Thursday, January 6, 2011

Pastors and Taxes

Reported from the Internet:
As tax time begins, church legal expert Richard Hammar warns ministers, pastors and clerics to be mindful of a legal battle that has strong financial implications on their personal and church taxes in 2011.  In the January 2011 issue of Church Law & Tax Report, Hammar highlights tax developments, drawing special attention to a California court case that threatens to extinguish a federal tax break which dates back to 1954, the parsonage exemption.
Many churches give their pastors and ministers an allowance to help ease housing-related expenses, such utility bills, repair and yard work costs. The parsonage exemption allows ministers to receive this money free of any federal, and in parts of the country, state taxes.  However, a lawsuit set for trial in 2011 threatens the constitutionality of sections 107 and 265(1)(6) of the federal tax code, which establishes the housing allowance for ministers.  Atheist group Freedom from Religion Foundation filed the federal lawsuit in 2009. The group asserts the unique benefit set aside especially for “ministers of the gospel” is a violation of separation of church and state.  The FFRF cites the 1989 U.S. Supreme Court case Texas Monthly, Inc. v. Bullock to assert that tax benefits given only to religious institutions violate the Constitution’s Establishment Clause.
FFRF Co-President Annie Laurie Gaylor states in a 2009 press release that the benefit is unfair to those who are not religious ministers.  "All other taxpayers pay more because clergy receive this privileged benefit," she proclaimed.
Ahhh yes.  Those Pastors don't pay their fair share of taxes.  For those of you who might wonder about this, the "benefit" was given to clergy at the same time it was given to military and since it was new to the military, the Congress used America's good will toward clergy to help get this measure passed for members of the armed services who receive a "housing allowance." Now about this great benefit.  Pastors must keep meticulous records of every penny spent on housing to justify exclusion of any amount of income from federal income tax -- every time you buy a bottle of furniture polish or a can of paint or a box of nails.  That is a lot of bookkeeping for a few hundred dollars a year.

Pastors, however, receive no such relief from the Social Security Self-Employment Tax.  Since Congress considers clergy self-employed for tax purposes, churches do not withhold FICA from their checks nor do they match the employee contribution.  Instead, Pastors pay this whole thing themselves -- 15.3% of every kind of income from their paychecks to the housing allowance to the honorariums from funerals and weddings to the Christmas gift (anything valued at over $25).  This amounts to a much greater cost to the Pastor than the value of the housing benefit.  I, for one, would gladly exchange this "benefit" to not have to do the bookkeeping and not have to pay my whole FICA bill myself.  Maybe others feel differently, but that's where I come down on this so-called violation of church and state and great privilege given to members of the clergy.

10 comments:

+ Robert Wurst said...

For a while now, I've thought that this exemption would be axed because of the prevailing mood in our country. If so, so be it. It's the government's decision.

The FICA is very difficult for pastors with lower pay. I think it will force many small congregations to make other arrangements over time. Me? I withdrew when I was ordained. I established my own separation between church and state. They can't threaten me by withholding my retirement or other "benefits." That has other ramifications for me, of course. Here we have no continuing city . . .

J.G.F. said...

Amen, Larry.

I wish I opted out, but I didn't, so I ante up a huge amount of money every April. I usually underpay, and get fined. However, I look at it as a low-interest loan from the government... the fee is less than any interest I'd have to pay if I got it from the bank, lol.

Blessed Epiphany!

John

Anonymous said...

Pastors self employed? Bizarro. You can't even be a pastor without the congregation. So, how could you be self employed? Nutty.

LChron said...

I think the Social Security Medicare tax is a non-issue.

Half is usually paid by the employer so, presumably, if you didn't pay it, the congregation would.

E.g. -
You could receive a $10,000 salary from the church, and the church pays zero taxes, and the pastor pays 15.3%, or $1,530 in taxes...

Or...
You could receive a $9,250 salary from the church, the church pays 7.6% or $750 in taxes, and the pastor pays 7.6% or $750 in taxes.
(This isn't strictly correct math, but is close enough -- I didn't want to have to break out the calculator...)

Either way, it's the same amount of (taxes + salary) to be paid from the church's coffers.

I'm self employed myself, and the SS+M taxes make me cringe every quarter!

LChron said...

Oops! Let me clean up that math a bit:

Assuming the congregation only wishes to spend only $10,000 on their Pastor...

Under the current system:
-- Church Pays $10,000 to Pastor
-- Pastor Pays 15.3% ($1,530) in Taxes
-- Pastor Ends up with: $8,470


Shifting half of the SS+M to the church:
-- Church Pays $9,294 + $706 in Taxes for a total budget of (again) $10,000
-- Pastor Pays 7.6% ($706) in taxes
-- Pastor Ends up with: $8,588


OK, so shifting social security and medicare to the church would improve the pastor's take home pay a little, but it's only about 1.3% or so of a salary increase (assuming the church strictly doesn't want to increase it's $10,000 budget on the pastor).

Maybe the real issue is simply that Pastors' salaries should be higher. ;)

Rev. Kevin Jennings said...

When I came to Corpus almost eight years ago, my son played in a soccer league in which I became friends with other dads, a couple of them pilots. One asked me what my salary was. I told him. His response: "That's all? You have a Master's degree, and that's your entire salary?" I thought it was fairly handsome, but I guess it's in the eye of the beholder.

I've heard the old, "Sure, you have to pay that huge tax, but you get to take your housing allowance." The housing allowance aside, most pastors I know aren't tax accountants (and this one certainly isn't either). We're paid not what we're worth to the congregations we serve, but what they can afford. Most congregations would love to pay their pastors more, but simply can't because the money isn't available.

We're given a pretty good health insurance coverage, but the price tag on that continues to go into the overhead.

There are two posts here, one from Pastor Peters and the other from LChron, both with merit. Pastor Peters, I hear you on that bit 15.3% price tag. Its sting is painful.

On the other hand, from LChron, somebody's got to pay the federales. If the congregation gets saddled with that bill, something provided to the pastor will suffer, be it salary or health insurance, or whatever. It will be the same pot of money, just divided differently.

Peter Reilly said...

What makes the exclusion subject to abuse is that there is no dollar limit on it. Phil Driscoll was allowed $195,000 for the portion of the exclusion relative to his second home.

http://riles52.blogspot.com/2011/01/work-fight-or-pray-vestige-of-medeival.html

Contracting Guide said...

Bear in mind that intentional interim pastors are specialists. Interims are the skilled surgeons, the orthopedic specialists, the discerning diagnosticians and the relentless physical therapists who will put your church right.

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