Q: Is the housing allowance also excluded from earnings subject to social
security taxes?
A: No. The housing allowance exclusion only applies for federal
income tax purposes.
Like most everyone else, clergy must pay both federal income taxes and social security taxes. Employees pay social security taxes through the Federal Insurance Contributions Act ("FICA") system and self-employed individuals pay social security taxes through the Self-Employment
Contributions Act ("SECA") system.
By law, clergy are considered self-employed for the purposes of paying social security taxes (more commonly referred to as self-employment taxes) and the housing allowance is subject to self-employment taxes.
Also, the fair rental value of a parsonage provided to a pastor (including
the cost of any utilities an furnishings provided) must be included as self-employment
earnings subject to the self-employment tax. (See IRS Publication
517).
Example 1: A church pays its pastor an annual salary of $35,000 and provides
her with the use of a church-owned parsonage. The church pays for all
expenses of maintaining the home. The fair rental value of the parsonage
(furnished, plus utilities) is $10,000 per year. The pastor’s gross income for
federal income tax purposes is $35,000, but for self-employment tax purposes
her gross earnings are $45,000 ($35,000 salary + $10,000 fair rental value of the
parsonage).
Example 2: A church pays its pastor an annual salary of $35,000 and provides
him with the use of a church-owned parsonage. The church pays for all
expenses of maintaining the home. The church serves an affluent community
where the average price of a home is $500,000. Hence, the fair rental value of
the parsonage (furnished, plus utilities) is quite high, in this case, $30,000 per
year. While the pastor will not have to report the fair rental value of the
parsonage as income for federal income tax purposes, he will have to include the
$30,000 fair rental value of the parsonage as gross earnings for self-employment
(social security) tax purposes, inflating his reportable earnings to $65,000.