The Parsonage Primer By: Edward Guttenplan, CPA, MBA Wilkin

The Parsonage Primer
By: Edward Guttenplan, CPA, MBA
Wilkin & Guttenplan, P.C., CPAs
Synagogue Services Group
Parsonage represents a portion of a clergy's compensation that is attributable to housing and
housing related expenses. Congress has afforded clergy favorable tax treatment with respect to
the financial arrangements relating to their housing expenses. The technical tax requirements of
utilizing this very favorable tax attribute of clergy compensation is often misunderstood,
misapplied, or in the worst case abused to the detriment, upon audit, to the clergy.
Parsonage can be in one of two forms, either the church or synagogue can provide actual
housing, that is they own the clergy's home and allow the clergy to live there, or they can
provide a dollar allowance to the clergy so that they may acquire and own their own home. It is
clear that the IRS and Congress intended housing costs in connection with the ministry not be
subject to income tax. Parsonage however is subject to self-employment tax or FICA and
Medicare. Amounts paid to the clergy for a housing allowance or the actual provision of housing
through church or synagogue owned property is considered housing and thus subject to all of the
requirements of a housing allowance.
The Clergy Housing Allowance Clarification Act of 2002, provides that the parsonage
component of a clergy's compensation package cannot exceed the fair market value rental of the
residence, including furnishings, plus utilities. This is a deviation from past history, which
allowed the clergy to characterize parsonage in any amount that was attributable to housing
related expenses. So effective for the 2002 tax year, the portion of a clergy's compensation that
can be characterized as parsonage is limited to the fair market value rental, including furnishings,
plus utilities of the housing. To the extent that either parsonage payments or the actual provision
of housing exceeds that amount, it will be subject to income taxes in addition to social
security/self-employment taxes. To the extent it is lower the actual amounts will apply.
One further compliance point, although it is has not been clearly tested or articulated in
the requirement is that the congregation board authorize or approve the allocation of the
compensation package between parsonage and compensation annually, in advance of
received by the clergy. The board should annually, in advance of payment, confirm
compensation package is split between taxable compensation and parsonage.
the law,
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it being
that the
What does this mean to your congregation?
Clearly, if your congregation is like every other
congregation to the extent that the Rabbi receives adverse consequences of tax treatment
afforded his compensation package, it will ultimately affect the net amount available for meeting
family expenses. Clergy have tremendous demands placed on them, including being role models
for our communities, and educating their children. To the extent that after tax cash flow is
impacted by negative tax consequences, it will undeniably be a cost that congregations will bear
in facilitating the appropriate lifestyle for their clergy.
We strongly recommend the following:
1. The portion of the Rabbi's compensation package that is designated as parsonage (and
therefore subject to only self-employmentfFICA and Medicare taxes and not income
taxes) is no more than what is the fair market value rental of his residence, including
furnishings, plus utilities.
2. The board of trustees approves the allocation of the clergy's compensation that is
attributable to parsonage in advance, or at the beginning of each year.
3. Encourage the Rabbi to utilize a tax advisor who is knowledgeable in the unique tax
requirements of clergy and ministers.
4. The board of trustees understands that any long-term relationship between the
congregation and the clergy must enable the clergy to achieve financial stability and
security. Furthermore, clergy's orientation and expertise is generally in an area other
than tax law and economics, and a partnership must be established for a win/win
outcome.
We have substantial experience in this area and would be delighted to help you and your
congregation achieve that win/win situation with your Rabbi, and, equally important help
minimize the risk of an adverse tax result of inappropriate or unrealistic tax positions taken by
either the Rabbi or the synagogue. Should you have any questions, please feel free to contact us.