Taxable or Non-Taxable Clergy Income?
Generally, most income you receive is considered taxable but there are situations when certain types of income are partially taxed or not taxed at all. All sources of income are fully taxable and must be included in your income unless it is specifically excluded by law.
To help clergy understand the differences between taxable and non-taxable income, Clergy Financial Resources offers a few common examples of different ministry sources of income, but not limited to:
- Qualified love gifts (person-to-person)
- Reimbursement from an accountable plan
- Church paid HSA contributions
- Housing allowance (federal only)
- Fair rental value of the parsonage (federal only)
- Utilities paid by the church (federal only)
- Church paid moving expenses
- Flexible spending arrangements *
- Health reimbursement arrangements *
- Ministry expenses only relating to sabbatical compensation
* (Stand only plan for one employee – Integrated with group health with over two employees)
- Pulpit supply
- Bonuses and special occasion offerings
- Personal use of church vehicle
- Severance pay
- Social security allowance paid by the church
- Auto or professional allowance
- Professional nonaccountable plan
- Forgiveness of debt
- Holy Land trips paid by the church
- Payment for personal expenses
- Spouse’s travel expense paid by the church (no legitimate ministry purpose)
- Interest on below market loans
- Love gifts (church to minister)
- Discretionary funds (unrestricted)
- Personal/spouse/family expenses relating to sabbatical compensation
- Individual health insurance paid or reimbursed by the church
- Housing allowance (SECA only)
- Fair rental value of the parsonage (SECA only)
- Utilities paid by the church (SECA only)
When it comes to holiday gifts, if your church gives you an item, such as a ham or a turkey or other merchandise of nominal value, it’s not taxable. However, if your church gives you cash, gift certificates or similar items of readily convertible cash value, the value of the gift is considered to be additional wages or salary. The gift amount would be included in your Form W-2 and would therefore be taxable.
Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:
- Life Insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are not taxable unless the policy was turned over to you for a price.
- Scholarship or Fellowship Grant If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
- Non-cash Income Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.