The pastor of the church where I am a member will begin collecting Social Security in 2002. Since there is a maximum allowance for income from work while he collects Social Security he has a question. He will continue to pastor the church. Does housing allowance count as income toward the maximum income allowance? Or is it only salary that counts?
I have been asked this question many times over the past several years, and I have researched it thoroughly. Unfortunately, there is no definitive answer in the sense of a code section or some other precedent that addresses the issue directly. That is unfortunate. It is my opinion, which I have shared with many, that a minister’s housing allowance is treated as income in applying the annual earnings test. I base this conclusion on section 1811 of the current Social Security Handbook, which states that “the following types of earnings count for earnings test purposes: (A) All wages for employment covered by Social Security … (B) All net earnings from self-employment.” Since the “employment wages” of ministers are not subject to social security with regard to services performed in the exercise of ministry (see section 3121(b)(8) of the code), a minister’s “earnings” for purposes of the annual earnings test are limited to “net earnings from self-employment.” This important term is defined by section 1402 of the code as follows: “[A]n individual who is a duly ordained, commissioned, or licensed minister of a church … shall compute his net earnings from self-employment derived from the performance of service [as a minister] without regard to section 107 (relating to rental value of parsonages) ….”
In summary, the best available evidence leads me to the conclusion that ministers should include housing allowances (and the annual rental value of parsonages) in applying the annual earnings test, since such items are not excluded from the definition of net earnings from self-employment under section 1402 of the code. Neither the IRS nor any court has ever addressed this issue directly, but I am reasonably certain (80% or so) that the IRS or a federal court would agree with my interpretation. The elimination of the annual earnings test for persons who are 65 years of age and older has happily diminished the relevance of this question, since very few ministers who are 62-65 years of age have any desire to begin receiving social security retirement benefits and continue working at the same time (since their benefits are reduced by $1 for every $2 they earn above $11,280, in 2002).