Employer Paying Housing Expenses Directly

Question:

A mission agency runs a school in a foreign country and pays its directors (who are ordained or licensed ministers) a housing allowance as part of their salaries. The ministers avoid income tax on the allowance, but do incur self-employment (SE) taxes. Can the agency pay for the housing directly and correspondingly reduce the salaries of the directors in order to decrease their SE tax burden?

Answer:

The agency can certainly pay for the housing directly; however, under normal circumstances, this will not decrease the SE tax burden on the directors. Because the directors still receive the housing benefit, even though it is paid directly to the landlord, it will be taxable as a housing allowance. In essence, the total tax will be unchanged since the IRS sees no change in the true nature of the compensation.

Possible exception to the above information:

If paid directly by the agency, the benefit may be non-taxable under very strict guidelines provided by the IRS in Publication 525. According to the Publication, "You do not include in your income the value of...lodging provided to you and your family by your employer at no charge if the following conditions are met: The lodging is

·    Furnished on the business premises of your employer,
·    Furnished for the convenience of your employer, and
·    A condition of your employment. (You must accept it in order to be able to properly perform your duties.)"

If these conditions are satisfactorily met, the housing benefit can be excluded from income, and the directors will realize a tax benefit. Publication 15-B provides more information regarding non-taxable housing benefits for an employee.

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MinistryCPA - Corey A. Pfaffe, CPA, LLC

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