Minister Tax - Church Tax Law

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Minister Tax

If you're a church leader, then you should know as much as you can about the "minister tax," so to speak. Ministers are taxed a bit differently than the rest of us. For one, they are entitled to what is known as a housing allowance or parsonage, depending on who owns the property the ministers resides in.

There is much to know about the housing allowance and how to designate it, but in this brief article, we tackle on some of the attendant issues of this "minister tax."

First, there are certain limitations to designating a housing allowance. For example, for ministers who own a home and their church designates a housing allowance, the actual nontaxable portion is limited to the lesser of (a) the actual housing expenses that can be justified under IRC section 107, or (b) the fair rental value of the home.

Second, it is never appropriate to designate a percentage of a minister's salary as a housing allowance because there's no relation to the actual housing expense.

Third, for the minister tax, you must choose a method of reporting housing allowances for federal income tax purposes. Not all churches do it the same. And some churches do it for the ministers, while others require the minister to do it himself. This issue is necessarily informed by decisions made in other matters, such as those discussed below.

Fourth, a minister should never receive two different checks. Some churches mistakenly believe it helps to distinguish the housing allowance from the rest of the minister's income. This is not appropriate.

Fifth, interest paid on a home is deductible in addition to claiming a housing allowance. Yes, you read that correctly! It's often referred to as a "Double Deduction." Although in reality, one is a deduction while the other is an exclusion. Either way, they both translate into a wonderful set of tax-reducing strategies under the minister tax rules.

Sixth, a housing allowance can only be applied to the expenses of maintaining one home.

Seventh, the housing allowance must be reported for self-employment taxes unless Form 4361 is timely filed.

Eighth, ministers should receive a W-2 form.

And ninth, traveling evangelists may exclude a designated housing allowance.

If you have started, or are staring a church, you must be intimately familiar with the rules relating to housing allowances or parsonages, and the special tax privileges available to ministers. But you must also be careful where you get your information.

You owe it to yourself to check out this amazing church-starting resource which was written by Abe Hernandez, Esq., a devoted Christian and church law expert. It's called... Building On Faith: Everything You Need To Know About Starting Your Own Church. It's the gold standard in use today by hundreds of churches around the country.