Clergy - W2

[Yardley CPA]

Good morning, Community.  I wrote last year about my first Clergy client who moved to his Church mid-year.  This year, he and his wife were members of their congregation for the entire year.  He is the youth minister at a Baptist Church in North Carolina.  Here is some information and I am rounding numbers:

• His W2 from the Church - the only entries:  $18,500 in wages and $17,500 Housing Allowance.  Zero's in the rest of the federal information.  State wages listed. I'm told the Housing Allowance is properly reflected.
• Wife has a normal W2 from the local school district with all entries made.  Lets say the wages were $11,500
• A bit of Interest Income
• A bit of Student Loan Interest.
• Standard deduction (not enough for itemized)

That's it.  Nothing else.

I just want to ensure my understanding is correct:

• The 1040 return should reflect total wages of $30,000.
• Self Employment Tax is calculated on the $17,500 housing allowance.
• Normal entries for interest and student loan interest. 
• Tax calculated normally.

 

AM I MISSING ANYTHING HERE?  As Clergy, are they entitled to any other benefit that I am missing?   Are there any other forms or information I need to provide. 

Thanks very much for help on this.

[Lynn EA USTCP in Louisiana]

Look at the clergy worksheets in your software. Your client needs to provide you details of their housing costs.  Does he have other unreimbursed expenses such as vestments, books, publications. Where does he prepare his sermons.  Does he have a home office. Travel from the church to visit his parishioners. Do you have CFS Tax Tools?  they have a clergy worksheet which I give yo my clergy clients. MAMalody will probably have more insights. 

[Yardley CPA]

Thank you.

[rfassett]

Lynn is spot on.  The big thing you need is the housing costs.  Without justification, they could have taxable excess housing costs.

If you are going to do much in this area, I would suggest getting the "Church and Clergy Tax Guide".

The Baptist denomination may also have some information.

Here is a booklet from a different denomination that I do work with.

 

 

finance-manual.pdf

[RitaB]

1 hour ago, Yardley CPA said:

Good morning, Community.  I wrote last year about my first Clergy client who moved to his Church mid-year.  This year, he and his wife were members of their congregation for the entire year.  He is the youth minister at a Baptist Church in North Carolina.  Here is some information and I am rounding numbers:

• His W2 from the Church - the only entries:  $18,500 in wages and $17,500 Housing Allowance.  Zero's in the rest of the federal information.  State wages listed. I'm told the Housing Allowance is properly reflected...

 

• Self Employment Tax is calculated on the $17,500 housing allowance.

SE tax is also calculated on the 18,500 clergy wages.  I couldn't tell from the post if you knew that.  Apologies if you did.  Also, if you knew the following and I didn't catch it:

The HA that can be excluded from 1040 Line 7 (and income tax) is the lowest of:

1)  17,500

2)  The actual housing costs, which includes everything but the kitchen sink.  Oh, wait, it includes that, too.

3)  The fair rental value of the furnished house plus the actual costs of utilities.

[RitaB]

This is a good little publication, too.

https://www.guidestone.org/~/media/GuideStone%20Corporate/Ministry%20Tools/2166_MinTaxIssues%20pdf.ashx

[Yardley CPA]

I know very little about Clergy taxes.  Very much appreciate all your insights.  Wondering if it may be best to steer them to someone who handles this on a more frequent basis than I.  I want to do what's best for them. 

 

[jasdlm]

As long as you are researching the issues thoroughly, why not take this chance to learn?  You've got support from this Board and some good publications.  You are conscientious enough that you will do a good job for your clients.

[RitaB]

1 hour ago, Yardley CPA said:

I know very little about Clergy taxes.  Very much appreciate all your insights.  Wondering if it may be best to steer them to someone who handles this on a more frequent basis than I.  I want to do what's best for them. 

 

You are what's best for him.  You got this.

