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Does the employee have to pay deemed a “minister,” and do not incurred for each home and mul- sonage may affect whether the rely upon this article or infor-
social security/Medicare tax on vary based on whether the rabbi tiplying each sum by the per- employee would be entitled to mation it contains as a substi-
his income? elects to accept parsonage. So centage of the year in which the other tax benefits. Thus, an tute for competent individual-
long as the rabbi is deemed a rabbi occupied that home. Only employee should be sure to ized legal advice about their
Here is the more troubling minister who is conducting min- the proportion of expenses check with a qualified tax advi- specific circumstances.
news. Indeed, the parsonage isterial services and is thus eligi- incurred given the time spent sor before electing to accept Attorneys advertising prior
exclusion merely applies to fed- ble for parsonage, the social living in that home may be con- parsonage, to ensure that, given results do not guarantee a simi-
eral income tax (as well as any security rules discussed above sidered tax-free expenses for the totality of the employee’s lar outcome.
local and state taxes that base will apply to him — regardless of parsonage purposes. specific financial circumstances, IRS Circular 230 Disclosure:
their taxable income on the whether he actually receives accepting parsonage would be To ensure compliance with
employee’s federal “adjusted parsonage. in his best financial interest. requirements imposed by the
gross income”). Social security On that note, once we’ve men- IRS, we inform you that any
taxes are a different story. The tioned a ramification of being For social security Conclusion U.S. federal tax advice con-
employee is required to pay classified as a “minister,” another Although parsonage amounts tained in this document is not
social security and Medicare tax important ramification is that the
purposes, ministers are not completely tax-free, intended or written to be used,
on his entire income, both the employer of a minister is exempt are considered “self- they nonetheless provide a sig- and cannot be used, for the pur-
parsonage as well as the non-par- from its obligation to withhold nificant tax break to many fam- pose of (i) avoiding penalties
sonage amounts. Not only that, federal income tax, whether or employed.” ilies that may be eligible. under the Internal Revenue
this burden of paying it falls not the rabbi is receiving parson- However, in actual practice, Code, or (ii) promoting, market-
completely on the employee — age. (If receiving parsonage, this it is important to keep in mind ing, or recommending to anoth-
all 15.3% of it. If you’re thinking would apply only to the non-par- What about local and state the above principles and the er party any transaction or mat-
it’s strange — that’s because it is. sonage amount, as the parsonage income taxes? need to seek guidance from a ter that is contained in this doc-
The tax code classifies “minis- amount is already excluded from tax advisor to ensure the exclu- ument.
ters” with respect to ministerial federal income tax.) In such a Most local and state taxes sion is applied correctly.
services they perform as “dual- case, the rabbi would be required base taxable income on the
status employees.” That means to pay quarterly estimated feder- “adjusted gross income” report- *** Judah I. Kupfer, Esq., is a staff
they are considered employees al income tax on any non-parson- ed on the employee’s federal tax This article is provided for counsel at Agudath Israel of
for all purposes (so they general- age amount, just as he must do return. Since parsonage is an general information and educa- America. He previously practiced
ly receive a W-2 at year’s end for social security tax. exclusion from gross income, it is tional purposes. Neither its dis- as an associate at the law firm of
from their employers), except The rabbi may request that not included in the employee’s tribution to any party nor any Allen & Overy LLP in New York.
when it comes to social security his employer voluntarily with- adjusted gross income. Thus, for statement or information it con- Mr. Kupfer is a summa cum laude
tax. hold federal income tax on his most jurisdictions, the parson- tains is intended to or shall be graduate of Touro College, a magna
For social security purposes, behalf (on any non-parsonage age amounts would also be construed as establishing an cum laude graduate of Brooklyn
ministers are considered “self- amount) so that he need not excluded from state and local attorney-client relationship or Law School and an LL.M. taxation
employed.” The rule is that bother arranging and filing quar- taxes. to constitute legal advice. candidate at New York University
employees pay half their social terly estimated federal income Readers also are cautioned that School of Law. To contact the
security and Medicare obliga- taxes. Should one who is eligible always the information in this article author, please email ykupfer@agu-
tions (also known as FICA, which One last note about social elect to accept parsonage? may not apply to all situations. dathisrael.org. Questions and com-
stands for Federal Insurance security tax: Besides being the Not always, as accepting par- Consequently, readers must not ments are welcome.
Contributions Act) while law and thus obligatory, as a
employers are required to kick in practical matter, paying into
the other half at their own social security serves as a sensi-
expense, which will not be tax- ble long-term investment, as it
able to employees. Since minis- allows the payer to receive
ters with respect to their minis- income after retirement.
terial services are exempt from Additionally, although there is
FICA, there is no obligation for the option for certain clergy
the employer to kick in half of members to opt out of social
the FICA. Indeed, should the security, based on their opposi-
employer decide to pay half tion to public insurance for per-
regardless, such amount is con- sonal religious considerations,
sidered additional taxable many tax professionals have seri-
income to the employee. ous questions about the avail-
Instead, ministers fall under ability of this exemption for
the SECA system (which stands Orthodox Jews.
for Self-Employment
Contributions Act), which May both a husband and wife
requires them to pay the entire claim parsonage?
15.3% of their entire salary Sure, keeping in mind that
themselves (parsonage and non- the above limitations apply:
parsonage), just like any other Actual (and pre-designated)
self-employed person. The minis- housing expenses used that year
ter would also be required to that do not exceed the fair rental
make quarterly estimated pay- value of the home (including fur-
ments towards the SECA obliga- nishings plus actual cost of utili-
tion and report those payments ties).
on Schedule SE to the Form Thus, if a rabbi’s entire salary
1040. (Boxes 3 through 6 on the won’t cover all of his housing
employee’s W-2 should be left expenses, so long as the wife is
blank, as those apply only to also eligible to receive parson-
FICA amounts, not SECA.) age, her salary, too, may be pre-
One saving grace, perhaps, is designated to cover the remain-
that a self-employed person is der of their housing expenses,
allowed an adjustment on his keeping in mind the fair rental
Form 1040 of 7.65% of his entire value limitation previously dis-
salary (also known as an “above- cussed.
the-line deduction”).
If, prior to reading this, an May one claim parsonage for a
employer had the practice of summer home?
paying half of the rabbi’s social The parsonage exclusion may
security tax as though the rabbi only be used to exclude housing
were an ordinary employee, and expenses incurred for one home.
now decides to no longer cover However, should the rabbi incur
any of the rabbi’s SECA obliga- expenses for more than one
tion, to maintain the understand- home, such expenses incurred
ing between the employer and while living in that other home
rabbi it is suggested that the may be treated as housing
employer increase the rabbi’s expenses for the parsonage
salary by the 7.65% that the exclusion. The catch is that dur-
employer was previously paying, ing that time, any housing
so that the rabbi is not left with expenses incurred in connection
a net loss. with the rabbi’s primary resi-
One further thing to remem- dence are taxable. A slightly dif-
ber is that the social security ferent way of structuring this
ramifications just discussed are arrangement is by adding the
a by-product of a taxpayer being total amount of expenses