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Is a minister's wages exempt from CA income tax.If a minister is exempt from withholding, is that the same as being exempt from paying taxes.Is box 16 of W2 left blank.

gdmaof12
Level 1

I have called the State of Calif (EDD) several times and get several different answers to this question

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itonewbie
Level 15

Being exempt for withholding purposes is not the same as being exempt from income and SE-tax liabilities.  The only exclusion that applies to ministers would be allowances designated as parsonage, which is limited by §107 to:

  1. the rental value of the home furnished as part of his compensation; or
  2. the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.

The Code does not extend any preferential tax treatment to religious ministers per se but rationalizes this exclusion as being akin to §119.

CA does not conform to subsection (2) in limiting the exclusion to the fair rental value of the home pursuant to RTC §17131.6.

This exclusion also does not apply to SE-tax (unless exemption is granted by the IRS).  In the absence of income tax withholding, the minister would also be required to make quarterly ES-tax payments or could otherwise be subject to underpayment of ES-tax penalty.

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itonewbie
Level 15

Being exempt for withholding purposes is not the same as being exempt from income and SE-tax liabilities.  The only exclusion that applies to ministers would be allowances designated as parsonage, which is limited by §107 to:

  1. the rental value of the home furnished as part of his compensation; or
  2. the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.

The Code does not extend any preferential tax treatment to religious ministers per se but rationalizes this exclusion as being akin to §119.

CA does not conform to subsection (2) in limiting the exclusion to the fair rental value of the home pursuant to RTC §17131.6.

This exclusion also does not apply to SE-tax (unless exemption is granted by the IRS).  In the absence of income tax withholding, the minister would also be required to make quarterly ES-tax payments or could otherwise be subject to underpayment of ES-tax penalty.

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gdmaof12
Level 1
Thank you,
In regards to the parsonage allowance: our minister is paid a cash compensation of $76,700/year.  He lives rent/utilities free in the church's residence.  The value of the FMRV is $56,000 (including utilities).  So do we subtract $56,000 from the $76,700 and he only pays taxes on $20,700 (W2 box 1) or is it just that he doesn't have to pay taxes on the non-compensation of $56,000, as a non-clergy person would have to and pays taxes on his cash compensation of $76,700 (W2 box 1).  He has opted out of SS, SE.   
In regards to the original question of the amount in box 16 of the W2 for State income - then the $76,700 is also put in box 16
thank you
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itonewbie
Level 15
"our minister is paid a cash compensation of $76,700/year.  He lives rent/utilities free in the church's residence"
If he is provided cash compensation PLUS rent-free accommodation, why would you subtract FMV of the rental from $76,700?

"He has opted out of SS, SE."
He cannot "opt out" of self-employment tax.  There are specific conditions that must be met, the exemption must be applied for, and it must be approved by the IRS.

In case you are not an accountant, you should consult a qualified tax accountant for implementation details.
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gdmaof12
Level 1
Sorry - I should have said he has done the exemption and it has been approved by IRS.  
The reason I asked about subtracting the FMRV from the cash compensation of $76,700 is because our church was told by a lawyer that it should be done that way but after doing my own research it seems that the FMRV is an exclusion from income not a subtraction (as I was told by a tax consultant). In orders words the preacher doesn't pay taxes on the FMRV, only on his cash compensation
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gdmaof12
Level 1
does anyone know about California income taxes as it relates to ministers.  I have called the state several times.  Some say ministers do not pay CA income tax; others say yes they do.  Yikes, they can't even agree.  We are a small church and I am trying to do our ministers W2 for this year.  Don't know whether to put an amount in box 16 of the W2 and if I do is it the same as the amount in box 1.  If I call the state I'll get different answers and don't trust any of them to know what they are talking about
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itonewbie
Level 15
Correct on no subtraction.  See my original response about CA tax treatment.
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