When It Comes to the Clergy, U.S. Tax Officials Go Strictly by the Book

Fed up with filling out tax forms? Try this: Join a religious order whose members take a vow of poverty.

Priests, nuns, monks and brothers who take vows of poverty don’t pay taxes as long as they work for a church institution. They rely on their superiors for a modest living allowance, which isn’t taxable.

But the regular parish priest, minister, rabbi and imam--who draw salaries and do not take vows of poverty--pay taxes like everyone else. And the Internal Revenue Service doesn’t let those in the service of God get away with a thing.

For instance, an IRS manual that is used to train tax agents to audit clergy returns advises them to watch out for “fees paid directly from parishioners for performing weddings, funerals, baptisms and Masses. All are included in gross income.”

Clergy often depend on those so-called “stole fees” to supplement their salary.

Some need it. In the Catholic Archdiocese of Hartford, Conn., for example, the annual starting salary for a newly ordained priest is $12,516. They may eventually work their way up to the maximum salary of $14,952.

“Obviously the room and board is supplied,” said Monsignor Charles W. Daly, the archdiocese’s recently retired fiscal officer.

A study several years ago by the Hartford Seminary showed that Catholic priests were at the bottom of the heap in remuneration among four major churches. Episcopal priests were tops, making an average of 70% more than Catholic priests. In between were Methodists and Lutherans.

IRS officials are keeping a sharp eye on how ministers report their expenses, just as they do on the rest of the citizenry.

When a United Methodist clergyman serving five rural churches in North Carolina reported himself as “self-employed” several years ago, the IRS challenged him.

Among the issues was how much the Rev. Michael D. Weber could deduct for expenses. If self-employed, Weber could claim every drop of gasoline and other unreimbursed expenses involved in running among five different churches.

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The IRS said, however, that he was not self-employed, but an employee of the church. That meant he could deduct only expenses that exceeded 2% of his gross income. Weber, with church backing, appealed.

The church argued that the minister was paid by his congregations, which agreed to engage him. That doesn’t matter, the government held. Weber was under the control of his bishop, so that clearly made him an employee. The tax court sided with the IRS and so did the federal court of appeals last July.

With that, the church gave up the fight and is advising its 38,000 ministers and local church treasurers to file their returns accordingly.

“It looked to us like the IRS was picking deliberately on poor clergy,” said Mary Logan, general counsel for the administration and financing arm of the United Methodist Church in Evanston, Ill. “It is normally people with a lot of money who get audited. With these people, you are talking about several hundred dollars--maybe even a thousand. They looked like they were nickeling and diming us to death.”

The court decision has implications beyond the United Methodist Church.

The IRS manual for its auditors says ministers “are commonly considered employees” and only in “very limited cases” can a minister be considered “an independent contractor, such as in the case of a traveling evangelist.”

Ministers such as Weber, who serves five churches and has a lot of unreimbursed expenses, will probably come out the loser by filing as an employee.

But the law governing clergy and rabbis has a strange quirk that works to their disadvantage: For Social Security purposes they are classed as self-employed, while to the IRS they are employees.

What that means is that the full 15.3% salary tax for Social Security comes directly out of the pocket of the clergy. The employer is normally obliged to pick up half the tab for Social Security.

“It’s a constitutional issue,” said Edmund Tortora, corporate secretary for the pension boards of the United Church of Christ in New York.

“If the church would be liable for the other half,” he said, “Congress would be taxing the church.” And that, he said, would be unconstitutional.