Payments to a Minister of Religion by a Church

[SunTaxMan]

I happened to be in the home of a Church Treasurer and was discussing the Church's financial reporting.

I noticed several items that caught my eye, which turned out to be payments to the Pastor or on his behalf:

1. Automobile Lease, $400.00 per month.

2. Automobile Insurance, $200.00 per month.

3. Professional Services, $200.00 per month.

4. Supplies Expense, $100.00 per month.

5. Gas Allowance, $200.00 per month.

The Church is not making any annual statement to the Pastor (no W-2, not even a 1099).

My reaction to what I read:

A. Items 1, 2, 3 should be included in a W-2.

B. Items 4 and 5, should be modified to become a direct reimbursement of receipts submitted, rather than a blanket "allowance" amount. Further, the Gas Allowance should be tracked to cover only gas used (miles traveled) in the Church's activities - personal use gasoline should also be added to the W-2.

This Church has not done anything about allocating a "Housing Allowance" because they have not categorized this Pastor as an employee, but this would be another step in modifying their recordkeeping and handling of payments to this Pastor.

And, by the way, this is a part-time Pastor for this Church. This Pastor has other income producing activity. This Church has no (other) employees.

Comments appreciated.

[Jiggers]

Minister

All items 1 -5 should be on a W-2, box 1 only. No SS or Med withheld.

That is for the way it has been done.

Now the proper way would be for the church to arrive at some type of compensation, housing allowance, and expense reimbursement.

The compensation would go on the W-2, Box 1 only.
The Housing Allowance would be identified as such ub Box 14.
The expense reimbursement, including reimbursement for business miles at the IRS mileage rate, and with proper substantiation would not be income by the minister.

Remember that going from the minister's home to the church for services is commuting.

[erchess]

What about

other trips to the church? He could go to counsel with someone or because that's where he plans everything he does or just because he is expected to keep certain office hours. He could even go there to pray that the Lord will smite with ten thousand plagues everyone in this Church after he gets a call from or appointment to a better Church........I am used to treating all trips between home and House of Worship by a religious professional as commuting.

[RLymanC]

Social Security & Medicare

The church is not required to enter anything on the W-2 except Box 1.

If the Employee has not opted out of SS & Medicare he must pay 100% of both Social Security & Medicare listed in box 1 of W-2.

Some Churches will withhold income tax and enter it in Box 2, this, in effect, will pay the SS & MC taxes and income taxes if properly done.

[MAMalody]

My take would be that as currently set up; all those items mentioned would be taxable income and should be reported on Form W-2, or at least Form 1099 Misc. (I believe Form W-2 would be the correct way to go.)

Properly set up the pastor should have
1. a designated housing allowance
2. a written accountable reimbursement policy
3. a properly prepared W-2. (note: the housing allowance is not required to be
reported on the W-2)
4. a social security/Medicare offset payment (this would be included as taxable
income in box 1 of W-2
5. a clear understanding of a pastor’s income/expense reporting requirements.

The above items can equal 100% of the pastor’s compensation. I am assuming that the compensation we are talking about is “reasonable” for the services rendered.

The church should be advised of:
1. how a proper housing allowance works
2. what it means to have a written accountable reimbursement policy
3. what the penalties are for not filing correct and accurate income reporting
documents
4. what a common law employee is

There are a few other odds and ends but this should kick off a healthy, robust conversation.

Mike

[SunTaxMan]

My response

First, thanks to all. I appreciate the comments, both those directly in response to the question asked and situation described, and also those that add advice to the situation apart from directly answering the questions. Sometimes, even the obvious reaction we have could be incorrect - some of us don't always think clearly all of the time - it's a SENIOR thing!

Specifically.....

MAMalody, I agree with your assessment of the situation. I have one question, what is "a Social Security/Medicare 'offset' payment?" This is not a term I am familiar with.

