Question: Fred is a minister who only receives a housing allowance as payment for his services. He heard he could request voluntary federal income tax withholding (FITW) from his pay to help offset the Self-Employed Contributions Act (SECA) tax he owes. He contacted his church and was told he could not take FITW from the housing allowance he received. Why was he not allowed FITW?
Answer: Fred was not allowed FITW because his housing allowance (sometimes called a parsonage allowance or a rental allowance) is not reported on Form W-2, Box 1.
Per IRS regulations, voluntary withholding agreements established under §3402(p)(3)(A) apply to amounts that must be included in an employee’s gross income under §61. If Fred only receives a housing allowance as income, it is excluded from gross income under §107(2) and does not qualify for voluntary FITW.
Because of these regulations, ministers cannot request voluntary FITW when they receive only a housing allowance. They must have some taxable income, including salary, wages or even an SECA equivalent. Fred would have been qualified if he had received other gross income, like health insurance premiums paid by the church on his behalf or reimbursement under a nonaccountable plan.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing.