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Q. Are ministers exempt from tax?

A.  No – ministers are generally subject to income tax and self-employment tax (Social Security/Medicare).
However, early in their careers in the ministry, clergy who are opposed, based on religious considerations to the acceptance of Social Security benefits, may elect to exempt themselves from Social Security/Medicare taxes. The rules are rigid and time for the election is limited. See IRS Form 4361 for more information.

Q. Are ministers employees or are they self-employed?

A.  Clergy are generally considered employees for purposes of income tax, but they are always considered self-employed for self-employment tax purposes.

Q. Why are tax rules for clergy unique?

A.  Several unique tax rules apply to ministers in the performance of their ministry:

  • A housing allowance or parsonage exclusion
  • Exemption from Social Security (if the minister has met certain specific criteria)
  • Always considered self-employed for purposes of Social Security (if not exempt)
  • Exemption from income tax withholding

Q. What is a housing allowance or parsonage exclusion?

A. Ministers who live in a church-owned parsonage (manse) may exclude the fair rental value of that home from their income tax - they are not required to pay income tax on the fair rental value of the parsonage. The full amount of the fair rental value of the parsonage is subject to self-employment tax.  ‚Äč

Ministers who own or rent their home may exclude an amount designated by the church as a housing allowance. The housing allowance exclusion is limited to the lesser of: 1.) housing allowance designated by the church, 2.) actual housing costs, or 3.) fair rental value of the home furnished plus utilities.

Q. What is the maximum amount that can be designated as a housing allowance?

A. Under the current tax rules, there is no specific limit on what portion of a minister's compensation may be allocated (designated) as a housing allowance. In some cases, it is possible, even advisable, to have 100% of the compensation designated as a housing allowance. Allocation of compensation should be considered in the context of each indivudal situation.

Q. Is a second home eligible for a housing allowance exclusion?

A. Recent interpreatation of the tax code has raised confusion about whether a housing allowance may be applied to more than one home. However, a 2012 appeals court ruling limits the housing allowance to one principal residence.

Q. What is the "Deason Rule"?

A. The "Deason Rule" is a 1964 Tax Court ruling that requires the adjustment of deductible business expenses to the extent of the ratio of tax-exempt income to total income. For example, if an excludable (tax-exempt) housing allowance represents 40% of the minister's total ministerial income, 40% of the eligible business expenses may not be deducted for income tax purposes.

Since a housing allowance for a minister (who is not exempt from Social Security taxes) is fully taxable for self-employment tax purposes, the full amount of eligible business expenses may be deducted (no adjustment is required) when calculating self-employment taxes.