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by Chesky Landa

Taxes and Parsonage Demystified

As the tax is season is upon us, one issue on everyone’s mind is how much of a refund can I get? How do I take advantage of all my available deductions? A particularly complex area that is of special importance in our community, where a large percentage of the population is working for religious institutions is the Parsonage Allowance.

Many people are aware that a portion of their income earned from a religious institution may not be taxable, but there is a lot of uncertainty regarding the details. For example, how much of my income can be considered Parsonage and therefore not taxable? Can the amount of parsonage fluctuate during the year? Can a female teacher who is not ordained be considered a member of clergy?

Let’s first define Parsonage:

Under the Internal Revenue ministers are accorded some unique tax benefits and savings for income, social security and Medicare taxes.
According to the IRS Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a place of religious worship (such as a Yeshiva or Shul). They are given the authority to conduct religious worship and administer duties according to the prescribed tenets and practices of that denomination.

These Ministers or rabbis or other religious officials are allowed to be paid “tax free” a portion of their earnings. However, these earnings must be used to pay directly for rent or mortgage of their home up to the fair rental value. It doesn’t stop there: The employee taxpayer can also be paid and deduct from regular income other home related expenses, such as utilities, and home repair. Parsonage can therefore generate huge tax savings for the individual taxpayer.

However, taxpayers need to be aware that these earnings are not a “get out of taxes free” card. Indeed, they are still taxed for self-employment tax purposes (i.e. FICA and Medicare) , (unless of course they choose to opt out of the whole program and file form 4361)
Taxpayers should also note that the parsonage earnings may also affect some of their eligibility for certain tax credits such as the Earned income credit for instance

Whether you are the Employer or the employee, there are many complex issues to consider, such as the requirement that  the parsonage is duly reported and designated by the employer organization before the employee starts earning the parsonage allowance each year.
Moreover this parsonage allowance is only allowed for:

a)      “Duties of Minister”, which includes conduct of religious worship, giving shiurim and the control and maintenance of the religious organization, not for other more general duties.

b)      Money earned by Ministers, which should include someone who has Semicha or some certificate or diploma from a yeshiva or seminary (which may include a female teacher as well).

Some Parsonage related questions to consider are:

1)      Whether the individual has to earn the money directly from a religious organization or can work as a Rabbi or Mashgiach for any organization such as nursing home with the caveat that the work comprises religious duties.

2)      What happens if the employee doesn’t end up using the estimated parsonage allowance (which by the way should be estimated and declared by the paying organization before the start of the year) towards paying for their actual housing?

5)      What kind of expenses can I add to my basic rental expenses s to calculate the parsonage?

6)      Can a self-employed individual still earn parsonage?

7)      Can a husband and wife both claim parsonage?

For answers to these tax questions, which might end up saving you huge amounts and any other tax questions, simple or complex, please feel free to contact us:

Chesky Landa, Tax Practitioner,  347-613-4259, rylanda@gmail.com

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13 Comments

  • choose to opt out of the whole program and file form 4361

    It is not so simple to just ‘choose to opt out of the whole program’ of FICA.

    The opting out of the program is based on the premise that you are religiously opposed to ACCEPTING public funds for certain causes (death, disability, medical, etc.).

    If you are willing to use Medicaid, child health plus, or Medicare (let alone other public benefits) would you be truthful by signing this form?

    Could anyone in Jew with any bit of Yiras Shomayim sign this form, unless he or she purchased their own Life Insurance, Disability Insurance and Medical Insurance, for themselves and their family, and really intend to keep on paying for those, and if g-d forbid those policies will not be in force at the time of need, NOT accept any public assistance? And on top of that claim that this is being done on religious grounds!!!

    Which Rov would suggest that one is allowed to disavow themselves and their families from public help in times of need?

  • should of been a Rabbi

    Chesky, If only you would have told me before I went to college. may be I would have reconsiderd and become a Rabbi.

  • gives clarity

    thanks for publishing this article it gives some clarity on the Parsonage.

  • graduated from seminary

    What work would I have to be doing in order to
    qualify for parsonage?

  • Michoel Dovid

    This is an interesting article. It would seem that before we try to fudge numbers and play around with taxes we should check with tax experts to make sure we follow the law of the land.

  • disabled

    be very careful with parsonage.make sure you deduct social security from your total pay not just from parsonage……if chas vsholem you become disabled you will need the higher social security and when you retire so please pay the social security deduction from total pay before the tax free parsonage….

  • If you have parsonage be sure to pay SE taxes

    What this seems to be saying to me is that if you have parsonage you must pay the 15% self employment taxes on that parsonage income even if you take the parsonage exclusion.
    If you are taking a parsonage exclusion make sure you are also paying the self employment taxes since you wouldn’t want to contradict yourself in the same tax return. Everything is computerized these days and they are getting smarter at cross referencing.

  • US citiznens overseas ie Shluchim

    Any advice for people who live and Ernst overseas but are US citizens and may thus be liable to pay or at least file for taxes? With foreign bank accounts being targeted as if late, what advice do you have for us? Must we pay taxes in the US for what we are already paying for in our current county of residence? Are we still eligible for US tax benefits despite not living there… ? Any other advcr specifically for Shluchim/Rabbis overseas? Thanks!

  • Chaim S

    quote “However, taxpayers need to be aware that these earnings are not a “get out of taxes free” card. Indeed, they are still taxed for self-employment tax purposes (i.e. FICA and Medicare) , (unless of course they choose to opt out of the whole program and file form 4361)
    Taxpayers should also note that the parsonage earnings may also affect some of their eligibility for certain tax credits such as the Earned income credit for instance”
    This is not true because when paying SE taxes it makes you eligible for Earned Income Credit. I know this from experience and even got audited by NYS and won