Understanding the Parsonage Allowance

Part 1: Parsonage and the Dual Tax Status of Clergy

By Mitchell J. Smilowitz, CPA

The parsonage – or housing – allowance is a major tax benefit available to clergy. Calculating the housing allowance, however, can be complicated. This three-part series of articles will improve your understanding of how rabbis and cantors can get the most out of this important benefit .


One of the most confusing aspects of the parsonage allowance relates to the dual status tax rules that apply to clergy. This first article in our Parsonage Allowance Series explores these rules.

Dual Tax Status

Under federal law, most clergy have dual tax status. Simply put, this means that a rabbi or cantor working for a synagogue or other employer is an employee for federal income tax purposes but is considered self-employed for Social Security and Medicare taxes.

  • Clergy Defined. Tax law defines clergy as individuals who are duly ordained, commissioned or licensed by a denomination or religious body and who conduct religious worship, perform sacerdotal functions and/or control, conduct or maintain religious organizations. Writing religious books or articles is also considered ministerial service.
  • “Employee” Status on Earnings. Ministers employed by a congregation or other employer who receive a Form W-2 are considered employees for income tax purposes. Therefore, employee wages and compensation are generally subject to income tax withholding by the employer.
  • “Self-employed” for Social Security and Medicare. Although ministers employed by a congregation or other employer are considered employees for income tax purposes, they are treated as self-employed individuals for Social Security and Medicare purposes and are subject to the Self-Employment Contributions Act (SECA). This means that clergy pay SECA tax (15.3%), not the employee share of FICA tax (7.65%).

Parsonage Allowance Subject to Social Security and Medicare Taxes

A rabbi’s or cantor’s parsonage allowance reduces income taxes but it does not reduce self-employment tax. In other words, the parsonage allowance is considered part of income for the payment of Social Security and Medicare taxes. Here’s an example:

Clergy Compensation$100,000
Parsonage Allowance$30,000
Income for Income Tax Purposes$70,000 (Compensation minus Parsonage)
Income for SECA Purposes100,000 (No reduction for parsonage)

Retirement Plan Contributions Reduce Taxable Income and SECA Taxes

Clergy can lower income taxes AND Self-Employment taxes by contributing to a denominational retirement plan such as The JRB 403(b)(9) Retirement Plan. Here’s an example:

Clergy Compensation$100,000

Parsonage Allowance$30,000

Contribution to JRB Retirement Plan$20,000
Income for Income Tax Purposes$50,000 (Compensation minus both Parsonage and Retirement Plan Contribution)
Income for SECA Purposes$80,000 (Compensation minus Retirement Plan Contribution; no reduction for parsonage)

Conclusion

Clergy have dual status for federal tax purposes. They are considered employees for income tax purposes if employed by a congregation or other employer and self-employed for Social Security and Medicare purposes. This means that clergy are responsible for paying Social Security and Medicare tax of 15.3%. The parsonage allowance does not reduce income for SECA taxes. Rabbis and cantors CAN reduce their SECA taxes by the entire amount they contribute to The JRB 403(b)(9) Retirement Plan.

Future articles will address how to claim the parsonage allowance during your working years and in retirement. If you have questions about the dual tax status of clergy – or how contributions by rabbis and cantors to your JRB account lower income and SECA taxes – contact us or call 888-JRB-FREE (572-3733).

May 2023