Church and Housing Allowance

[DaveO]

I’ve had a number of pastor clients over the years. From the missionary whom I have to coax information from to use up his housing allowance to the director of a religious foundation who had opted out of SS and would use his to build and furnish a new home every three years to sell at no taxable gain. Also had a couple of pastors from one of the local “mega churches” whose total compensation could approach a half million dollars. My favorite ones to work with are the retired pastors with the pension designated as housing. They busy themselves with weddings, funerals and hospice care. Minister housing allowance is a huge tax benefit I’m sure the average person is unaware of.

[Burke]

. My favorite ones to work with are the retired pastors with the pension designated as housing.

I've always had a dilemma with this one. Do you do a W-2 and show zeros in Box 1,3,5 and show it all in Box 14? Or do you do a 1099R, which has no way of designating it? The former works, I am not sure the latter wouldn't produce a lot of problems.

[DaveO]

Since no SE tax is involved I just show it on 16a and 16b and subtract it on line 21 as minister housing. Some 1099R forms even come showing $0 in box 2 with a letter of explanation.

[JenMO]

Isn't housing subject to SE tax no matter what? Can you give a pastor a $0.00 W-2 and show all housing in box 14? Or should you?

[DaveO]

Housing is only subject to SE tax for an active pastor. A retired pastor who has their pension designated as housing is not subject to SE tax on that income. If they continue to work parttime as a pastor they are subject to SE tax only on that income, not their pension.

[JenMO]

Right, I thought that's what we were talking about. A church wouldn't be paying their pastor a pension. Wouldn't that come from somewhere else? Still, what about a $0.00 w-2. Probably wouldn't even efile.

[taxmanken]

Clergy W-2 procedure

You cannot efile a W2 that has no entry in block 1. You can paper file it, but not efile. We do payroll for over 70 churches and we have some ministers who have their entire salary designated for housing. We set them up in our payroll software so at least $1 per pay goes to salary. Form 941 won't file either if you have no taxable earnings. For a member of the clergy, blocks 3, 4, 5 & 6 should all be zero. The instructions say to leave those blocks blank, but our experience is that leaving them blank leads to problems. Putting zeroes in the blocks has never caused us a problem.

If a minister's pension is totally or partially designated for housing, the preparer still has to determine if in fact all of the designated money was spent for housing. Any money that spent on housing becomes taxable pension. Our software program (UltraTax) has a block that we check for clergy housing designation and we reduce the gross pension by the lower of the amount designated or amount spent. We've never had a single issue with the IRS on this and we file hundreds of clergy returns each year.

[JohnH]

I think you meant to say:
" Any money NOT spent on housing becomes taxable pension..."