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.