Qualifications for Ministerial Tax Status

It is important for the organization to decide whether or not the services of employed ministers qualify for special tax treatment as ministerial services. The special tax treatments follow:

  • Exclusion for income tax purposes of the housing allowance and the fair rental value of a church-owned parsonage provided rent free to clergy.

  • Exemption of clergy from self-employment tax, under very limited circumstances.

  • Treatment of clergy who do not elect Social Security exemption as self-employed for Social Security tax purposes for income from ministerial services.

  • Exemption of clergy compensation from mandatory income tax withholding.

  • Eligibility for a voluntary income tax withholding arrangement between the minister-employee and the church.

  • Potential double deduction of mortgage interest and real estate taxes as itemized deductions and as housing expenses for housing allowance purposes.

Ministers serving local churches. Most ordained, commissioned, or licensed ministers serving local churches will qualify for the above six special tax provisions with respect to services performed in the exercise of ministry. The Internal Revenue Service and courts apply certain tests to ministers serving local churches. Requirements may include whether or not the minister administers sacraments, conducts worship services, is considered a spiritual leader by the church, and whether or not the minister performs management services in the "control, conduct, or maintenance of a religious organization." It may not be necessary for a minister to meet all of these tests to qualify for special tax treatment.

Ministers not serving local churches. Ordained, commissioned, or licensed ministers not serving local churches may qualify as "ministers" for federal tax purposes in the following situations:

Denominational Service

This category encompasses services provided by a minister in the administration and maintenance of religious organizations and their integral agencies. This includes teaching or administration in parochial schools, colleges, or universities that are under the authority of a church or denomination. (Treas. Reg. 1.107-1(a) and Letter Ruling 5807234520A)

The IRS uses the following criteria to determine whether or not an institution is an integral agency of a church:

  • Did the church incorporate the institution?

  • Does the corporate name of the institution suggest a church relationship?

  • Does the church continuously control, manage, and maintain the institution?

  • If dissolved, will the assets be turned over to the church?

  • Are the trustees or directors of the institution approved by, or must they be approved by, the church and may they be removed by the church?

  • Does the church require annual reports of finances and general operations?

  • Does the church contribute to the support of the institution?

Assignment by a Church

Services performed by a minister for a parachurch organization, based upon a substantive assignment or designation by a church, may provide the basis for ministerial tax treatment. The housing allowance should be designated by the employing organization, not the assigning church.

The following characteristics must be present for an effective assignment:

  • A sufficient relationship must exist between the minister and the assigning church to justify the assignment of the minister.

  • An adequate relationship must exist between the assigning church and the parachurch organization to which the minister is assigned to justify the assignment.

To substantiate the relationship between the minister and the church, the church must determine if there is sufficient authority, power, or legitimacy for the church to assign this particular minister. Such matters as being the ordaining church, providing ongoing supervision, denominational affiliation, contributing significant financial support, or being the long-term "home church" all would appear to support this relationship.

In addressing the relationship between the church and the parachurch organization, the church must answer the question, "Why should the church assign a minister to this particular ministry?" Essentially, the assignment of the minister must accomplish the ministry purposes of the church.

In considering an assignment, it is important to distinguish between the process of assigning and the documentation of the assignment. The process of assigning expresses the church’s theology, philosophy, and policy of operation, or its way of doing ministry. The documentation of the assignment provides evidence that the church is providing ministry through the particular individual assigned. The keys to a proper assignment are:

  • A written policy describing the specific requirements for the relationship of the church, both to the minister being assigned and to the parachurch organization to which the minister is assigned. This would include the church’s theological and policy goals for the assignment.

  • A formal review to confirm the qualifications of the minister and the proposed ministry with a parachurch organization.

  • A written assignment coupled with guidelines explaining how the church should supervise the minister and how the parachurch organization should report to the church.

  • A periodic, at least annual, formal review of the minister’s activities to confirm that the assignment continues to comply with the policy.

 

Sample Board Resolution for Ministerial Assignment

Whereas, __________Name of assigning church __________recognizes the calling of                   Name of minister assigned                                       as a minister and is (ordained, licensed, or commissioned), and

Whereas, We believe that the assignment of _____Name of minister assigned______ will further the efforts and mission of our church and because we desire to provide support and encouragement;

Resolved, That _________Name of minister assigned___________ is hereby assigned to                                Name of ministry to which assigned                  effective ______________, 20___ to serve as __________Position Title__________ and

Resolved, That this assignment is made for a period of one year, upon which time it will be reviewed and may be renewed, and

Resolved, That this assignment is contingent upon the quarterly submission of activity and financial reports by            Name of minister assigned                to our church.

 

Other Service

If you are not engaged in service performed in the exercise of the ministry of a local church, or are not an integral agency of a church, or a church does not assign your services, the definition of a qualifying minister becomes much narrower. Tax law and regulations provide little guidance for ministers in this category. However, Tax Court cases and IRS rulings suggest that an individual will qualify for the special tax treatments of a minister only if the individual’s services for the employer substantially involve conducting religious worship or performing sacerdotal functions. This definition might include conducting Bible studies, spiritual and pastoral counseling, conducting crusades, producing religious television and radio broadcasts, and publishing religious literature.

In one important case, Mosley v. Commissioner, T.C. Memo 1994-457 (1994), the Tax Court ruled that a minister fulfilled his ministry through his parachurch organization by producing mission tapes for local congregations. Testimony in this case indicated an ordained minister who "seeks to proclaim the gospel in any fashion to any person or groups of persons, or who provides church-related services to congregations" is functioning as a minister.

How much time constitutes substantial involvement in conducting worship or administering the sacraments? This is difficult to say. However, in two IRS letter rulings, the IRS determined that five percent of the minister’s working hours were not sufficient to qualify for tax treatment as a minister.

 

Portions of this document have been excerpted by permission from  Church & Nonprofit Tax & Financial Guide and  Minister’s Tax & Financial Guide, by Dan Busby and Michael Martin.
 

 

 


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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