Pastor's housing allowance

[JON]

The allowance is always subject to SE tax, right?? If spent on housing or quailified expenses it is not subject to income tax, right? Why would a church still have the rest of the salary in box 1 as taxable with no withholdings fro anything??? Help

[thomtax]

Churches are not allowed to deduct the FICA and Medicare. If they agree, income taxes may be withheld.

The IRS does not require that the housing allowance be shown on the W2. It may be shown but is not required.

The reason that the other amount is shown on the W2 is because the housing allowance must be set up by the church "prior" to the year in question. This amount is usually requested by the pastor and should be more than he knows will be spent to allow for unexpected expenses. He is allowed to spend less, but not more than allowed. Qualified expenses are then figured, up to the fair rental value, and then any additional added to the amount of wages. Keep in mind that, according to some experts, this rental value could be calculated for the house and furnishings.

Bottom line - all of it is subject ot SE. For income tax, only the amount that is not paid for housing allowance.

Hope this helps.

LT

[JON]

Thank you

The problem for this new Pastor is SE tax on W-2 box one and housing allowance amounts to around $3300 for the year and now withholding. The finance person at the church I think should have seen it coming and had federal withholding (not Fica) to at least help the blow.

Oh well, she has the numbers and the problem.

[thomtax]

Jon

As I said in an earlier thread, you have to be in one of the smaller churches to understand the dynamic.

Everything is done on a voluntary basis. Many times the treasurer of the church has no idea about taxes, they are there to pay the bills and keep the checkbook. They are not tax people and my earlier statement was "They were either absent at the business meeting or were the slowest to run away, so they were elected treasurer". By the way, my wife is treasurer in one of these situations, so I see it firsthand. She only took it because she knew I would help her.

One of the other posters noted that one situation he deals with, the treasurer hands the preacher a blank W2 and tells him to fill it out. He then takes the blank W2 to his tax preparer to be completed. So it's not a real sophisticated situation, but it is reality in the too small and broke to hire it done world.

LT

[GIMoe]

SE Tax

The problem for this new Pastor is SE tax on W-2 box one and housing allowance amounts to around $3300 for the year...

Don't forget any additional stipends received for weddings, funerals, etc... may not be on the W-2 and you will need to do Sch C for these.

Also, don't forget to deduct the allowable unreimbursed employee business expenses before calculating SE tax.

See PUB 517. Example return starts on Page 13 & workshets you can use on page 23.

[MAMalody]

While I agree with the prior postings, it is possible to have clerical income that is not subject to social security and Medicare. If the pastor has an approved Form 4361, then the salary and housing from the church are not subject to SE tax.

I might also mention that you are able to subtract from his clerical SE income any unreimbursed professional expenses, disregarding the IRC 265 adjustment.

Mike

[Chief]

Clergy Housing Allowance

Although this does not pertain in your case. For a minister who is retired and received a housing allowance from a church owned group does not even pay FICA or SE tax on the allowance. This perk is an attractive one and to the best of my knowledge does not duplicate itself any where else.

[JON]

4361

Has anybody ever used that. My understanding fo that is the choice is not to be covered by Social Security and it is foever??!!!!!!!!!!

This is not a small church and she met with the financial "expert" when they cam up with all of this.

[thomtax]

I have one time, but it is not something that I personally think is wise in a financial way. Also, it is not supposed to be done for financial reasons, just if there is a religious objection. There are time limits as to when you can opt out, and you are right - once you are out, you're out. What happens to these people if they become disabled? They cannot collect on social security disability.

LT

[MAMalody]

I have one time, but it is not something that I personally think is wise in a financial way. Also, it is not supposed to be done for financial reasons, just if there is a religious objection. There are time limits as to when you can opt out, and you are right - once you are out, you're out. What happens to these people if they become disabled? They cannot collect on social security disability.

LT

Actually, they can if they have the required credits of non-clerical income.

It is also interesting to note that there have been two opportinities so far to opt back into the system.

Mike

[jjstephens]

Clergy housing and social security tax issue

Has anybody ever used that. My understanding fo that is the choice is not to be covered by Social Security and it is foever??!!!!!!!!!!

This is not a small church and she met with the financial "expert" when they cam up with all of this.

In addition to operating a consulting biz for pastors and ministries, I am an ordained pastor. For all the right reasons I 'opted out' many years ago.

The prerequisite for opting out (ie., the only 'right' reason) is the the clergy person must have a firmly held conviction that it is inappropriate to receive public insurance benefits (ie. SS) related to ministry services. They have to certify that conviction when they file Form 4361 and the IRS follows up with a letter reminding the applicant of that requirement. The applicant must then recertify his/her conviction before the IRS approves the 4361. The exclusion is only for ministry related earnings--all secular earnings are still subject to either FICA or SECA tax and the person is still eligible for SS benefits based on amounts paid in.

