Skip to main content

Earned Income Credit and Housing Allowance

Question:

For purposes of the Earned Income Credit (EIC), is housing allowance considered to be part of earned income?

Answer:

According to the IRS, "The rental value of a home or a housing allowance provided to a minister as part of the minister's pay generally is not subject to income tax but is included in net earnings from self-employment. For that reason, it is included in earned income for EITC, unless you have an approved Form 4361."

This statement is part of IRS Publication 596 which goes on to say,
"Form 4361.
Even if you have an approved Form 4361, amounts you received for performing ministerial duties as an employee count as earned income. This includes wages, salaries, tips, and other taxable employee compensation. A nontaxable housing allowance or the nontaxable rental value of a home is not earned income [our emphasis]. Also, amounts you received for performing ministerial duties, but not as an employee, do not count as earned income. Examples include fees for performing marriages and honoraria for delivering speeches."

Comments

  1. So do you recommend including the housing allowance or excluding the housing allowance when calculating EIC?

    ReplyDelete
  2. Josh,
    It is not a matter of recommendation. If a pastor includes, as required, his housing allowance or parsonage fair rental value in his Schedule SE self-employment income, then it will be also a factor in determining his Earned Income Credit. The same is not true of a minister who has opted out of social security via filing and approval of Form 4361.

    ReplyDelete
  3. Corey,
    I am a minister without form 4361. I receive both a salary and a housing allowance. In regards to the EIC, does the full amount of my housing allowance (before deductions for housing expenses) count towards the EIC? Or is it the total income after deductions for housing expenses that counts (coupled with my salary of course)?
    Thanks for the clarification.

    ReplyDelete
  4. The Earned Income Credit (EIC) calculation uses amounts from a minister’s Schedule SE (calculation of self-employment taxable income). Because housing allowance is included in the Schedule SE calculation, it does necessarily affect determination of one’s EIC.

    ReplyDelete

Post a Comment

Popular posts from this blog

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 a…

Review: Form 1099 Payments to 501(c)(3) Organizations

Question:

A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC?

Answer:

We have written similar blog posts on this topic in the past (listed below), but we figured it was a good time for a review. 

Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The 2015 Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC. 

The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC:
Rent paid to an individual (non-corporation)Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers)Support sent directly to missionariesHere are some similar blog posts that we have written in the past:

Form 1099 for Payments to Other Ministries
Form 1099 for Non-profit?
Fo…

Heath Care Sharing Ministries and the SE Insurance Deduction

Question:

Can payments made to a health care sharing ministry (e.g., Samaritan Ministries, Christian Healthcare Ministries) which are exempt from the Affordable Care Act be deducted from income as a self-employed (SE) insurance deduction?

Answer:

First, to be technical, "health care sharing ministries" (IRS exemption D) provide participants an exception from Shared Responsibility Payments (ACA penalties), but don't connote other tax benefits.

Second, a health care share ministry does not qualify as health insurance. One does not pay what the IRS considers to be premiums, but instead shares the health expenses of others. And according to IRS Pub 535, in order for self-employed individuals to qualify for a SE insurance deductions they must be to pay premiums for qualifying health insurance.