Very few areas get me wound up faster than clergy finances. There are two reasons for this. One is that the actual situation with taxes and clergy compensation is quite complicated and not well understood even by people who work with taxes professionally and, as if that isn’t trouble enough, many clergy in my experience are inadequate and in some cases even ignorant in the financial area.
Sure enough, this has led to some very poor reporting on this story already, as well as some even worse posting about it on the blogs. If you wish to understand it can I please advise that you do your own research and not jump to conclusions.
With that said, here goes. First, there is no need for panic. This is one ruling, and we have a system which involves a lot of layers of the judicial system, so overeacting now is not going to help.
Second, you need to understand the bizarre–and I mean bizarre–basic situation of clergy finances.
If you take a look at the basic IRS definition it starts as follows:
A minister’s housing allowance, sometimes called a parsonage allowance or a rental allowance is excludable from gross income for income tax purposes, but not for self-employment tax purposes.
Now before you go whizzing past that, make sure to read it and take it in a couple of times. Please note the DUAL status of clergy finances. Housing allowances are excludable (under certain conditions) BUT NOT FOR SELF EMPLOYMENT TAXES.
In other words, for the purpose of social security, the situation is different, and, indeed, I would argue, poor, because as far as social security is concerned, a clergyman or clergywoman is treated as if there were a self employed writer like Gore Vidal or Stephen King, and for that they pay both their portion of social security taxes AS WELL AS the employers portion. So whereas the woman who works for Coca Cola, say, pays for half of her social security taxes every pay period, her employer, Coca Cola, pays the other half. For ministers this is not true; ministers pay both halves.
So the important point right from the get go is that any idea that clergy get some kind of special “deal” in the tax system at a basic level is wildly misleading. No article that reports on this fairly can do so without mentioning the dual tax status issue and whereas the housing allowance does help, the social security situation does not.
There is more. The housing allowance is for actual housing costs so any compensation which is what it costs you to maintain a home for the year (or, if the church owns the home, there are other stipulations). So If you see a minister X and he reports a salary of 10,000 and a housing allowance of 40,000 and you think this is unfair be aware that any amount of the 40,000 dollars NOT related to housing is to be declared as “excess housing allowance” to the IRS (and, yes, I will also remind you that this person is paying 2x social security taxes on the WHOLE 50,000 overall compensation).
Now, I am well aware that some churches (and sadly some clergy) abuse this situation. That is unfortunate but remember that is an abuse of existing rules not the rules themselves.
Why do we have this crazy system? Mainly because when it was originally put in place many clergy lived in church owned housing and so when they retired because many did not own their own home ever they had no housing equity built up at all. That has since changed, never mind that life expectancy has gone up considerably. But changing existing law in America is not easy. For myself, I think a strong case can be made that it would be “fairer” if clergy were treated as employed (as opposed to self–employed for self-employment tax purposes, which would mean paying half of social security and the church paying the other half) and did not get the housing allowance consideration. But the situation with many smaller congregations and their ministers would very much be impacted. It would take a herculaean effort to reform the bizarre area of clergy compensation taxes in the right way, even if it were attempted.
All of which brings us back to the real underlying problem here in America, and that is not with our tax system’s basic structure BUT ITS COMPLEXITY. This system is built to favor those with resources and power and the accountants and lawyers who get compensated to enable them to manage it so much better than most. If I were ever working in this area, I would be promoting TAX SIMPLICITY and TAX STABILITY (the tax code changes way too often also).
In the meantime, pray for those in ordained ministry, it is a very, very demanding area in which to work–KSH.