Minister Housing Allowance

[peggysioux]

I have a new client who is a minister for a start-up church (very small) and basically the minister is handling everything for the church. No W-2 or 1099 was issued for minister. He received $21,000 from church for housing allowance. I know that the $21000 is subject to SE tax. This is the first return I have handled for a minister and want to make sure I don't miss anything. Is it unusual for a minister to receive a housing allowance but no wages? Once church begins to grow, church is suppose to pay wages.

[MRTAX4EA]

Minister's Housing

I have a new client who is a minister for a start-up church (very small) and basically the minister is handling everything for the church. No W-2 or 1099 was issued for minister. He received $21,000 from church for housing allowance. I know that the $21000 is subject to SE tax. This is the first return I have handled for a minister and want to make sure I don't miss anything. Is it unusual for a minister to receive a housing allowance but no wages? Once church begins to grow, church is suppose to pay wages.

It can happen. There are limits to how much of the allowance is not taxable. In today's economy likely all would be non-taxable. Drake software handlles it quite well. You are correct the entire $21,000. is subject to SE. The housing allowance is not required to be reported on a W-2, but I have seen it included as misc info (Box 14 I think). The Housing Allowance must be established by the church board before it is paid. You can probably enter the allowance directly on to Schedule SE depending on your software.

B J Worth writes an excellent tax guide for ministers. I have attended her seminars also. The guide is especially good for correcting reporting which was done without following the rules for ministers.
Another excellent guide is written by Richard Hammar. He is a lawyer and CPA. His book is also a good guide for setting up the church books.

Both are on Amazon as well as from the authors.

I hope this helps.

[thomtax]

I have a new client who is a minister for a start-up church (very small) and basically the minister is handling everything for the church. No W-2 or 1099 was issued for minister. He received $21,000 from church for housing allowance. I know that the $21000 is subject to SE tax. This is the first return I have handled for a minister and want to make sure I don't miss anything. Is it unusual for a minister to receive a housing allowance but no wages? Once church begins to grow, church is suppose to pay wages.

No, for smaller churches, this is not at all unusual. In Drake, there are clergy forms that will handle all this for you. Getting this break, many times, is the only way that there is enough income for them to survive and continue preaching.

Basically, for the income tax, you take the amount that the church established as housing allowance (21,000), then subtract the expenses paid for housing to see if any was left over. Then compare the result with the fair rental value of the home, including cost of renting the furniture. The fair rental value is the cap. The difference between the allowance and either 1) the amount spent or 2) the cap amount is the taxable amount reported on the 1040.

I have heard it explained, "tongue in cheek", if you can't eat it or wear it, it is deductible as having been spent on housing.

LT

[JohnH]

--> if you can't eat it or wear it, <---

Scarlet O'Hara (and Carol Burnette) might even take exception to the "wear it" part of that sentence.

[peggysioux]

Minister

I did order the book from BJ Worth which was very helpful. What concerned me was that the church is soo small that the church doesn't readlly have a board or you could say that the church board consists only of the pastor. But he did set up the housing allowance in the beginning of the year and documented it. So all should be good, correct?

[MAMalody]

It is not unusual for a pastor's entire compensation to be a designated housing allowance. It must be desigated prior to payment to qualify. The amount that is deductible as housing allowance is the smaller or (1) the amount designated (2) the amount spent on housing or (3) the fair rental value of the house.

In reference to the SE tax (assuming the pastor does not have an approved Form 4361 which would exempt him for the SE tax on this income), the designated housing allowance is subject to the SE tax. There are some adjustments you can make prior to the computation, such as unreimbursed professional expenses, the business portion of any tax preparation fee and the business % of auto interest and personal property tax. These are adjustments that would reduce the SE tax.

The big issue I see here is that in a start up was there any designation by the church, finance committee, trustees or any group that had the authority to do that. If there is no designation, there is no housing allowance.

[MRTAX4EA]

No Expenses Against Compensation

It is not unusual for a pastor's entire compensation to be a designated housing allowance. It must be desigated prior to payment to qualify. The amount that is deductible as housing allowance is the smaller or (1) the amount designated (2) the amount spent on housing or (3) the fair rental value of the house.

In reference to the SE tax (assuming the pastor does not have an approved Form 4361 which would exempt him for the SE tax on this income), the designated housing allowance is subject to the SE tax. There are some adjustments you can make prior to the computation, such as unreimbursed professional expenses, the business portion of any tax preparation fee and the business % of auto interest and personal property tax. These are adjustments that would reduce the SE tax.

The big issue I see here is that in a start up was there any designation by the church, finance committee, trustees or any group that had the authority to do that. If there is no designation, there is no housing allowance.

You cannot reduce SE income with other expenses. Only exception would be 403(B) contributions. For at least 15 years expenses have had to be reported separately. Best is to set up an accountable plan. It has always been a problem with me to have the Pastor paying expenses out of his compensation. Pay him and reimburse his expenses! Also the church should have some officer in addition to the Pastor. I think the designation is okay, but going forward it would be a good practice to have other officers.

[peggysioux]

Minister

MAMalody, so if the pastor is the sole board member for a start up church, even if he set up the housing allowance paperwork in the beginning of the year, the housing allowance cannot be allowed? Is there any IRS regulations that you can direct me to so I can go over it with the pastor?

Much appreciated.

Also, I have another new pastor who asked me file an extension and he will be coming to me in a couple of weeks. He stated that his church issued a 1099. In the BJ Worth's book, it stated that pastors should not be on Schedule C with 1099's but should receive W-2's. If it all has already taken place, how would you suggest it be filed? Should I put the 1099 income on line 7 of the 1040?

[MAMalody]

You cannot reduce SE income with other expenses. Only exception would be 403(B) contributions. For at least 15 years expenses have had to be reported separately. Best is to set up an accountable plan. It has always been a problem with me to have the Pastor paying expenses out of his compensation. Pay him and reimburse his expenses! Also the church should have some officer in addition to the Pastor. I think the designation is okay, but going forward it would be a good practice to have other officers.

While I don't disagree that a written accountable reimbursement policy is the best way to you, you are incorrect in saying that you cannot reduce SE tax by unreimbursed professional expenses. The simpliest way to see this is to simply look at the IRS Publication 517. There you will find the IRS recommended worksheets for clergy. Worksheet #4 (page 23), which is the SE base computation worksheet, shows on line 7 a reduction of the SE base, which effectively reduces your SE tax from what it would have been if you had not made the reduction for the unreimbursed expenses. The expenses themselves obviously got from the Form 2106 to the Misc Ded portion of Schedule A. Another interesting thing here is that even if the pastor cannot itemize deductions he can still make the SE base adjustment and reduce his SE tax.

[MAMalody]

MAMalody, so if the pastor is the sole board member for a start up church, even if he set up the housing allowance paperwork in the beginning of the year, the housing allowance cannot be allowed? Is there any IRS regulations that you can direct me to so I can go over it with the pastor?

Much appreciated.

Also, I have another new pastor who asked me file an extension and he will be coming to me in a couple of weeks. He stated that his church issued a 1099. In the BJ Worth's book, it stated that pastors should not be on Schedule C with 1099's but should receive W-2's. If it all has already taken place, how would you suggest it be filed? Should I put the 1099 income on line 7 of the 1040?

Hmmm. I would have to see how the housing was set up to see if it would appear to qualify. It might be possible. My memory says to see Reg 1.107-1(b). I hope I remember right.

In reference to the 1099 income, I would use the recommendation that Worth makes: report it in the Schedule C and the back it off and move it to line 7 of Form 1040. I seem to recall that Worth gives specific directions on how to do this. If not, let us know and we can show a way to do that.