W-2 All Housing

[bekzm]

Client has a W-2 with only box 14 for housing of $22800. Nothing in Box 1-13. He is now telling me not to tax this for FICA. He is saying and I copied and pasted what he is saying: I checked with the finance department of our denomination, as well as with a couple of other sources. Since my church income is designated as housing, and since that designation does not exceed my payment from the church, and since the amount designated is not above actual housing costs under the legal categories ... the designated amount of housing is not subject to taxation. It is not subject to FICA ... and it is also not subject to self employment tax. This has been in the news lately due to a judge in Illinois ruling on the housing exemption. And for the next couple of years or so, if things remain the same ... funds designated as housing for ministers are exempt from taxation.

I would like to use this benefit of exemption this year when our taxes are figured, so please do not include the church income when calculating our taxes, as this is a legal exemption for me to take as a minister.

I appreciate your continued assistance in helping us file our taxes ... I know minister's taxes can be difficult ... but fortunately mine are very straight forward, as my church salary is low and all is designated as housing.

So does anyone know anything about this IL or not taxing it for FICA since the W-2 is Baptist Church - is this right? He has a full time job as a counselor with the State. Planning on retiring to do the church full time next year or so. It almost sounded like the W-2 was not submitted cause he was like let me check if she can change it??? Huh

Help

[JohnH]

I'd like for your client to be correct, but unfortunately I think he is mistaken. He must pay S/E tax on the H&U allowance, and he can only exclude it to the lesser of the amount actually spent for housing & utilities or the Fair Rental Value of the home (fully furnished and with utilities provided).

He is probably confusing this with the ability for a retired minister to exclude H&U allowance paid through a retirement plan. Is it still subject to the "Actual amount" and "FRV" limitations. But this only applies to payments through a retirement plan, not to payments made by a local church.

[New York Enrolled Agent]

Client has a W-2 with only box 14 for housing of $22800. Nothing in Box 1-13. He is now telling me not to tax this for FICA. He is saying and I copied and pasted what he is saying: I checked with the finance department of our denomination, as well as with a couple of other sources. Since my church income is designated as housing, and since that designation does not exceed my payment from the church, and since the amount designated is not above actual housing costs under the legal categories ... the designated amount of housing is not subject to taxation. It is not subject to FICA ... and it is also not subject to self employment tax. This has been in the news lately due to a judge in Illinois ruling on the housing exemption. And for the next couple of years or so, if things remain the same ... funds designated as housing for ministers are exempt from taxation.

I would like to use this benefit of exemption this year when our taxes are figured, so please do not include the church income when calculating our taxes, as this is a legal exemption for me to take as a minister.

I appreciate your continued assistance in helping us file our taxes ... I know minister's taxes can be difficult ... but fortunately mine are very straight forward, as my church salary is low and all is designated as housing.

So does anyone know anything about this IL or not taxing it for FICA since the W-2 is Baptist Church - is this right? He has a full time job as a counselor with the State. Planning on retiring to do the church full time next year or so. It almost sounded like the W-2 was not submitted cause he was like let me check if she can change it??? Huh

Help

I think Reg. §1.1402(a)-11 says the housing allowance is subject to SE tax (without exception for any specific denomination).

Perhaps your client is confusing the stay in the order from a decision in US District Court in WI where the parsonage allowance was ruled unconstitutional.

[bekzm]

Thank you

Thank you for your input. This may be one of those to take to somewhere else cause don't want to be responsible for it

[Burke]

He is probably confusing this with the ability for a retired minister to exclude H&U allowance paid through a retirement plan...... But this only applies to payments through a retirement plan, not to payments made by a local church.

John, do you have a cite for this? I have someone I wish to send this info to. He gets paid from a local church, is retired, and it is all designated as Housing Allowance. In fact, he says the church doesn't need to send him a W-2 at all. I always felt it should be on a 1099-R. You said "payments from a retirement plan." The church apparently had this stipulation in his contract when he was its full-time minister.

[peggysioux]

Does minister have an approved Form 4361 from the IRS? It is possible for pastors to receive a self-employment tax exemption if they are morally opposed to public insurance, which requires filling out an IRS Form 4361. See Pub 517.

