By Attorney David C. Gibbs, Jr.
During this time of year, many people breathe a sign of relief
and determine not to think about the IRS until next April. This is
understandable given the confusion and frustration that often surrounds this
area of law, but this is the time to make certain that personal and church
procedures are in place to prepare appropriately for next year’s tax filings.
1. Can a church “help” a minister by paying all or part of his
Yes! Due to the fact that a minister must bear the entire 15.3%
self-employment tax burden himself, some churches have elected to pay a portion
or all of this tax liability.
Remember that any amount paid to a minister to help defray the higher
self-employment tax must be reported as additional income on any
quarterly filings with the IRS and on the pastor’s W-2 Form.
2. How should a minister’s parsonage or housing allowance be set up?
A housing allowance is a designated portion of the salary or
compensation package to which a minister can be entitled, free of income
taxes. However, it must be included with the amounts by which
calculations are made for Social Security or Self-Employment Tax purposes unless
the minister has previously been exempted from Social Security by a timely
filing of Form 4361 with the IRS. The housing allowance can apply to a
parsonage, rental home or apartment, or personal residence that is owned by the
The gross income excluded is the smallest of the following:
1. The amount designated by the church;
2. The amount actually used to provide a home; or
3. The fair rental value of the home, including furnishings, utilities,
The pastor may still deduct the mortgage interest and real estate taxes on
Schedule A, even though all or part of the mortgage is paid with funds received
through a tax-free rental or housing allowance.
If the pastor owns his home, the housing allowance exclusion can take into
account the following expenses:
1. The down payment;
2. Mortgage payment to purchase or improve the home;
3. Real estate taxes;
4. Utilities (gas, electric, garbage, water, lawn maintenance, local phone
5. Property insurance;
6. Purchase and repair of furnishings and appliances;
7. Home repair and remodeling;
8. Homeowners association dues, if any;
9. Yard maintenance and improvements; and
10. Home maintenance items (light bulbs, household cleaners, pest control,
It is mandatory that a housing allowance be approved in advance of the need
because it is not retroactive! It is only effective from the approval date forward.
Any excess housing allowance must be listed as “excess housing
allowance” on line 21 of Form 1040.
Currently, the Ninth Circuit of the United States Court of Appeals is
considering the case of Warren v. Commissioner of the Internal Revenue
Service. (The Ninth Circuit covers Alaska, Arizona, California, Hawaii,
Idaho, Montana, Nevada, Oregon and Washington.) The United States Tax Court
found in favor of Pastor Warren, who argued that the parsonage allowance statute
allows for actual housing expenses, if such actual expenses are greater than the
fair rental value of the home. The IRS, however, argued that the parsonage
allowance exclusion must be limited to the fair rental value of the home, plus
the actual expenses of utilities. When the IRS lost, it appealed to the Ninth
Circuit. Now, although neither Pastor Warren nor the IRS has challenged the
constitutionality of the statute, the court itself has hired a law professor to
provide the court with an analysis of whether the parsonage allowance violates
the Establishment Clause. The ultimate decision could affect every pastor’s
3. Is the housing allowance available to retired ministers?
Yes! A retired minister may exclude from gross income the rental value of a
residence (plus utilities) furnished by the church as a part of his compensation
for past services, or the portion of his pension that was designated as a
housing allowance. In other words, the church can designate a part of the
pension it pays a pastor as a rental or housing allowance. This portion would be
excluded from both income tax and self-employment taxes.
IRS Publication 517 states that in the event of the death of the minister,
the church can continue the pension to the spouse, but the rental or housing
allowance would no longer be applicable. The entire pension would then be
subject to income taxes.
4. What is the best way to make a Christian school that is part of a
church ministry qualify as a 501(c)(3)?
If the school is a ministry of the church, the school should use the church’s
FEIN number on its checking accounts and on its payroll reporting forms to the
If the school uses a different FEIN than the church, the IRS will consider it
a separate entity, and the school would have to file the IRS Form 1023 to obtain
its own 501(c)(3) status.
5. Can church schools consider their teaching staff self-employed (1099
If the school determines the hours of work and the curriculum, and provides
the materials with which the teacher works, the teacher cannot be considered a
self-employed person. Self-employed persons set their own hours and usually work
for more than one entity in their field of expertise. Generally, church-school
staff should be considered employees with full withholding as applicable, and
given W-2 forms.
6. What benefits can be given to teacher volunteers and/or
monitor/supervisor volunteers in a Christian school?
Volunteers by law must be paid nothing in wages, compensation or
benefits. They can only be reimbursed for out-of-pocket expenses, such as
travel. If a church gives them anything, including free tuition for their
children, it has thereby just converted them to paid staff. Therefore, the rules
regarding minimum wages, tax withholding and so on must be adhered to for that
7. Can a church or Christian school that is a ministry of a church sell
property at a discount to its minister?
If a church elects to give or sell church property for less than its fair
market value, it must include on the W-2 Form the excess of the property’s fair
market value over the discounted or bargain sale price.
EXAMPLE: A church owns a parsonage that has a fair market value of $80,000.
The church sells the parsonage to the pastor for $40,000. The church must
reflect an additional $40,000 in income on the pastor’s W-2 form for the year
the parsonage was sold.
8. How can we best handle donations of non-cash property?
The charitable contribution substantiation rules in respect to non-cash
contributions are as follows:
1. Individual contributions of non-cash property valued at less than $500
will not be allowed a tax deduction unless the church gives the donor a receipt
on the church letterhead describing the donated item or items, the date of
receipt, and the name of the donor. No value should be attached to the
donated items by the church. The donor will attach a copy of the church letter
to his/her tax return, claiming a monetary amount on Schedule A of the 1040
form. The letter must also include the No Tangible Benefit Statement.
2. Individual contributions of non-cash property valued at $500 to $5,000
will not be allowed unless the donor fills out Section A, Parts I and II
of IRS Form 8283. The church will give the donor a receipt on the church
letterhead describing the donated item(s), the date of receipt, and the name of
the donor. Again, no value should be attached to the donated items by
the church. The No Tangible Benefit Statement* must also be a part of the
letter or receipt. The donor will attach the church letter and Form 8283 to his
1040 tax form, claiming a monetary amount for the donation on Schedule A of the
3. Individual contributions of $5,000 or more non-cash property will not be
allowed unless the donor receives a receipt on church letterhead (as in 1
and 2 above). In addition, the donor must obtain an appraisal of the
donated property by a qualified appraiser, and complete a qualified appraisal
summary on the back of the Form 8283. The donor will complete Section B,
Parts I and II of Form 8283. The appraiser will complete Section B, Part
I, Line 5(C), and Part III of the 8283. The church will complete Section
B, Part IV of Form 8283. Again, the church should make no judgment as to the
value of the donated property since the church is not a qualified appraiser.
The No Tangible Benefit Statement reads as follows:
goods or services have been provided in exchange for your contribution. The
benefit to you consists solely of what the IRS considers ‘intangible religious
Attorney David C. Gibbs, Jr., represents the Christian Law Association, a
ministry of helps to Bible-believing churches and Christians. If you have tax
questions, contact a tax professional or call/write the legal missionary
ministry of the CLA: (727) 399-8300, P.O. Box 4010, Seminole, FL 33775-4010. Log