Clergy receiving W-2, why not 1099-misc?

[AZ-Tax]

New client I obtained is a clergy. The taxpayer has only 2106 exps, state income tax, vehicle tax and donations that barely surpassed the standard deduction. The taxpayer received a W-2 with only Fed and State income tax withholding so only boxes on W-2 filled are 1, 2, c, b, a, d, e, 15,16 & 17.

I ran a mock Schedule C with the box 1 being 1099-misc income, included fed and state withholding and relocated the taxpayers 2106 exps to Schedule C. The taxpayers receive higher refunds with both fed and state.

Is there any reason why this Clergy cannot receive income in a 1099-misc form opposed to a W-2?

[outwest]

One reason..

would be that receiving the W2 is the published IRS procedure. To much to cover at this late date, but read up on "clergy" + "dual status employee". Congratulations, you've actually got a church that reads and follows the IRS rules.

TTB 14-6 to start

[JohnH]

I agree with outwest - it's refreshing to see a church following the rules.

However, if your client has significant out of pocket expenses, you should encourage him/her to speak with the church about setting up an accountable plan for reimbursing those work-related expenses. Then there wouldn't be an issue about a foregone deduciton for unreimbursed business expenses becasue there wouldn't be any. I'll bet most the members of his/her congregation wouldn't dream of paying their work-related expenses out of their own pocket without being reimbursed by their employer, but yet they're content to expect the pastor to do so.

[SunTaxMan]

Housing Allowance

And whatever else you do, don't forget to include Housing Allowance in your:

-- research, so YOU know what to do with it and about it.

-- discussions with the Church - that's where the Housing Allowance has to start.

And to start you in the right direction, I suggest Richard Hammar, www.ChurchLawToday.com Sign up for the newsletters, buy the book(s), depend on him.

[thomtax]

Is there any reason why this Clergy cannot receive income in a 1099-misc form opposed to a W-2?

Quite possibly it is the clergy's choice. Many of the experts that I read feel that filing on a schedule c increases the risk of audit.

LT

[MAMalody]

I think the idea of a written accountable reimbursement policy is a great way to go. Even if the church would not budget extra dollars for this, have them reduce his salary by the expected amount of professional expenses. It will do the same thing on generating nontaxable income and not cost the church or the pastor any money.

All the IRS guidance does not give the option of selecting a W-2 or 1099 like one of the posting responders seemed to indicate. All the major guidance I have seen, including Pub 517, 1828, Richard Hammer and three or four tax attorneys who specialize in clergy taxes indicated that if you meet the control issue questions, that is what dictates, not what the pastor or church necessarily wants.

I agree with the poster who said that it is refreshing to see another church that appears to be doing it correct.

Just my three cents (inflation made it more that 2)

Mike

[thomtax]

Since this is your area of expertise, I will defer to your posting. However, I don't necessarily agree with it. To clarify, I am referring to small churches, not the big time ones that you are probably dealing with. Many of them will arrange the situation, when hiring, to fit the person's desires that they want as a pastor. That in effect, if not actuality and legalistic standpoint, a choice situation.

[MAMalody]

Since this is your area of expertise, I will defer to your posting. However, I don't necessarily agree with it. To clarify, I am referring to small churches, not the big time ones that you are probably dealing with. Many of them will arrange the situation, when hiring, to fit the person's desires that they want as a pastor. That in effect, if not actuality and legalistic standpoint, a choice situation.

While I agree that the situation you indicate above is quite common, my point is that it is wrong. I also agree that there is a lot a church can do in conjunction with the pastor to structure his compensation package for a better tax advantage. However, one of the things that cannot be structured is whether he is self-employed or a common law employee. It has been maintained that even with the great deal of control and latitude that the church gives a pastor, that he is an employee for income tax and fringe benefit purposes and self-employed for Social Security purposes. Therefore he will be receiving a W-2 with only box 1 and maybe 12 or 14 and any appropriate state boxes filled out.

The IRS, in fact, has had a project on the books for a few years, unfunded by congress, to audit about 5,000 pastors with this being one of the specific issues in question. I would be interested to know if you have been to any audits where this was the issue, a pastor of a mainline church claiming to be self-employed, receive a Form 1099 Misc and it cleared the audit? That is, the IRS did not change his status to employee and disallow the Schedule C, other than for royalties, honorariums and such.

About my area of expertise, while this is supposed to be it, I still make mistakes and many of your are kind enough to help me "see the light." (Sorry I couldn't help the pun). Like you, I just hope there are not too many and that they are all caught.

Anyway, have a great day!

Mike

[thomtax]

Interested

Mike, Sometime when you have a chance, probably after season, I would be interested in how you ended up with the type practice that you have. If I remember correctly, you have said that pastors, etc are the only type of returns that you do.

Since you may not want to post it to the board, send me a private email.

Thanks,
LT