What a truly strange way to describe somebody: minister for tax purposes. What does it even mean and why is it important?
First, let me just say it is hugely important if you work in ministry. I’ll tell you why before we dig into who qualifies.
In the United States, the federal government provides ‘ministers for tax purposes’ with significant tax benefits and applies unique rules to their income. For example, Congress and the IRS created a system where nearly all housing expenses of a minister for tax purposes are exempt from income tax.
For example, if a pastor makes $100,000 and spends $40,000 on housing every year, his or her church can designate $40,000 as a ‘housing allowance.’ Then instead of receiving $100,000 in salaried compensation, the pastor now gets $60,000 in salary and $40,000 in a housing allowance. That pastor’s taxable income has dropped by $40,000. Regardless of what tax bracket the household is in that’s a significant benefit. (For more information on housing allowances, see my post titled Housing Allowances—You Can Do That?).
Who gets this benefit? Ministers for tax purposes.
Right out of the gate, let me say that ‘ministers’ is used interchangeably for faith leaders from any tradition. So, in this context a rabbi or an imam is a ‘minister.’ Weird, but true and fair.
‘Ministers for tax purposes’ are determined using a two-prong test that has been developed through legislation, federal regulations, and case law. Both prongs are essential.
Every religious institution has its own unique standards, practices, and ways to describe its faith and its personnel—that is fine and well understood by the IRS. However, the religious entity—whether church, temple, mosque, or para-ministry—must be able to clearly articulate responses to the following.
Functions: The core question is does the employee minister to people? The IRS looks to four components that it balances—the more the better to avoid problems.
· Administers sacraments (i.e., perform sacerdotal functions like performing weddings and baptisms, administering communion or the Eucharist, etc.)
· Conducts worship (i.e., preaches and teaches, leads worship services, guides a congregation)
· Controls, conducts, or maintains a religious organization under a church or denomination (often, this is how para-ministry people qualify since many don’t administer sacraments)
· Viewed by the church or denomination as a religious leader
For practical examples: Lead pastors qualify. Usually, so do family ministry pastors, children’s pastors, student ministry directors, associate pastors, and hospital chaplains. The tougher calls are worship pastors (leading church music or a choir is not sufficient). Generally, the further afield from the function test the less likely it will be upheld if the minister is audited.
The IRS will not issue a private letter to you or your church answering whether a specific person or role qualifies under the criteria. If you’re not sure, please reach out to Aslan for greater insight.
Credentials: This is a clear-cut requirement: is the employee ordained, licensed, or commissioned?
Entities that issue these credentials are denominations, churches, and some para-church ministries. For a minister to be credentialed does not require full-time employment at a church or ministry. Bi-vocational ministers—that is, people who work elsewhere during the week or have a side hustle—can be credentialed.
Ordination is a weighty call from God. Licensing and commissioning are a step down and the two levels are defined differently across the faith landscape. Any given church should have clear standards for all three credentials whether developed by a denomination or the local church itself. The latter approach is especially important for the growing number of non-denominational churches.
Churches and ministries should not simply credential employees to get them the housing allowance benefit as ‘ministers for tax purposes’. However, the housing allowance should not be denied to employees due to employer neglect to procure or offer credentials to otherwise qualified staff under the functional test above.
If your church does not have a credentialing scheme and is not part of a denomination that does, there are reputable ministries that exist to offer credentials to qualified ministry professionals. Aslan can help.
So, those are the two prongs of the Ministers for Tax Purposes test. The principal benefit is the housing allowance. There are also other tax rules or strategies that may affect Ministers for Tax Purposes. They are:
· the exclusion of the fair market rental value of a parsonage (related to the housing allowance concept)
· upon certain conditions, the exemption from self-employment taxes
· for non-exempt ministers, self-employment status for Social Security for performance of ministerial services
· exemption of ministers’ wages from income tax withholding
For information on how you or your church intersect with these other tax rules, consult a subject matter professional such as a CPA or employment lawyer.
For help with housing allowances, contact Aslan Housing Foundation www.aslan.org
Aslan endeavors to provide accurate information, however, ministers and religious organizations should contact tax or legal subject matter experts to ensure the specific circumstances of the minister and Church are understood. This document does not constitute, and should not be treated as, professional advice regarding the use of any particular tax or legal technique. Aslan does not assume responsibility for any individual or entity’s reliance upon the information provided above.