The deadline for filing Form 4361 is the deadline for filing the second tax return on which the clergy person reports at least 400 dollars of ministry related income. The election is generally irrevocable--except that over the last 25 years the Congress has allowed a brief window of opportunity on three different occasions for clergy to opt back in (most recently in 2001 and 2002).

Someone else stated that it is not wise financially. Technically, the financial benefit (or lack thereof) is not supposed to be a consideration--though in all honesty it probably is for some who opt out. Further, I'm not convinced a person can't do better for him/herself anyway. The key (and something I strongly stress with my clients who choose to opt out) is that they need to be extremely diligent about pumping the money they save by not paying SECA tax into a 403b and also pick up some disability coverage.

Here's a quick formula for determining the amount of clergy income subject to SECA tax (for those clergy who did NOT opt out):
+ Church W2 (box 1)
+ Clergy housing/parsonage allowance
+ Fair rental value of church provided parsonage
+ Net self-employment income on Sch C (secular and ministry related)
- Unreimbursed ministry expenses reportable on Form 2106 (even if F2106 is not filed)
= Amount subject to SECA tax

[veritas]

"For all the right reasons I 'opted out' many years ago."

If I may ask what are all the right reasons?

[Chief]

for all the right reasons

I too would be interested in hearing these. Related to this I was a public school teacher for 2 years in Colorado. The public employees had opted out for the "right reasons." I was happy to leave the state and get back into the social security umbrella.
Many pastors of these small churches the majority dont want public assistance programs; rather they depend on the good graces of their flocks to provide their needs. Later without the churches they depend on the Lord to provide. Generally they wind up in poverty and I feel sorry for them. Social security is at least one program that they can depend on. Even church supported pensions depend upon how much you put in. You only get what you have invested in them. The Salvation Army and the Catholic Church are the only church related organizations that continue to support their clergy and other workers for life. I can see why they optout of social security but these other churches and religio0us orgnizations I do not understand their opting out. Would they go on public assistance? Not according to their thinking. They would die first. How hungry does a man have to get to compromise his ideals?

[jjstephens]

Right reasons

What I meant by 'right reasons' was a firmly held conviction that receiving public (that is, goverment provided) benefits related to my ministry service is inappropriate. The theory behind the option is that the ability to compensate (even to the extent of providing a retirement or disability benefit) carries with it the possibility of exerting influence on the person receiving that benefit. I believe it is inappropriate for the govt to even have the ability (whether they utilize it or not) to exert influence on me in an effort to influence what I preach and teach. The exemption is offered to those who do not wish to be placed in that postion. IMHO, the govt is not presently engaging in such activities (some of my colleagues are not so sure). However, the possibility exists. I chose to opt out because I do believe it is inappropriate and do not wish to be placed in that position should circumstances change in the future. As a consequence of that choice I am making alternative arrangements for my retirement. To be honest, in a sense I have the best of both worlds. I have worked long enough in secular employment (in excess of 40 quarters) so that I am vested in the SS system. I will be eligible to draw SS benefits on the basis of what was (and is continuing to be) paid in on my secular earnings. I simply do not accrue any additional benefits on the basis of my clergy earnings because I do not pay into SS on those earnings. A surprising number of clergy who have opted out are in a similar position, especially those for whom the ministry is a second career.

I fully agree that many pastors opt out for the wrong reason (to 'save' money or because they think they can do better elsewhere) and give little thought to the consequences. That is wrong on several levels. However, the opportunity for exemption exists because of a real and valid concern on the part of some about govt interference in religious matters.

My clergy clients often ask me if they should opt out. My reply is always the same. "If--but only if--you have a firmly held religious conviction that it is inappropriate for you to receive public insurance benefits related to your ministry service then carefully consider the consequences pro and con of opting out. But if you do not firmly hold such a conviction and if you are not willing to make appropriate alternative arrangements then do not even consider it."

[veritas]

Interesting

I might get booted for this one.

But if the church membership understood the special advantages clergy received with regards to their taxes I'm thinking it would cause many to stumble.

I can't help thinking when a preacher talks to the laity telling them that we should not fudge on our taxes. Yet here we have people exempting themselves out of a social security taxes and then a housing allowance to boot. Or better yet talk to us about giving. Giving would be so much easier if one did not have to pay fica taxes and could exempt thousands from income tax.


Then they retire and exempt their retirement from income tax and collect social security from their "secular earnings".

Sorry but that is so wrong it is shameful.