Taxation of ministers

Yes, you're missing the fact that the person your arguing with thinks ministers are underpaid by at least 7.5% of their current salaries. Apparently, you don't believe they are undercompensated, at least not by that much.

Here is the real question. Is the TOTAL compensation package "fair" (however you define fair) for the services rendered by a particular minister? If yes, then no increase is needed. If no, then the total package should be adjusted to whatever that "fair" number is.

By the way, don't expect agreement on what a fair total package would be.

This is about income tax law. SInce when did income tax law get written to be fair?

If you were an insurance executive instead of a minister, could your employer designate say 30% or 40% of your salary to be housing allowance?

Of course not. And it's even better for retired ministers. Thier organization can desinate, say, 75-80% of their pension to be housing allowance and their pension becomes much less taxable and not subject to SECA either!

And as you noted, if you have a religious objection to social secuirty and Medicare and elected to opt of of it, you pay no SECA at all.

And in what other profession can you file a Form 2106 to deduct employee travel and entertainment expense directly from income, without worrying about the 2% haircut?

These are just facts, not an arguemnnt for tax fairness or lack of it.

Is it? To me it's a debate whether ministers' salaries are overstated by

7.5%. I don't know what denomination the OP is, but I imagine that any job has a set of standards. I went to a private high school and was aware of the teachers making far less than their public school counterparts. "far less danger and stress" I was advised. I imagine there's a 'going rate' for this position, and it's adjusted by region. A minister in San Francisco making more than one in Detroit (no offense to either city intended). The 7.5% is just buried in the number. As is the lack of housing expense, which is far greater. So to the OP - If you are concerned that you should add 7.5% to his salary, why doesn't the congregation also look to reduce by that (housing) amount? Again, I'm sure there are compensation specialists who can produce numbers showing a fair range of compensation which takes all these factors into account. Pardon my ignorance, but can these ministers marry? I imagine the same 40yr old's fair income to be different based on number of his dependents. A bit of research should get you closer to the data that can help answer this type of question.

You might think so, but other than the few making the cynical argument, the people I'm arguing with insist that the 7.5% is to compensate for the unfairness of the special FICA tax treatment, not a hidden raise. I've always said that the way to fix budgets with the topup line is to add the topup into the salary line and report the total pay as total pay, not to delete it, but they're not interested.

We have surprisingly little argument about how much to pay the minister. In our town, which is dominated by two large colleges, the rule of thumb has been that the pay should be what an associate professor of similar experience gets, and the denomination does salary surveys so we have a pretty good idea how much ministers in churches of similar size are paid. (Well, perhaps give or take 7.5%.)

Regards, John Levine, snipped-for-privacy@iecc.com, Primary Perpetrator of "The Internet for Dummies", Please consider the environment before reading this e-mail.

My point is exactly the opposite. The original question is not about income tax law but about appropriate level of compensation for a particular minister. The starting and ending point is the TOTAL compensation package, net of taxes, paid to that minister. Yes, the tax hit does effect the total after taxes but, it makes no difference what part of the tax law increases or decreases that net compensation. The only relevant difference is how much the minister puts into his/her pocket.

In my opinion, to say that having the minister pay his own SE tax is "unfair" avoids the real question which is, does the minister have enough after taxes to be receiving a fair total package.

Since future Social Security benefits are based on Social Security covered wages, in theory, a minister gets some value from their FICA payments. Since paying both halves of FICA doesn't result in larger future Social Security benefits, I can see the logic in your denomination's recommendation to "top up" salary to compensate the minister for paying both halves of FICA.

With the housing allowance being FICA free, the 'cost' of the minister not paying FICA may be a lower future Social Security Benefit. The minister gets what would be the FICA payments in his/her pocket today but it isn't 'free' money - it cost the minister something.

I suppose you could try and figure out the net present value of the future reduction in Social Security benefits, compare it to the amount saved by not paying FICA on the housing allowance and then try and net it against the "top up" amount but I certainly would not try going there...... All in all, I think your denomination's current recommendation sounds about right.

It's not. Unless a minister opts out of Social Security, which nobody in our denomination does, the housing allowance is exempt from income tax, but is treated as income for FICA purposes. Please see Pub 517.

I see that a lot of people are confused about this topic.

