Working for religious institutions is a service to God but to protect the interests of the ministers and rabbi, it is good to have financial information provided by the state. Most clergy including cantors, rabbi, priests and religious officers working in religious institutions have the right to get a waiver on some portion of the income. Usually home rent, furnishing and maintenance of the home are excluded from income tax and this is termed as Parsonage.
Due to the special tax waiver that is enjoyed by the clergy, ministers, cantors and rabbis have a special standing in the laws dealing with taxation. They are employees of the religious institutions and thereby have income tax withholding and a W-2. But for all purposes of Medicare and Social Security, they are considered to be self employed. This is a unique position and on being deemed as self employed, the clergy has to pay double taxes.
Sometimes the clergy, rabbi and cantor are not provided accommodation by the religious institutions they are affiliated with. Under these circumstances, the parsonage amounts to the rent, annual upkeep of the home, furnishings and utilities. Some of the items that are included in parsonage include insurance, rent, remodeling expenses, furnishings, repairs, pots and pans, audio and video devices, computers, linen, cleaning supplies, electrical appliances and lawn movers. But if the church or religious institution is providing accommodation, then the Parsonage is calculated as the market value of the home, yard, furnishings and other utilities. However, parsonage is not unlimited. The clergy is entitled to the lesser of these evaluations:
* The real amount spent on the home, furnishings and other utilities
* The fair rental value with furnishings and utilities of the house
* Or, the amount that is designated officially by the institution as parsonage
Theoretically, 100% of the minister’s salary can be deemed as parsonage but that is when limitations on the parsonage are being maintained. In case, couples are deemed dual ministers and are active members of their institutions, the parsonage is combined and cannot exceed the limitation. Sometimes, a minister or a rabbi holds multiple positions in many institutions that allow him for a parsonage but as per the rules, there is no double counting and the total parsonage that is awarded cannot go beyond the limitation.
However contrary to popular belief, parsonage is not an automatic perk but has to be awarded by the religious institution or the employing organization usually houses of worship such as the churches and synagogues are automatically granted tax exemption status by IRS even if they are not registered charities. The minister should ensure that the organization is validated to award parsonage and should ensure that once the parsonage is awarded, it is noted down officially in the minutes of the board or in the institutions records. This helps in any event of an audit. It is best to reevaluate the parsonage annually. If you are looking for more information on Clergy taxes, it is best to seek an advice of a CPA who deals in clergy taxes.