• The IRS addressed the question of the taxability of food and lodging provided (on a cost-free basis) to clergy and lay workers who are required to reside on a church's premises to fulfill their duties. Many churches have employees (both clergy and non-clergy) who live in church-owned housing. Of course, federal law permits clergy to exclude the annual rental value of a church-provided parsonage from their gross income for federal income tax purposes (it is taxable for self-employment tax purposes). But what about non-minister church employees who live in church-owned housing? Is the annual rental value of such housing reportable as taxable income for income tax and social security tax purposes? And what about food provided on a church's premises to both clergy and non-clergy employees? Must it be valued and reported as taxable income? These are significant questions. The recent case before the IRS involved ten church centers engaged in religious activities including praying, preaching the gospel, ministering to the spiritual needs of members, and teaching the Bible. These centers employ full-time ordained ministers and lay workers who are required as a condition of their employment to live at the assigned church center. The primary service required of the ministers and lay workers is prayer. In addition, the ministers conduct Sunday services, hold prayer meetings, counsel and help church members, and carry out evangelistic work. The lay workers teach Bible school, administer the church's business affairs, organize and run annual conventions, and maintain facilities. Although the ministers and lay workers are not paid a salary, they are provided with meals and lodging. The church centers asked the IRS for a ruling addressing the federal social security tax consequences of the meals, lodging, foodstuffs, and cash reimbursements for grocery expenses provided to the full-time ordained ministers and full-time lay workers. The IRS began its ruling by noting that under section 119 of the Code, a non-minister employee may exclude from gross income the value of lodging furnished by an employer "for the convenience of the employer." To qualify for this exclusion, the following three tests must be satisfied: (1) the lodging is furnished on the business premises of the employer, (2) the lodging is furnished for the convenience of the employer, and (3) the employee is required to accept such lodging as a condition of employment. In explaining this test, the IRS observed:
The requirement that the employee must accept such lodging as a condition of employment means that the employee must accept the lodging to enable the employee properly to perform the duties of employment. Lodging will be regarded as furnished to enable the employee properly to perform the duties of employment when, for example, the lodging is furnished because the employee is required to be available for duty at all times or because the employee could not perform the required services unless furnished with such lodging.
Section 119 of the Code further provides that an employee (minister or non-minister) may exclude from gross income the value of any meals furnished by the employer for the convenience of the employer. The meals must be furnished on the business premises of the employer and for the convenience of the employer. According to the income tax regulations, employer-provided meals are furnished for the convenience of the employer if the meals are furnished for a substantial noncompensatory business reason of the employer. Whether meals are furnished for a substantial noncompensatory business reason requires an examination of the surrounding facts and circumstances. With regard to the lay workers, the IRS concluded that the lodging was for the convenience of the employer and accordingly was not includable in gross income for either federal income tax or social security (FICA) purposes. It observed:
The information submitted specifies that all lodging is provided on property owned by [the church] and that substantially all of the religious activities of its workers occur on these premises. [The church] requires the lay workers to live at the church centers as a condition of their service to the church so that they are available at all times to gather in prayer and to fulfill their other assignments. As a result, the requirements of section 119 are satisfied, and the lodging provided by X to its lay workers is excludable from the income of the lay workers under section 119. Thus, the lodging furnished to the lay workers is not wages for FICA purposes.
Similarly, the IRS concluded that the meals furnished on the church premises for the lay employees were for the convenience of the employer and accordingly were not includable in gross income for federal tax purposes. It observed:
The information submitted specifies that the meals are furnished on the business premises of [the church]. The lay workers are assigned by [the church] to dining facilities at which they are required to eat their meals. The lay workers are expected to be fully available at all times to be ready to join in prayer and to fulfill their other assigned tasks. They are also required to remain on the premises of their assigned church center unless there is a specific reason for being away. We conclude that the meals furnished by [the church] to its lay workers are furnished for a substantial noncompensatory business reason and are excludable from the income of the lay workers under section 119. Thus, the meals furnished to the lay workers are not wages for FICA purposes.
However, the IRS concluded that groceries purchased by the lay employees did not qualify as "meals" under section 119 of the Code. As a result, cash reimbursements paid by the church to its lay workers for grocery expenses were not excludable from taxable income.
With regard to the ordained ministers who were employed by the churches, the IRS noted that such persons are self-employed for purposes of social security taxes with respect to service performed in the exercise of their ministries. Accordingly, they are not subject to FICA taxes, but rather pay the self-employment tax with respect to such services. The IRS further noted that section 1402(a)(8) of the Code prevents the section 119 exclusion for meals and lodging from reducing a minister's net earnings. Thus, the value of meals, lodging, and cash reimbursements for groceries furnished by the churches to their ordained ministers "must be included in the ministers' net earnings from self-employment" for self-employment tax purposes. Private Letter Ruling 9129037.
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