R's, John

I'm admittedly confused about the tax details so I'll stick to the "fairness" part of the discussion. The result will be as subjective and unsatisfying as most discussions about "fairness".

What people tend to think is "fair" is what they are used to and have come to expect. People expect their employer to pay half the FICA. Because of tax code peculiarities, a minister has to pay both halves of FICA and it is easy to see how the denomination authorities and members of your congregation think it is "fair" to "top up" nominal salary so that the employer essentially pays their "fair" half of FICA.

There is a possible benefit to the Housing Allowance being exempt from Federal Income tax. The fairness question is 'Who should get the benefit?'. When the Federal Government bestows a benefit on someone by deciding not to tax some of their individual income, is it "fair" for that person's employer to formally recapture some or all of that benefit? I think most people would answer no.

A decision by the church leaders to offset the employee cost of the FICA rule with an estimate of the benefit of the housing rule seems to me to require answering two questions in a way that most people would consider "unfair". As a practical matter, it is not obvious to me that the "cost of the FICA rule and the benefit of the housing rule are about equal". Without an intrusive and offensive examination of the minister's finances, how do you know whether the benefit of the housing rule is zero or a lot?

Good Luck and Best Regards

One thing they are missing is that if they want to make up for the

7.5% tax, they will have to give an 8.1% bump rather than 7.5%. So even if their attempt to be equitable is reasonable, they're still underpaying.

On 4/18/2011 2:21 PM, BignTall wrote: ...

"Unsatisfying" indeed... :)

I suspect those same folks don't see anything "unfair" about the self-employed members of the congregation having to pay both halves of _their_ FICA obligation and wouldn't even think of "pony-ing up" to contribute to one of those individual's income for the purpose...

As member of local church boards; I'll admit that thought of somehow being an obligation of the congregation to make up to the pastor has never come up in our salary discussions since I've been member. Much else has, but never that...

Doesn't it take 10% to clear the 7.5% if one is in the 25% bracket? So the bump needed is 11.11%, no?

In most churches, including ours, the salaries are in the budget, so we know what they are. But more importantly, the details turn out not to matter. If you make any sort of reasonable assumptions and calculate tax both ways, it comes out quite close.

For example, assume the total pay is $75K, of which $30K is taken as housing allowance, $20K in itemized deductions, and four exemptions. Work this out for a regular employee and (by my calculation) they'd owe $5226 in income tax, plus the 7.5% employee FICA of $5625 for a total of $10,851. Calculate it using the minister's rules, $513 in tax and $10597 in FICA, total $11,110, so the minister pays $250 more. Increase the salary to $95K (not unusual in our urban or white collar suburban churches) and it's $14361 normally, $12716 for the minister, and the minister pays $2K less.

So they're not precisely identical, but there's no systematic difference and it sure isn't 7.5%. As far as I can tell, nobody advocating the FICA topup has ever done this exercise.

Regards, John Levine, snipped-for-privacy@iecc.com, Primary Perpetrator of "The Internet for Dummies", Please consider the environment before reading this e-mail.

The original post described the reasoning behind the practice of topping up the salary by 7.5% to compensate for the FICA rule as something that seemed "totally bogus", "utterly cynical", and/or "confused" and asked "Am I missing anything". My response was that there are reasons for the salary "top up" that are not "totally bogus" and there are also reasons not to offset the "top up" with the estimated benefit from the tax savings of the housing allowance. Whether the "top up" and/or the tax savings from the housing allowance should be taken into consideration when setting the salary of the minister is not fundamentally a factual question, it is an opinion of "fairness". Different reasonable people can come to different conclusions without one conclusion being "totally bogus".

Both the original poster and I seem to be in agreement that that topping up the salary to compensate for the FICA rule is undesirable. The OP seems to take this approach based on the often rough equivalence of the FICA rule cost and the housing allowance benefit. I think having an employer (the church) in effect, target after tax income for an employee (the minister) is conceptually and practically very problematic (the more I think about it, the more problematic it seems to me). IMHO, it would be far better just to say "The tax code has unusual provisions regarding ministers. Some are financially beneficial, some are financially costly. It is the responsibility of the minister to manage the tax consequences according to their personal circumstances".

Regards.

========================================= MODERATOR'S COMMENT: Please refrain from adding new messages which add no tax code information and discuss only "perceived fairness." We can get bogged down quickly if we opened discussions to fairness of tax codes.