[JJStephens]

The bulk of my practice is clergy returns. I just PM'd some info to you. Perhaps it will be helpful

[Lion EA]

The clergy person is a bit of a hybrid employee.  Employee for income tax purposes (think Box 1) but a self-employed person for SS/Medicare purposes (think Schedule C for Box 1 + qualified housing, as Rita defined).  If he owns his house, he still gets to deduct mortgage interest and property tax on Schedule A.

You've been given good advice and have clergy specialists advising.  His national church probably has good publications.  Those mentioned above are great.  The IRS must have a pub or two and maybe an Audit Guide.  Read Church and Clergy Tax Guide and anything else by Richard R. Hammer, J.D., LL.M., CPA.  I also like anything from William F. Geisler.  You started with him when he came to this job, so you're getting to know his situation from the beginning.  Getting him started right will make it very easy for future years.  If you like him -- keep him.

[MAMalody]

Just to put things together:

1.  The W-2 for the pastor (in your situation) should only have entries in box 1 and box 14 (this is the housing allowance and should not be included in box 1).

2,  Both the salary (box 1) and the housing allowance (box 14) is subject to SE tax unless he has an approved Form 4361 exempting him from FICA/MC on clerical income.

3.  The amount that is not subject to income tax is the lower of (1) the amount designated, (2) the amount actually spent on qualified houisng expenses, or (3) the fair rental value of a furnished home plus (utilities, decorator items, and some miscellaneous expenses). If the designated housing is larger than (2) or (3), the excess amount is added into income and notated to the left of line 7 of Form 1040

4.  The amount subject to SE tax can be reduced by unreimbursed professional expenses, even if he is not able to itemize deductions.  

5.  Here is where it gets tricky.  You need to calculate the amount of professional expenses that can be attributed to his tax exempt income and reduce that amount from his unreimbursed professional expenses.  The is generally referred to as the Deason Rule.

6.  The IRS has a couple of free publications that help in the clergychurch area.  Publication 517 and 1828 are two I remember.  I also think there is a MSSP. Of coure the other recommendations for info are also all good but more expensive and not as readily available. The Guidestone (for Southern Baptist) RitaB recommended above is good.

7.  The advice above is all good.

8.  I also specialize in clergy taxes, you can e-mail me at [email protected] with any questions, if you think that will help.  If you do that, be advised, that you will lose the benefit of peer review that this board makes available.

9.  Don't ship the client, you can do this.

[Yardley CPA]

Thank you All for your advice and suggestions.  Here is the latest on this situation:

I did find out their living expenses:

• The Minister and his wife live in a single family home.  Fair Rental Value of that home is approximately $18,000 per year. 
• The couple pays all utilities which amount to about $518 per month (total of $6,216 per year) There is no utility allowance from his church.
• Monthly general maintenance amounts to $44.  (total of $528 per year)
• The actual expenses (rent, utilities, maintenance) amounts to $19,944 per year
• Fair Rental Value plus cost of utilities amounts to $24,216
• Minister travels about $500 per year to visit members of the church (would this go on Schedule A?)
• No home office, No Schedule C
• No other expenses.

I use ATX and input the above information into their Clergy Worksheet.

• 1040 now reflects $30,050 in wages (The Ministers 18,550 and the wife's 11,500)
• Small amount of interest.
• Self Employment Tax of $5,093 (calculated from the minister's $18,550 in wages + $17,500 housing allowance).
• Small amount of student loan interest.
• Educator Expenses.
• Standard Deduction
• Tax is calculated normally. 

With all of your assistance, I believe I've completed this return correctly but wanted to run the results past you again to make sure I am not missing anything.

 

Thank you.

 

 

 

 

 

[MAMalody]

I am not sure I understand your figures.  You indicate that there is a FRV of their home at $18K yet when you list their actual expenses you have "rent" included in those.  I am assuming that they are renting their home so your figures do not compute (if my assumption is correct).

Since the pastor is a common law employee I assume that his mileage, $500, would go first to the Form 2106 and then to the Schedule A.

In reference to the SE tax your may reduce his SE base by any umreimbursed professional expenses, such as the $500 mileage (adjusted for the Deason rule).