"minister of the gospel" Housing allowance question

[MN2V]

I knew this would catch up to me sometime...but why on the eve of April Fools Day, Opening day of Baseball season and with 8 inches of new snow to shovel....

Box 1 shows $20,000 but nothing in box 3 or 5...and box 14 has $6500 housing allowance. She actually rents an apartment in a different town for $6000...so what is subject to SE tax...$6500 or the excess $500. and if it all ($26500) is subject to se tax do you have people file quarterly estimates to cover this? Didn't realize they were paid so poorly, their reward in Heaven should be great...

thanks for your help...I have been at this since 1979 and have avoided doing clergy returns...now I see why!

[Peggy Cobb]

Ministers pay income taxes on the amount in box 1 and they pay Self-employment taxes on the amount in box 1 plus the housing allowance. If you are using ATX, you enter box 1 and if there is anything in box 2 as you would normally. You need to unclick the automatic calcualtion of box 3 through 6. ATX also has a worksheet that puts the Self-employment tax in the correct place. It is called 1040 Clergy, if you type Clergy in the search part of the forms menu it will bring it up.

You will also need to know how much she paid for housing expenses. This would be the apartment rent, utilities and any upkeep or maintenance on the apartment. If the housing expenses are less than the housing allowance this additional amount is added to the amount in box 1. But the 1040 Clergy addresses this. She does not pay additional self-employment taxes on the under reported housing expenses. A minister's compensation package is divided between salary (box 1) and housing allowance. They need to report to the governing body of the church by December 31 what they estimate their housing allowance to be in the next year. What they declare for housing allowance is then deducted from the compensation package and the remainer is their salary. You might check her housing expenses and help her get a better number for 2009, so she doesn't have additional salary. She wants to estimate as close as possible to the actual amount.

You can deduct from housing and salary any unreimbursed work expenses. These are deducted portionally and the percentage related to housing also reduces the Self-employment taxes. Again this new worksheet 1040 Clergy does the calculation.

She will need to make estimated payments unless the church will withhold taxes for her. Small churches usually do not withhold taxes especially if the only employee is the pastor. You will generally only have to make estimated taxes on the Self-employment taxes and occassionally a small amount of the income taxes

Ministers are consider self-employed for Social Security and Medicare, but an employee for Federal Income Taxes. She can complete the application to be excluded from Social Security, but if she does she will not receive any Medicare coverage unless she has other non-church income. Most pastors stay in Social Security so they can receive Medicare when they retire.

What I have found is that a married pastor with the wife working part-time and they are buying a house can pay almost nothing in income taxes and all they pay is the self-employment taxes.

Count your lucky stars that the church prepared the W-2 right. I know of a major payroll service that has managed to get 4 different churches W-2s wrong. It took 6 months to get them to correct the W-2s.

[MAMalody]

Let me answer your question in a little different way. I may repeat some things that have been said before, but once I am on a roll, unless I go over the edge I sort of dump the whole load.

1. Generally, pastors are considered dual-status. They are common law employees for income tax, fringe benefit and retirement purposes. They are considered Sefl-employed for Social Security purposes. Therefore they receive a Form W-2, however, no deductions are taken out.

2. A pastor can request a church to make withholdings form them, however, the church is not required to do so. They can choose to do so if they wish.

3. If a church provides their "1/2 of Social Security" for the pastor, it is considered additional taxable componsation and should be included in box 1 of the W-2. This is commonly called a social security offset.

4. A pastor can opt out of Social Security only if they complete Form 4361 by the filing deadline of the second year (including extensions) in which they have clerical income of $400 or more. If your pastor has made more that $400 for at least two different years from the pastorate they are NOT eligible to be exempted for social security. By-the-way, this is a theological decision not an economic decision.

5. If they are not exempted from Social Security, the income they have that is subject to the SE tax is: cash salary, designated (and paid) housing allowance, social security offset, honorariums, royalties, recapture of auto depreciation; less any unreimbursed professional expenses, business portion of tax prep fee, and business % of auto interest and personal property tax. The worksheet that the IRS uses and ATX uses has an error in it. It mistakenly does not allow the IRC 265 limitation as a reduction for the SE computation while the code and regs do.

6. The pastor is NOT required to provide any documentation to the church to support their housing allowance request, designation or grant.

7. It is a good idea when the pastor makes the request to the church that he adds about 20% to the amount that they think they will use. Since this is a use it or lose it proposition, the pastor and church lose nothing by making the figure larger that actually used. However, it cost them money, if the designated amount is not more than what they expect to use.

8. The housing amount that is not subject to income tax is the lower of (1) designated amount, (2) amount actually spent or (3) the fair rental value. So if the amount designated and fair rental value is less than what is spent, the pastor is paying income tax on income that could have been exempted. If the amount spent is less than the amount designated or the fair rental value, then the difference between the designated amount and what was spent becomes subject to income tax and is added to line 7 of Form 1040. As you can see it does not hurt to overdesignate but hurts when you underdesignate.

9. Be careful when you compute the EIC if they have it. The ATX worksheet is good, however, make sure you read the earned income worksheet carefully, it will change you computation.

10. This is not relevant in your current situation, however, mortagage interest and property taxes can be used on Schedule A and for housing at the same time. Cool huh.

11. The housing amount is NOT required to be listed on the W-2, however, the pastor will always need to know what it is so their tax return can be properly prepared.

I hope this helps, that between others and myself your questions has been answered and I have not muddied the waters.

Mike

[Randall]

They're not all paid so poorly.

[JohnH]

You are right - they are not all paid so poorly.

But by far the majority are vastly undercompensated, even when taking into account the tax-favored treatment for the H&U allowance.

[MN2V]

THANK YOU ALL SO MUCH! I do love this board... you are so helpful

[dexterman]

Is 100% of the housing allowance always subject to SE tax (if not exempted) or is it also the lesser of (1) designated amount, (2) amount actually spent or (3) the fair rental value? If it is not the lesser of, why would it more be advantageous for an increased $ amount, because what you save in income taxes you pay in SE tax, or am I missing something? Former CPA told (according to minister anyways) minister the less the designated allowance the better because he wouldn't have to pay SE tax on this amount.

I have a new minister and in previous years the CPA took a deduction for part of the housing allowance on line 21? Under what circustances would this be done? Could it be that part of the housing allowance was erroneously included in box 7 of the W-2? CPA has sinced died and new treasurer at the church and the Minister has not a clue???