Discussion:Clergy's W2

They were correct in reporting the health and auto allowance in box 14...this is usually for "terms of call" items to be reported, but are not tax related. If the minister is receiving a car allowance, and sometimes a book allowance, etc. it is not taxable to them if it was due to amounts paid under a qualified plan.

In box 1, the SS and the wages are subject to FWT so they are correct in reporting it there. Housing allowance should also be reported in box 14...they pick this up on their Sch SE...:)

2. His car "allowance" should be report on his W-2 on lines 1 and 16. An allowance is a flat rate you pay the minister and this is income. An accountable reimbursement plan is where the minister turns in his mileage monthly and the church reimburses him. This reimbursement would not be taxable to your minister.

3. Housing allowance may be reported in box 14 for information purposes. I would report it to help the ministers tax preparer. Make sure the church did the housing allowance correctly (voted on the amount before payments started). If the church goofed, housing allowance would then go on lines 1 and 16. You and the minister need to understand that when it comes to social security and medicare, ministers are unique. They are employees of the church but self-employed for self-employment taxes. It has to be that way because some ministers expempt out of social security and medicare.

Be sure to read the IRS Publication for ministers listed on this sight. If your church is part of a large denomination, the denomination will have literature and people to help you understand church taxes. Setting up the minister's package incorrectly will cause your minister great hardship. This is a stewardship issue of the leaders of your church to set up the package for your minister correctly.

If the medical insurance is with the salary package....I agree it is stupid to report it....if the auto allowance and/or book allowance is over the minister's accountable amount, then yes, this should also be reported as income.

In the churches I did the accounting for, the auto and book allowance rolled over from year to year unless he got "reimbursed" for the expenditures. Each church operates differently, but...

Look at the "terms of call" and see if these are accountable plans or strickly allowances where the minister does not have to give an account for the expenditures...any of the above, auto, books, phone, etc. will then be taxable to them and they take the deduction on their 1040's....

Thank you Mark for chiming in!! :)

Just wondering, is this an acceptable approach, for the church, and myself as the preparer?

What on earth is a child allowance? Are they giving him an allowance for child care perhaps?

Sorry to ask if not appropriate, but what denomination is the clergy?

Sandy, I guess it would be unethical to tell you the denomination :) I haven't a clue what child allowance is for. I don't handle the accounting for the church so I'm thinking...not my problem. I just prepare the minister's return and don't know what else to do but file the sch c as I have. (shrug)

Also consult IRS Publication 517 for more specific information

Pastor’s salary Box 1 & 16. Pastor’s Tax paid by the church Box 1 & 16. W-2 and W3. Pastor’s Housing Allowance… Box ? Is this Taxable income??? Pastor’s Car Allowance Box ? Pastor uses his own Vehicle for all Church activities and District activities and does not receive any other compensation. This is an agreement by the Church Board and The pastor. Is this taxable income??? Pastor’s Health Insurance. Should this be reported? If so Where???? Thank You very much and I really do Appreciate all of You and Your Time….. Skyhorse1

Pastor’s Housing Allowance… Box ? The most important tax benefit available to pastor, ministers ect.. who own or rent their homes is the housing allownace exclusion. Pastor who own their home DO NOT PAY FEDERAL INCOME TAXES on the amount of their compensation that their employing church designates in advance as a housing allowance, to the extent that (i)the allowance represents compensation for ministerial services, (ii) it is used to pay housing expenses, and (iii) it does not exceed the annual fair rental value of the home (furnished, plus utilities). Same principal applies to Pastor who rent a home or apartment. For Pastors who live in church-owned manse also are permitted from their gross income the annual rental value of the manse(plus other housing expenses). If they live there and incur any out-of-pocket expenses in maintaining the manse(such utilities, property taxes, insurance ect...) should be sure that their employing church designates in advance a portion of their annual compensation as a manse allowance. The amount so designated IS NOT REPORTED AS WAGES on the Pastor's Form W-2 at the end of the year(if the allowance exceeds the actual expenses, the difference must be reported as income by the Pastor). Pastor’s Car Allowance Box ? Pastor uses his own Vehicle for all Church activities and District activities and does not receive any other compensation. This is an agreement by the Church Board and The pastor. Is this taxable income??? If the Pastor is not required to account to the church for any of his business and professional expenses, and the church has a NONACCOUTNABLE REIMBURSEMENT PLAN , then the total reimbursements are included on the pastor's W-2 (or 1099-misc). In this senario the expenses themselves can be deducted by the employee ONLY as miscellaneous itemized deductions on Schedule A. If the church adopt an accountable reimbursement plan, such a plan reimburses only those expenses that are adequately substantiated within 60 days ( as to amount,date place, and business purporse) and requires any excess reimbursements to be returned to the church. Reimbursements under an accountable plan DO NOT NEED TO BE INCLUDED IN A WORKER'S INCOME, and there are non expenses to deduct. The failure of the church to adopt such a plan results in the nondeductibility of a portion of Pastor's business expenses.However, the difference often is not significant if the Pastor is able to itemize expenses on schedule A. So all the the church 's business expenses reimbursements ARE INCLUDED IN THE PASTOR'S TAXABLE INCOME. Pastor’s Health Insurance. Should this be reported? If so Where???? Since the Church is actually paying the Pastor for his Family Health Insurance and not offering medical reimbursements for medical expenses the total Health Insurance is subject to income tax or social security tax. Try to estabished a Health care spending account for 2007 and again obtain the 2007 "Church and Clergy Tax Guide".

Also, why would a church pay FICA to their minister since s/he's going to pay tax on that amount anyway? Kinda negates the income or am I tripping? Why not just bump up their housing allowance a bit to cover the SECA the minister will have to pay?

