January 29, 2011

Definition of a Minister

Question:

A man serving in the capacity as pastor is not yet ordained, but serving "on trial" and will come up for ordination in 2011. He received a small amount of compensation in 2010 (but greater than $600), all of which the church designated by formal action as housing allowance. Though he is not yet ordained can he have a housing allowance or will everything he received in 2010 be reported on a Form 1099-MISC?

Answer:

A minister is not required to be ordained to qualify as a minister. As long as he fits the definition of a minister he is eligible for a housing allowance and other ministerial tax provisions. This includes the potential that 100% of his compensation may be designated as a housing allowance. When the pastor files his tax return, he must then apply the three-part test for a housing allowance to determine his exclusion. This test is discussed in other postings to this blog.

The Internal Revenue Service's "Minister Audit Technique Guide" states the following.
"Treas. Reg. § 1.1402(c)-5(b)(2) provides that service performed by a minister in the exercise of the ministry includes:
  • Ministration of sacerdotal functions;
  • Conduct of religious worship;
  • Control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body constituting a church or denomination.
"Treas. Reg. § 1.1402(c)-5(b)(2) also provides that whether service performed by a minister constitutes conduct of religious worship or ministration of sacerdotal functions depends on the tenets and practices of the particular religious body constituting the church or denomination."

I generally recommend that churches consider licensing their pastors recognizing their call to the gospel minister in situations where they are preparing for lifelong ministry but are not yet ordained.

In the case when 100% of the compensation was properly designated by the church as non-taxable housing, no Form W-2 or Form 1099-MISC is required. However, I recommend that the church provide the pastor a letter communicating the amount to him so that he can properly fulfill his responsibility to apply the three-part test. Further, the housing allowance is only exempt from income taxes. He will need to consider his self-employment tax obligation for these earnings.

2 comments:

  1. Thank you for addressing this issue. However, where and how does the minister report housing allowance to pay SS taxes on it?

    ReplyDelete
  2. The housing allowance amount is added to self-employment income reportable on Form 1040, Schedule SE, Section A, line 2 or Section B, Part I, line 2.

    ReplyDelete