label large multi-national corporations as traitors.
In Fresenius Medical Care Holdings, the US Court of Appeals for the First Circuit held that taxpayers can meet their burden of proving that a government settlement was compensatory—and thus deductible—with evidence beyond the settlement’s terms.