Also Minister's compensation is exempt from income tax withholding whether a minister reports his income taxes as an employee or as self-employed. Minister's use the estimated tax procedure to pay their federal taxes, unless they have entered into a voluntary withholding agreement with theri employing church.

Thanks for the concise input Mauro!!!

So its inportant to determine how much the church designated for House allowance in 2006 because he could be aubject to a double deduction. (its more complicated to explain)

So where does medical reimbursement come in? Does it show at all on the W2? I understand the housing allowance still requires self-employment tax.

Anyway, to answear your question its all depends what kind of HSA the church established to the minister. HSA (Health care spending accouts)- This accounts allows a minister or lay employee to set aside pre-tax dollars to pay for eligible medical, dental, ect.... Now, some churches employers offer medical reimbursement arrangements for medical expenses that are not reimbursed by the Medical Plan. These arrangements are NOT SUBJECT TO INCOME TAX or Social Security tax if they are provided as a group plan established to reimburse employees for medical expenses not covered by the Plan. If the church as no plan established then any fringe benefit is considered taxable and will be part of taxable income and it will be reported on his W-2. (See pub 969 for more details).

Federal Law specifies that any director, officer, mninister, employee ect,,,who is responsible for withholding taxes and paying them over to the govertment may be liable for a penalty in the amount of 100% of such taxes if they are either not withheld or not paid over the goverment. This penalty is of special relavance to church leaders, given the high rate of noncompliance by churches with the payroll reporting procedures.

This is how it was done at our last church...is it right? 1/2 pay is paid as housing allowance, other 1/2 pay is considered medical reimbursement and divided by calendar year equally. (This was voted on and approved by the church.)Then receipts are submitted for medical expenses each month and a check is cut for the total of the receipts, but no more than the predetermined medical amount.

So the housing was listed on the W2 in box 14 but the medical was not shown because it was a reimbursement.

So did our old church do this correct?

1) is the person ordained, licensed, or commissioned 2) does the person admister sacerdotal functions 3) does the person conduct religious workspip 4) does the person have management responsibilities in the church 5) is the person considered to be a religious leader by the church?

However, the IRS has issued audit guidelines for its staff agents to follow when auditing ministers. The guidelines reject the narrow view that a minister must statisfy all the 5 of the factors mentioned above. In general to be considered a MINISTER for federal tax purposes, YOU MUST ordained, licensed, or commissioned and meet a majority of the remaning 4 factors. So do not assume anything other then following the IRS guidelines for ministers.

For federal income taxes, they ordinarily are employees, but for Social security purposes they are self-employed with regard to services performed in the exercise of ministry.

I think everyone here agrees with how a minister's income and expenses are SUPPOSED to be handled. In one of my earlier postings I said I only prepare the return for the minister, using his issued Form 1099, and that I do not prepare the form for the church. Now, what else are we, as preparers, supposed to do with that but file a sch c? Is it my responsibilty to inform the church of their accountant's incorrect methods? Will I, as preparer, incur any "blame" from the IRS for putting income and deducting otherwise sch A items, on the sch c?

MGreene...just consider that all the money is income, no withholding,it's merely more money to pay for taxes...much easier to understand.

They can file a W-2C (corrected W-2) after the fact, but this does not do you much good at this time. You can file Form 4852 as a wage statement with the IRS if you do not and do not expect to receive a w-2 for 2006. Hope this helps!

So, what you are saying is, that if they finished setting up things correctly this month, they can go ahead and issue a W-2 for my wages for 2006?

The financial person does not know what she is doing yet. She has never had to set up a church, or deal with church pay roll issues.

Church accounting is different to say the least....but if you need any help with some information, I will be glad to give you or her some help. There are some church software programs which are inexpensive and quickbooks as well can help...just let me know if you want to help point her in the right direction...it is for God's work after all :)

Does anyone know how a church can be set up to pay employees but not have to pay S.S., medicare or fed taxes?

Another option would be to ask the church to pay her as compensation the taxes she would have to absorb by treating it as a 1099.

I too would file it as 1099 income; take appropriate write off's for self employment type income..depending if she has any and then talk to the church about possibly changing it in 2007 or to reimburse her for taxes she has to pay on the income :)

Actually, with taxable distributions my wife and I took from IRAs we are (this year) in a situation where we do have to pay some taxes. If I would put the stipend amount into a Roth now, I would have to pay taxes now. I think that in some later year I will not max out on my taxable distribution IRA draw, and then do the Roth and can breathe easier during that year.  :)

I'm an ordained clergy person who serves a small congregation on a part-time basis; 100% of my very modest compensation is designated as parsonage and covers only a fraction of my actual housing costs. I also lead weekly religious services at a secular, not-for-profit nursing home as a member of their pastoral care team and receive modest W-2 income for this work, and none of this income is currently designated as housing allowance. The sum total received from both positions is less than my actual housing costs. Can 100% of my nursing home salary also be designated as parsonage, assuming the nursing home is open to this? (FYI, the vast bulk of my income is derived from secular Schedule C work, and I'm not eligible to take the home-office deduction.) Thanks!

What has me confused is whether the medical insurance premiums are deductible in calculating the self employment tax. Or, in other words, whether the medical insurance premiums must be added to Box 1 wages and the housing allowance in the calulation of self employment taxes.

Publication 517 page 10 does state that the deduction is not used to reduce the earnings subject to SE tax. BUT, this sentence is under the section describing the Health insurance costs of Self-Employed ministers. Since there are self-employed ministers, who are not statutory employees, I have cause to wonder is this sentence is applicable to Statutory employees. My readings of the MSSP and the Audit Guide did not help me either, maybe I mised something.

However, the specific issue is still about pastors.