What is taxable income?
Your stipend, the rental value of housing provided to you, and the cost of all utilities (if they are paid for you by the congregation) are taxable as income and for FICA. In effect, the congregation becomes your employer and you are its employee. The value of the housing provided you is taxable, just as is the stipend that you receive in cash.
What will be withheld?
For each pay period the treasurer must withhold from your check 5.65% of both your stipend and
the value of non-cash benefits for Social Security and Medicare taxes, and an additional amount for federal income tax, which is determined by the number of exemptions you claim on Form W-4.
[The congregation is also required to contribute 7.65% for Social Security and Medicare taxes.]
Do I have to pay tax on the value of the housing provided me?
Yes. Neither ELCA polity nor I.R.S. regulations consider an intern "clergy." While ordained pastors may exclude a housing allowance (or the rental value of a parsonage provided them) from their income, interns may not.
Why aren't interns treated like pastors?
Interns are not "ordained, licensed, or commissioned," which are the only categories recognized by the I.R.S. as entitled to special tax considerations provided to clergy. The official I.R.S. statement about theological students says, "You cannot exclude a housing allowance from your income if you are a theological student serving a required internship as an assistant pastor, unless you are ordained, commissioned, or licensed as a minister." You are a student, and internship is part of your educational program, even though you are getting paid for doing it.
This means that I have to pay taxes on something I don't receive?
In effect, yes. What it really means is that you have to pay taxes (and FICA contributions) on a benefit that you did not receive in cash. The distinction is mostly academic, however, because you are required to have the taxes on the value of your housing withheld regularly from your cash stipend.
So I won't actually get all of my stipend?
Well, the money that the congregation sends to the I.R.S. is really your money, if that's any consolation. Considering the financial hardship that this works on an intern, the congregation may choose to increase your stipend somewhat, but, if so, that extra amount is also taxable--and for both FICA and income tax.
How can I determine how much will be withheld from my stipend?
The amount withheld will vary according to marital status, employed or non-employed spouse, number of dependents, and rental value of the housing and utilities provided you. It will have to be calculated according to your personal situation. The church treasurer ought to be able to provide you with the fair rental value of your housing (and utilities). You need to add that to your anticipated income from your stipend and any other income, earned or unearned, you or your spouse have already received or may expect to receive during the year.
What do I do then?
After you have estimated your income (both in cash and the value of your housing), you should
obtain a Form W-4 from either your church treasurer or T.L.S. and use it to calculate the number of exemptions to which you are entitled. Then the treasurer will consult the I.R.S. Circular E and tell you how much needs to be withheld from each stipend check. (To obtain a copy of Form W-4 and/or Circular E from the I.R.S., call 1-800-TAX-FORM or go to www.irs.gov)
Aren't there any breaks?
Yes, as of 2009 you will owe no income tax at all if your adjusted gross income is less than $9,350.00 for a single individual under the age of 65 or $18,700.00 for a married couple under the ago of 65 filing jointly with no dependents. Your tax liability will also be spread over two years. The normal internship format of August 15 to August 15 will have four months in one taxable year and eight months in the following year. It may be possible, if your income is going to be low and your exemptions high, for you to exempt yourself from withholding. BUT DON'T TAKE CHANCES! If you exempt yourself but do owe tax at the end of the year, you may be assessed a penalty in addition to having to pay the tax. (Note: Even if you can exempt yourself from federal income tax for the year, you cannot exempt yourself from FICA; the 5.65% must still be withheld from your stipend and the value of your housing, and it will not be refunded.)
How about state and local taxes?
You have to pay them, too, if you reside in a state and/or municipality (even for only part of a year) that imposes income taxes. We cannot advise you on all state or local tax regulations, but we suggest that it is prudent for you to find out what law applies in the locality where you are assigned to internship.