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Cash compensation can include the following four components. Consider the tax implications of each component as you design this part of the package.

Cash salary

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.

  • Increasing the cash portion of a compensation package will obligate the minister to pay more in taxes.
  • Because employee-paid retirement plan contributions cannot exceed 100% of includible compensation (plus any age 50 catch-up contributions), reducing cash salary can potentially limit a minister’s contribution to his/her retirement plan. Few ministers set aside 100% of their salary for retirement, so this is a lesser concern.

Later in this guide, we explain how to determine a fair cash salary based on national averages and the minister’s experience and qualifications.

Housing/parsonage allowance

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:

  • Designating a larger portion of salary as a housing allowance will reduce a minister’s federal tax liability.
  • But overestimating the housing allowance may cause a minister to under-report his or her taxable wages, which could lead to an underpayment of taxes.

Social Security-Medicare tax offset

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.

Equity allowance for ministers living in a parsonage

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
A Cash salary $15,000
B Housing allowance $10,000
C Social Security offset $3,800
D Equity allowance $5,000
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)

Legal Challenge to
Clergy Housing Allowance

For the latest information on the legal challenge to the Clergy Housing Allowance, click here.

Estimate Your Social Security Benefit