RLymanC. In addition to Churches, many Mission Boards also voluntarily withhold "additional" FIT, calculated to cover the taxpayer's SE Tax and any state income tax liability, and, as an extra bonus, adjust the amount withheld as the worker spends time out of the country on foreign Mission work (where Foreign Income Credit becomes a consideration).

erchess. You raise an interesting point. For the Pastor, I can see that ALL trips from home to the Church are commuting - no argument there, and I am not sure how this relates to the question asked/situation described. But the distinction you raise, i.e., are the miles commuting or not, I think DOES apply to contributions. The voluntary worker for the Church, e.g., Music Director (unpaid), who would be going to Church anyway (I am assuming I comprehend the motives of the Church member), just to attend services, would not get a mileage deduction for going to the Church on Sunday, when they are going to direct the Chior in the Service - it is a time for regular Church attendance. But if that Music Director goes to the Church apart from those regular services, e.g., to direct Chior practice at a time other than regular Church services, I think a mileage deduction would be appropriate. In the same way, miles to a music store, phone calls to a music company, that are directly related to the work as Music Director, are also deductible.

Jiggers. I agree with your first statement. As stated, and for historical purposes (the current year included) ALL FIVE of the items of Church expenditure to the Pastor would be includable in Box 1 of the W-2. BUT, if the Church establishes an Accountable Plan - Pastor submits expense documentation for items 4 and 5 in my original post - these could be eliminated from W-2 entry completely. And if, the expense and the reimbursement amounts are identical, then the Pastor would NOT need to show either payment on his 2106. If the reimbursement were more or less than the expense, then 2106 reporting IS required, either to account for expense beyond reimbursement (deduction) or reimbursement greater than expense (income). And for this year (2007) there IS NO Housing Allowance, because it has not already been so established by the Church Board, i.e., Housing Allowance CANNOT be established retroactively.

What I see as the primary issue here is the lack of establishing an employee status for this Pastor, there is NO W-4 in existence - no payroll and no payroll reporting -- no anticipation of reporting this on W-2 or 1099 at all.

Jiggers, one further question. I agree that the only boxes on the W-2 that should have a money entry are Box 1 and 2 (Income and withholding) and Box 14, Housing Allowance (and I agree that HA is not a REQUIRED entry on the W-2, but it does provide documentation to the Pastor, and the Tax Preparer, of the amount allocated. However, there is one other potential, State Income. The states I deal with usually start with a carryover of the Federal, so Fed AGI would be the starting point for the state returns. I am wondering how many states, and which ones, do NOT recognize the Housing Allowance for state purposes. Any idea? This would affect the accuracy of any stated stated income on the W-2.

Again, thanks for the various responses - helping me to "think through" this situation. And I welcome further response.

[MAMalody]

MAMalody, I agree with your assessment of the situation. I have one question, what is "a Social Security/Medicare 'offset' payment?" This is not a term I am familiar with.

What I see as the primary issue here is the lack of establishing an employee status for this Pastor, there is NO W-4 in existence - no payroll and no payroll reporting -- no anticipation of reporting this on W-2 or 1099 at all.

I am wondering how many states, and which ones, do NOT recognize the Housing Allowance for state purposes. Any idea? This would affect the accuracy of any stated stated income on the W-2.

In reference to the above three items:

1. A Social Security/Medicare Offset is where the church would decide to pay, in addition to, the pastor's other compensation an amount equal to the "employer share" of Social Security/Medicare. If that is the case, then it would be considered additional compensation to the pastor and included in box 1 of W-2 with his other taxable income.

2. While this is not the question at hand, in this situation I would handle him like a normal dual-status pastor and include all these monies on line 7 of Form 1040 and handle any appropriate expense on Form 2106.

3. In CA, you are not limited by FRV when making the determination of housing that can be excluded from taxation. They only consider amount designated and amount spent. I am in the process of researching, but, I understand that PA does not allow the housing allowance (I have not confirmed this yet, so a grain of salt is in order) to be excluded from taxation.

Mike