Today’s post is from Annie Fairchild of AFairchildPC. Annie has been an exceptional partner as her CPA firm provides tax and accounting advice and services to EMS as well as a number of affiliated companies.
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Telephone: (214) 731-7664
Ministers Working for Non Profit Organizations – Housing Allowance
Are you a minister working for a non‐profit organization? If you are, are you being paid a housing allowance?
The IRS housing allowance regulations allow a minister to divide their pay into two categories: salary and housing allowance. Housing allowance is not included in taxable income for income tax purposes (although it is included as income for social security and Medicare purposes). In addition, although housing allowance includes interest and taxes on a home (expenses that will not be included in the minister’s taxable income), the minister can still deduct those expenses as itemized deductions on their personal tax return. This is what some call “double dipping.”
Some ministers believe they can only receive a housing allowance if they are working for a church. On the contrary, ministers can receive a housing allowance if they are working for a non‐profit organization as long as they are performing the “duties” of a minister. This also extends to missionaries as well that are working for a non‐profit organization and are performing their “duties” within a ministerial capacity.
A minister may receive a housing allowance if he/she is employed to provide a service in the exercise of his or her ministry. Section 1.1402 (b)(2) states:
…service performed by a minister in the exercise of his ministry includes the ministration of sacerdotal functions and the conduct of religious worship, and the control, conduct and maintenance of religious organizations, under the authority of a religious body constituting a church or church denomination. The following rules are applicable in determining whether services performed by a minister are performed in the exercise of his ministry:
(i) Whether service performed by a minister constitutes the conduct of religious worship or the ministration of sacerdotal functions depends on the tenets and practices of the particular religious body constituting his church or church denomination.
(ii) Service performed by a minister in the control, conduct, and maintenance of a religious organization relates to directing, managing, or promoting the activities of such organization. Any religious organization is deemed to be under the authority of a religious body constituting a church or church denomination if it is organized and dedicated to carrying out the tenets and principles of a faith in accordance with either the requirements or sanctions governing the creation of institutions of the faith. The term “religious organization” has the same meaning and application as is given to the term for income tax purposes.
(iii) If a minister is performing service in the conduct of religious worship or the ministration of sacerdotal functions, such service is in the exercise of his ministry whether or not it is performed for a religious organization.
When the regulations say, “under the authority of a religious body constituting a church or a church denomination”, they are essentially saying that you must be working under your ministerial license guidance. The organization that gave you your license or credentials will have certain guidelines that you must follow.
To qualify, a minister must be a “duly ordained, commissioned, or licensed minister of a church” (Treas. Reg 1.1402 (c)‐5).
The Audit Technique Guide for Ministers prepared by the IRS states:
Treasury Regulation 1.1402 (c)‐5(b)(2) provides that service performed by a minister in the exercise of the ministry includes:
a. Ministration of sacerdotal functions;
b. Conduct of religious worship;
c. Control, conduct and maintenance of religious organizations (including 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.
Treas. Reg. §1.107‐1(a) also provides examples of specific services considered duties of a minister, including:
a. Performance of sacerdotal functions;
b. Conduct of religious worship;
c. Administration and maintenance of religious organizations and their integral agencies;
d. Performance of teaching and administrative duties at theological seminaries.
Employer Accounting and Reporting
So, how does an organization account for treating and paying a minister? Ministers that are employees are paid a W‐2 with federal withholding (if they have elected to have income taxes withheld – we would recommend the employer to withhold income taxes), but they are not paid Social Security or Medicare wages. Instead, they are treated as self‐employed for both Social Security and Medicare taxes (unless the minister has opted out of the Social Security and Medicare system). NOTE: Opting out of Social Security and Medicare may have an impact on the Ministers retirement years and should be analyzed thoroughly prior to making an opt out decision.
If the minister does not elect to have the organization withhold federal taxes, the minister should make the necessary estimated tax payments to cover his federal and self-employment taxes. By making these, the minister will avoid potential penalties for not paying enough tax throughout the year. This will also eliminate the need for a large cash payment at the time of filing the minister’s tax return.
A minister’s W‐2 will include Taxable Income (not housing allowance) in Box 1 of the W‐2. Then the minister should also receive a letter from the Employer stating the amount of the housing allowance. Alternatively, a minister may receive a W‐2 for the taxable income, and have in Box 14 of the W‐2 the appropriate amount allocated for their housing allowance. Then Box 1 and Box 14 would be used to calculate the minister’s self-employment income, net of ministerial expenses.
Ministers performing duties on a Contract Basis Some ministers perform duties on a contractual basis and are not Employees of the organization. Instead they are contractors that receive a 1099 at the end of the year. For these ministers, their earnings are reported on Schedule C.
Expenses Not Reimbursed by Employer
If there are expenses related to the Ministerial functions that are not reimbursed by the Employer, the minister may deduct these expenses in arriving at taxable income for Social Security and Medicare (Self Employment) purposes. These expenses are deducted on Schedule A, itemized deductions.
A housing allowance MUST be approved by the Board of the organization before given to the Employee. Therefore, the Board must meet either in December or January before the first payroll to approve the housing allowance. Minutes must be kept and on file proving that the Board approved the housing allowance. In addition, the Board should keep copies of all credentials and make sure those credentials are up‐to‐date and have not expired.
Calculation of Housing Allowance
The housing allowance can include the cost of the home including mortgage or rent payments, utilities, homeowners or renters insurance, maintenance, repairs, furnishings, and other costs of the home.
End of Year Reconciliation
Because a housing allowance must be approved at the beginning of the year, estimates are used. If a minister receives an amount for the housing allowance that is greater than the actual calculated expenses at the end of the year, the excess must be included in taxable income.
Foreign Earned Income Exclusion
A qualified individual living abroad, working in a ministerial capacity, and meeting specific guidelines may elect to exclude the individual’s foreign earned income and the housing cost amount from the individual’s gross income for the taxable year. Foreign earned income is excludable to the extent of the applicable limitation for the taxable year.
Allowing ministers to be paid a housing allowance is a benefit every non‐profit organization should extend to their ministers. It is a way that ministers may be blessed and pay the minimum taxes allowed by the law.
Please contact Annie Fairchild at email@example.com or the number below if you have further questions concerning how to pay a minister.
With Warm Regards,