Is Housing Allowance Exempt From Social Security Tax?

Housing allowance is a tax benefit reserved exclusively for clergy.

The U.S. tax code makes a special provision for payment of a housing allowance by a church to a bona fide minister. Whether this benefit is subject to Social Security tax depends on a number of factors.

Housing Allowance Excludable From Taxable Income

A minister who receives a housing allowance from his church to help pay a mortgage or rent, utilities and upkeep of a primary residence may exclude the amount of the housing allowance from taxable wages. The amount excluded must not exceed the fair market value of the home or rental; in addition, the minister's compensation, including housing allowance and wages, must be reasonable.

Minister's Dual Status

For purposes of Social Security, a minister is treated as a self-employed individual and the housing allowance is taxed. Clergy housing allowance is only exempt from federal income tax, not Social Security. If the church does not withhold payroll deductions for Social Security, the minister will be faced with a tax bill at the end of the year.

Opting Out

Ministers are in the unique in that they can object to paying Social Security taxes. The objections must be on purely religious and not economic grounds.

Form 4361

To apply for a waiver from payment of Social Security tax on the basis of objecting to the payment of public insurance, the minister must complete and file IRS Form 4361. If your status is accepted, the housing allowance will not be subject to Social Security tax. This is the only way to avoid paying this tax on housing allowance.

A Word of Caution

A large percentage of ministers leave the ministry during the first five years. If you have previously claimed exemption from Social Security and move into the private sector, it is possible that the IRS will require you to pay all Social Security taxes from which you exempted yourself. Remember that before you send in Form 4361 opting out of Social Security.

References

• IRS.gov: Rules on Earnings for Clergy
• IRS.gov: Form 4361 (Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners)