Q: Tax Playa, what type of tax benefits do clergy get?
Tim, Providence RI
A: Despite popular misconception, religion is not a tax-free activity. Qualified religious institutions are free of tax and can accept tax-deductible contributions. Church land is usually exempt from property tax. However, the clergy themselves are generally-liable for the same taxes as anyone else, with a few exceptions...
For more information, please see IRS Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.
A "minister" is someone duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. They officiate religious activities.
Social Security and Medicare Taxes
The default is for ministers to be treated as self-employed individuals subject to SECA (Social Security and Medicare tax for the self-employed). Exceptions are generally made for ministers treated as employees (and thereby covered by FICA), or members of religious orders who take a vow of poverty.
You can apply to be exempt from paying SECA if you belong to a religious tradition that objects to paying the tax. This exception can apply to a minister, a member of a religious order that has not taken a vow of poverty, a Christian science practitioner, or a member of a recognized religious sect.
You can also apply to be exempt from FICA if you are a non-minister employee of a church that doesn't have to pay FICA on your behalf. If you are in this situation but not exempt from FICA, you are considered self-employed and liable for SECA.
Income, Exclusions, Deductions
All earnings and fees to ministers are subject to taxation. Ministers can exclude the rental cost or fair market rental value of a parsonage provided as pay for services. This also applies to ministers who own their own home and get a housing allowance (provided the exclusion is not excessive). With the exception of home mortgage interest and property tax deductions, otherwise-deductible items are not deductible to the extent they are attributed to this excluded income.
All business expenses allowed to other self-employed persons and employees are allowable to clergy under the same rules.
Church employees are also allowed to set up a 403(b) tax-deferred retirement account. However, it is usually a better idea for them to set up the less-expensive 401(k) style plans.