Cash compensation can include the following four components. Consider the tax implications of each component as you design this part of the package.
A minister’s cash salary can be subject to federal, state, and local income taxes. It also serves as the basis for calculating allowable retirement plan contributions.
Later in this guide, we explain how to determine a fair cash salary based on national averages and the minister’s experience and qualifications.
Section 107 of the Internal Revenue Code allows ordained ministers to exclude from federally taxed income some or all of the cost of providing their principle residence. For example, a minister receiving a cash salary of $30,000 might have $5,000 of the cash amount designated as a housing or parsonage allowance. Only $25,000 would be considered taxable for federal income taxes.
This exclusion applies only to a minister’s federal income tax. The implications:
While ministers are employees for federal income tax reporting purposes, they are self-employed for Social Security purposes with respect to services they perform in the exercise of their ministry. This “dual status” means they are not subject to withholding requirements for the employee’s share of Social Security and Medicare taxes. Instead, they pay a Self-Employment Contributions Act (SECA) tax.
Churches are not permitted to pay the SECA tax for their pastors, however, most churches assist ministers by providing them with a Social Security/Medicare tax offset of at least 50% of the SECA tax. This provides an equivalent of Social Security/Medicare taxes that the church would pay on behalf of a lay church worker.
Unlike homeowners, ministers living in parsonages do not build equity in their homes. Many churches help compensate for that by paying an equity allowance that is not subject to federal income tax.
You can read more about the housing, parsonage, and equity allowances on the following pages.
|Tax Implications of Cash Compensation: Example|
|C||Social Security offset||$3,800|
|Amount subject to federal income tax:||$18,800
|Amount subject to state, local, and SECA (Social Security and Medicare) taxes:||$33,800 (A+B+C+D)|