A pastor terminated his position with a church and moved to serve a new church started in another state. The pastor's former church/employer is going to send support to this pastor through the end of the year, even though he is no longer employed by them and will not be providing any services to them. Can the income be reported in Box 3 of Form 1099-MISC as Other Income thus avoiding self-employment taxes? Alternatively, should the church continue to report the support as pastoral W-2 wages and designate it as housing allowance?
Box 3 of Form 1099-MISC is reserved for Other Income--"prizes and awards that are not for services performed." Regardless whether a minister's compensation is considered wages as an employee or non-employee compensation as a self-employed individual, for purposes of self-employment tax he is considered as self-employed. Accordingly, he must file Schedule SE and pay SE tax (unless he has been recognized by the IRS as exempt by virtue of filing Form 4361).
As a minister engaged in providing religious services, his earnings are considered earned income regardless of their source. For example, a foreign missionary performing services overseas yet supported by a U.S. congregation is subject to SE tax even though the payer (the U.S. church) received no direct services.
However, whether classified as an employee of a local church or as a non-employee independent contractor the compensating church or organization may designate (at the minister's request) all or a portion of his compensation as housing allowance. Of course, the minister must comply with the provisions of the the Clergy Housing Allowance Clarification Act of 2002 which is explained fully in other entries within this blog.