Peggy Sioux

[JohnH]

Here's the Audit Techniques Guide. https://www.irs.gov/pub/irs-utl/ministers.pdf Retired ministers are discussed on page 9, with a cite.

One thing I noticed in there that had escaped me before is the last sentence of the paragraph, which does say that a retired minister can exclude "retirement benefits received from a church plan." So my choice of wording in that last reply was not good.

Most of the time when I've seen this issue arise, it is a situation similar to the one in the original post. When services are provided, the H&U allowance cannot be excluded from S/E tax unless the minster filed a 4361. This is true even if the minister is otherwise retired.

I've never seen a local church which actually paid a minister a retirement benefit - only denominational plans. So if your situation involves a local church which is truly paying a retirement benefit without any ministerial duties being performed by the retired minster, then apparently it may qualify for exclusion from S/E tax. Of course, the exclusion from income must still be calculated using the 3-step process.

As far as the reporting is concerned, I don't know the answer. I suspect that a letter might be all that is needed, because a letter is acceptable for reporting the H&U payments for an actively employed minister. There is no requirement that the H&U allowance be reported on Box 14 of a W-2 form for a actively employed minister. Box 14 is handy, but not required.

[Burke]

Thanks for the clarification. This is a small, independent church not affiliated with any national denomination, etc. The reason he has always gotten a W-2 is because a form 1099R has no box in which to designate a housing allowance. He performs no services at the church since he retired. (That I know of -- I don't do the W-2's any more). The relevant part of this cite "under IRC 107" seems to be the first two sentences; to wit, "A retired minister may receive PART OF his pension benefits as a parsonage allowance..... Trustees of a minister's retirement plan may designate a PORTION of each pension distribution as a parsonage allowance excludible....." In this case, it is 100%. Then, just to make things interesting, the last sentence says that "the minister may exclude from net earnings from self-employment any parsonage allowance received after retirement. In addition, the retired minister may exclude from net earnings from self-employment ANY retirement benefits received from a church plan." I have another source which states the church plan can be included in an employment contract, a church budget, or any other official church document. But it also refers to a "portion" must be designated as a housing allowance. And I have been told by others that it could not be 100%. Maybe the two paragraphs are not mutually exclusive, but the last 2 sentences seem to contradict each other.

[JohnH]

It is confusing at times, especially when the language seemingly contains contradictions.
I suppose one could spend quote a bit of time and effort trying to figure out if "a portion" could be 100%.

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FWIW, Guidestone is fine with 100%.
Here's their Q&A:

Can retired ministers receive some or all of their retirement income from GuideStone as a housing allowance?

Yes. Revenue Ruling 75-22 allows denominational pension boards such as GuideStone to designate a housing allowance for retired ministers receiving income. Retired ministers may ask GuideStone to designate up to 100% of their retirement income as housing. But retired ministers must continue to follow the housing allowance rules and limits discussed above.

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And here's what the Presbyterian Retirement board says (PCUSA)

3. Can retired clergy exclude their Retirement Savings Plan distributions as clergy housing allowance? If so, where is the documentation for this? How should this be entered on the tax forms?

The Board designates distributions from our Retirement Savings Plan — as well as retirement pension and disability payments — as 100 percent clergy housing allowance for clergy, to the extent they are used as such. This is documented in a letter from the Board of Pensions published annually in the Tax Guide for Ministers. You will find this letter in the front of the guide; it is also available on pensions.org. We suggest retired clergy detach this perforated page from the guide and keep it with the file copy of their tax return in the event of an audit. Do not mail it to the IRS with your Form 1040.
Inform Fidelity Investments that you wish your distributions to come to you as housing allowance so Fidelity staff can make the appropriate notations on your records and the forms they submit to the IRS. At the end of the year, Fidelity will report your Retirement Savings Plan distributions to you and the IRS on Form 1099-R, noting that the distribution was housing allowance.

( I guess they report it this way because they want to be theologically consistent - they consider retirement pension payments predestined to be Housing & Utilities.