How to enter Minister Income and Housing (Parsonage) Allowance in Scenario Analysis

Ministers may be considered employees of a church or self-employed. Certain types of pay, like housing or parsonage allowance, may be exempt from federal income tax but subject to self-employment tax! 

Ministers may also have additional Schedule C income from performing other services, like officiating weddings, funerals, etc. 

Modeling self-employment tax will vary depending on whether the client is considered an employee of the church or self-employed. 

To illustrate this, we will use examples for our sample minister, Bob, showing three different types of income: 

1. Wages paid by the church
2. Designated housing allowance
3. Schedule C income from fees for performing services

The first example assumes Bob is considered an employee of the church, while the second example assumes he is self-employed.

 

Example 1: Bob is considered an employee of the church and has FICA withheld from his wages

Bob is considered an employee of the church and has income as follows: 

• $55,750 gross wages, FICA is withheld
• $1,850 gross Schedule C income from officiating weddings, after expenses, net profit is $1,575
• $33,250 designated housing allowance
  
  

Wages

In the Wages Worksheet, enter “Gross Wages" of $55,750 for Bob.

It is important to enter income per taxpayer and make sure overrides are not in use to properly account for self-employment tax.

 

Schedule C Income

To add Schedule C Income, open the Schedule C Worksheet in the Schedule 1 Income section, select Bob’s name from the dropdown. Enter “Gross Sales” of $1,850 and “Net Profit” of $1,575. 

For more details on the Schedule C Worksheet, see our knowledge base article How do I model Schedule C Income?

 

Housing Allowance

Designated housing allowance is exempt from federal income tax, but is subject to self-employment tax. To account for this, navigate to Other Taxes > Schedule SE - Self Employment Detail and enter the $33,250 housing allowance as “Taxpayer 1 Other Self Employment Income”. 

 

Note that the income is added under “Taxpayer 1” because in the Filing Status section, Bob is listed first, and is considered Taxpayer 1. If he were Taxpayer 2, you would enter as “Taxpayer 2 Other Self Employment Income”.

In this example, self-employment tax totals $4,815, and is calculated based on Schedule C Income and the Housing Allowance.

 

Example 2: Bob is considered self-employed

Bob is considered self-employed and has income as follows:

• $55,750 gross wages, FICA is not withheld
• $33,250 designated housing allowance
• $1,850 gross Schedule C income from officiating weddings, after expenses, his net profit is $1,575
  
  

Wages

In the Wages Worksheet, enter “Gross Wages” of $55,750 for Bob. Check the boxes that the wages are exempt from Social Security and Medicare Payroll Tax. This is important because, while the income is not technically exempt from these taxes, the IRS states that these taxes are paid under the self-employment tax system. Accordingly, we will be making an adjustment to calculate self-employment tax on this income. Checking these boxes will indicate that FICA has not yet been withheld.

It is important to enter income per taxpayer and make sure overrides are not in use to properly account for self-employment tax.

 

Schedule C Income

To add Schedule C Income, open the Schedule C worksheet in the Schedule 1 Income section, select Bob’s name to assign the Schedule C income to him, and enter “Gross Sales” of $1,850 and “Net Profit” of $1,575.

For more details on the Schedule C Worksheet, see our knowledge base article How do I model Schedule C Income?

 

Housing Allowance / Wages Subject to SE Tax

Designated housing allowance is exempt from federal income tax, but is subject to self-employment tax. Also, in this example, Bob’s salary is subject to SE Tax because he is considered self-employed (and no FICA tax has been withheld).

To account for this, navigate to Other Taxes > Schedule SE - Self Employment Detail and enter the $88,250 as “Taxpayer 1 Other Self Employment Income”. This is $33,250 of housing allowance plus $55,750 of wages. You can use a Field Note and a Calculation Row to make a note of these two items for future reference.

Note that the income is added under “Taxpayer 1” because in the Filing Status section, Bob is listed first, and is considered Taxpayer 1. If he were Taxpayer 2, you would enter as “Taxpayer 2 Other Self Employment Income”.

Note in the above example, self-employment tax totals $12,692, which is calculated based on Schedule C Income, along with housing allowance and wages.

Example of field note/calculation row data entry:

 

Additional IRS resources:

• Topic no. 417, Earnings for Clergy
• Ministers' Compensation & Housing Allowance