Radde v. Commissioner, T.C. Memo. 1997—490 (1997)
Key point. Some ministers are employees for federal income tax reporting purposes.
The United States Tax Court ruled that a Methodist minister was an employee for federal income tax reporting purposes. An ordained minister of the United Methodist Church reported his income taxes as a self—employed worker rather than as an employee. The IRS audited him and reclassified him as an employee. The minister appealed to the Tax Court, which relied on a 1994 case finding that a Methodist minister was an employee. Weber v. Commissioner, 103 T.C. 378 (1994), affirmed 60 F.3d 1104 (4th Cir. 1995). The Court concluded that the minister had failed to distinguish his case from the Weber case. The Tax Court made the following additional observations:
(1) Some ministers are self—employed. The Court conceded that "for federal income tax purposes, an ordained minister of a church may be treated as an employee or as a self—employed individual."
(2) Business expenses. Whether a minister is an employee or self—employed for income tax reporting purposes "affects the manner and extent to which related expenses may be deducted on a minister's income tax return. If a minister is treated as an employee of the church, the minister's expenses will be deductible only on Schedule A of the income tax return subject to a 2—percent floor. If a minister is treated as a self—employed individual, the minister's expenses will be fully deductible as business expenses on Schedule C of the income tax return."
(3) Self—employment tax. "Whether a minister, for federal income tax purposes, is treated as an employee or as a self—employed individual has no effect upon a minister's self—employment tax liability because … a minister's income is treated as self—employment income."
(4) Pre—Weber audit years. The Court rejected the minister's argument that the Weber case should not apply because it was decided after the tax years for which he was being audited.
(5) Parsonage expenses reimbursed by the church. During one year under examination, the minister lived in a church—owned parsonage. In addition, his church designated $2,167 of his compensation for utilities and other household expenses of the parsonage. The Court noted that the fair rental value of the parsonage represented taxable income for self—employment (social security) tax purposes. The Court also ruled that the minister had to pay self—employment tax on $2,167 that he received for utilities and household expenses. It rejected the minister's argument that such expenses were already "incorporated" into the parsonage's fair rental value, and so they had to be "deducted" from his taxable income in computing the self—employment tax. The Court noted that the minister "has not proven that the stipulated fair rental value of the parsonage already includes amounts [he] received in cash relating to the utility and other household expenses of the parsonages." The lesson is clear-ministers who live in a church—owned parsonage pay self—employment tax on the fair rental value of the parsonage and any amounts paid to them for utilities or other household expenses.
Application. The issue of whether ministers are employees or self—employed for income tax reporting purposes is addressed in chapter 2 of Richard Hammar's Church and Clergy Tax Guide.