September 18, 2009

Housing Allowance and Form 1099-MISC Reporting

Question:

A church provides its minister a housing allowance, but for other purposes it believes that it must report the full amount of compensation (including the non-taxable housing allowance portion) on Form 1099-MISC (in order to demonstrate the full earnings of the minister). If the church reports his compensation, including the housing allowance, on Form 1099-MISC as taxable income, will he be able to deduct his housing expenses somewhere else on the Form 1040?

Answer:

This questions brings up a couple of issues. First, most ministers are properly classified as employees who receive Form W-2, not as independent contractors who receive Form 1099-MISC. On Form W-2, Box 1 for taxable compensation is reduced reflecting the church's designation of a portion of his pay as non-taxable. Then in Box 14, it typically reports as a memorandum item his additional non-taxable, housing allowance compensation. In the situation addressed in the question, this Form W-2 reporting may or may not adequately address the other uses the church must make of the Form 1099-MISC.

Alternatively, the minister will need to report the full Form 1099-MISC income on Schedule C where it will be fully taxable. The minister could then claim as a deduction on Line 21 of his Form 1040 as Other Income a negative amount for his allowable housing allowance. He should probably attach an explanation of the negative amount and be ready to answer correspondence from the IRS regarding the deduction.

Of course, the full amount of compensation (including the non-taxable housing allowance) is subject to self-employment tax on Schedule SE unless the minister has successfully applied for exempt status using Form 4361.

12 comments:

  1. I think this clarifies the issue. You are saying that if the church issues a 1099MISC, it needs to include the full amount and the minister reports the housing allowance as negative income on his taxes.

    Who decides whether to issue a W-2 or 1099, the church or the individual minister?

    ReplyDelete
  2. First, let me clarify that a church filing a Form 1099-MISC with its pastor's compensation is virtually never correct. He is an employee and should be issued a Form W-2. Of course, being classified as an employee is very helpful to both the church and the pastor since independent contractors are ineligible for all of the employee fringe benefits that churches typically provide pastors (e.g. health insurance).

    If a church erroneously issues a Form 1099-MISC, especially if it reports housing allowances as taxable, leaves the pastor with few options. My blog response attempts to suggest a way to mitigate the damages.

    I have commented on the independent contractor issue within this blog so a search using that term may offer some direction. Also, typing "independent contractor" in the search window on the IRS site will offer a number of hits that can help.

    ReplyDelete
  3. What if the church is small enough that it does not provide benefits and treats all its pastors (and employees) as independent contractors, thus sending out 1099s? Is such a pastor simply not entitled to the housing allowance?

    ReplyDelete
  4. Unfortunately the size of the church is irrelevant when it comes to compliance with the law – Form 1099-MISC is only intended for truly independent contractors.
    Nevertheless, in these situations a church can still designate a portion of the pastor’s compensation as housing allowance (HA). The church must provide the pastor with documentation listing the amount of income designated as HA. This amount will not be reported on the Form 1099-MISC (i.e. only the amount the pastor received as non-HA income is reported on Form 1099-MISC). The pastor will report the amount listed on Form 1099-MISC on Schedule C and is responsible to report as additional income any amount of the HA he did not use for HA purposes.

    ReplyDelete
  5. does the rule for a minister also apply to a volunteer chaplain of a sheriffif's department that is being compensated financially by a non profit organization by way of housing, medical and utility allowances? thank you, Julie

    ReplyDelete
  6. An individual who is properly classified as a minister is eligible for all of the tax benefits available to all ministers including housing allowance. Ministers employed by parachurch organizations must observe IRS stipulations regarding their ministerial status (See http://ministrycpa.blogspot.com/2011/01/ministers-employed-in-parachurch.html; http://ministrycpa.blogspot.com/2011/01/definition-of-minister.html).

    ReplyDelete
  7. If a pastor only receives a housing allowance should the church still issue him a w-2 with $0 in box 1 and in box 14 the actual amount of the housing allowance?

    ReplyDelete
  8. The answer to your question may vary based the specifics of your situation. I recommend typing "w-2, housing" in the blog's search window for multiple posts that should guide you in the right direction.

    ReplyDelete
  9. Our University Minister is retiring Feb 28th, we are allowing him to live in our house until June 30th. Since he will no longer be our employee and getting paid, are the 4 months of housing taxable on a W-2 or should we give him a 1099? My next question, is the housing taxable at all?

    ReplyDelete
  10. In accordance with the IRS Ministers Audit Technique Guide “The retired minister may exclude from his/her net earnings from self-employment the rental value of the parsonage or the parsonage allowance received after retirement. The entire amount of parsonage allowance received is excludible from net earnings from self-employment (this means no SE tax), even if a portion of it is not excludible for income tax purposes."

    Since the housing is strictly provided within the ministry’s facilities and no cash parsonage allowance is involved, there will be no income tax effect.

    ReplyDelete
  11. I was hired as an interim worship minister 10 months ago and the church did not take out any taxes. I asked them to designate my income as Housing Allowance. I have been issued a 1099-Misc. How does this work when it comes to filing my tax return?

    ReplyDelete
    Replies
    1. Self employment earnings which are designated as housing allowance are not reportable on Form 1099-MISC. A request for a corrected form is likely the best solution. As a reminder this amount (housing allowance) while exempt from income tax is still subject to self employment tax.

      Delete