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The only way that a minister can avoid the problem of forgetting (prior to the end of the year) to have a housing allowance approved by the church's governing body is to have a "safety net" resolution. The resolution could say the church designates "40% of the minister's salary for 2005 and for all years in the future until this amount is changed in writing by the church."

One other exception to housing allowance designation is when housing status changes within the year, such as selling/buying a house within the year. In this case, the church needs to modify the agreement, and the minister would prorate the money according to the amount of time that he/she owned each house.

Can you still deduct mortgage interest?

Yes, ministers can still deduct mortgage interest the same as non-ministers. This is often referred to as "double dipping," but it is totally legal.

What happens if the minister lives in a parsonage or manse?

If you live in a parsonage or manse, you do not report the value of the parsonage as income. The minister may designate other housing expenses as housing allowance such as utilities, furnishings, maintenance, etc. The church should designate a housing allowance to cover any expenses not covered by the church.

Where does Social Security tax fit in?

While a housing allowance is free from income tax, it is not free from Social Security taxes (SECA). The minister must pay SECA taxes on the amount that he/she claims as housing allowance.

Self Employment

Is a minister considered an employee or an independent contractor? According to the Internal Revenue Service, all persons who are paid for work are either employees or independent contractors. Most ministers are employees for income tax purposes; however, ministers are always considered self-employed (independent contractors) for Social Security purposes. Therefore, ministers are often considered to have dual tax status. What this means for the minister is that he/she must make quarterly estimated tax payments to the IRS for Social Security. These payments must be paid at the higher self-employed rate of 15.37 percent since the employer is not allowed to pay half of this amount as in the case of other employees. Social Security taxes (FICA) are never withheld from the minister's pay. However, the minister can have enough federal income tax withheld to cover his/her self-employment Social Security tax obligation.

Can I opt out of Social Security?

Ministers can opt out of Social Security if the following statement from Form 4361 describes them: "I certify that I am conscientiously opposed to, or because of my religious principles I am opposed to, the acceptance (for services I perform as a minister, member of a religious order not under a vow of poverty, or a Christian Science practitioner) of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care. (Public insurance includes insurance systems established by the Social Security Act.)" When ministers are in full agreement with the statement above, they may opt out of Social Security with their ministerial income; however, other earnings are subject to Social Security. In order to opt out of Social Security, the minister must file Form 4361 "Application for Exemption from SelfEmployment Tax for use by Ministers, Members of Religious Orders and Christian Science Practitioners," early in his/her career. The form must be submitted in triplicate and the minister must receive a form authorizing receipt by the Social Security administration. Typically, this decision is non-revocable, although there have been periods in the last decade where ministers could re-enter Social Security. While opting out of Social Security may seem like a wise choice since ministers intend to invest the extra money in other retirement options, this rarely is the case. In addition to the failure of many ministers to invest the funds, survivor benefits in the event of death and Medicare benefits at retirement are two good reasons to stay in Social Security. With the continuing escalation of health care cost, Medicare may be a single good reason to stay in Social Security. Should you opt back into Social Security you would have to have 10 years of payments prior to receiving benefits.

(See page 68 for form entitled MINISTERS’ ESTIMATE OF HOUSING ALLOWANCE.)