Printer Friendly

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

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 by the employing church or other qualified organization.

An easy error to make on ministers' returns is to not add the excluded amount back to SE income in computing the SE tax - as required by Sec. 1402(a)(8). Even though Sec. 107 excludes such amount for computing income tax, it is not exempt from SE tax.

Rev. Rul. 83-3 precluded deductions for home mortgage interest and real estate taxes allocable to parsonage allowances excluded from gross income. However, this ruling was reversed by the enactment of Sec. 265(a)(6) in the Tax Reform Act of 1986. Nevertheless, Sec. 265 still requires ministers to prorate business expenses related to ministerial compensation, based on the relationship of excluded income to total income earned as a minister. For example, if a minister receives a $12,000 parsonage allowance and $48,000 of other compensation, the disallowance percentage would be 20% ($12,000 [divided by] ($12,000 + $48,000)). Therefore, if this minister's total business expenses were $10,000, $2,000 would not be deductible.
COPYRIGHT 1994 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1994, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Author:Whiteaker, Stephen C.
Publication:The Tax Adviser
Article Type:Brief Article
Date:May 1, 1994
Previous Article:Passive loss relief for real estate professionals: fact or fiction?
Next Article:Rev. Rul. 93-88 expands exclusion for employee discrimination damages.

Related Articles
Maximizing deductions for self-employed persons' medical expenses.
Tax break for self-employeds.
LLCs and liability for self-employment taxes.
Hobby or hard work? Don't let the IRS decide.
Tax-free housing allowances for ministers: documentation is critical to ensure exclusion.
SE tax treatment of LLCs' members.
Proposed regulation classifies LLC members for self-employment tax purposes.
Self-employment tax treatment of Keogh and SEP contributions and unreimbursed business expenses.
Ninth Circuit disallows Keogh deduction based on S income.
Marginal and average tax rates and the incentive for self-employment.

Terms of use | Privacy policy | Copyright © 2020 Farlex, Inc. | Feedback | For webmasters