Congress has special tax rules for ministers and clergy. Internal Revenue code section 107 provides “gross income does not include, in the case of a minister of the gospel, the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home ...”
That means a proper housing allowance is not subject to income taxes.
The requirements include:
A.) The home or rental allowance must be provided as remuneration for services that are ordinarily the duties of a minister of the gospel
B.) Before the payment of this allowance, the employing church must designate the allowance in official action. That might be evidenced in an employment contract or any other appropriate instrument (minutes of a church meeting, etc.)
C.) The designation must clearly identify the portion of the minister’s salary that is the allowance.
Unless the minister has filed a timely form to be exempt from self-employment tax under code section 1402(e) or a valid vow of poverty was done, the housing allowance is subject to self-employment tax.
A recent tax case found Donald L. Rogers did not provide evidence of an official action in which a housing allowance was designated by his church.
So, he had to pay income tax on the $43,200 he received and also had to pay the self-employment tax. The court rejected his defense that he had taken a vow of poverty.
The normal result is the minister receives a W-2 that shows the regular wages with additional information about the housing allowance (that is not included in the regular wages). Some ministers are self-employed, so they may receive a 1099-MISC form that shows the information.
I think the main item to watch is the official church determination of the amount of the housing allowance is to be done before any payments are made. That is not very convenient because many churches will adopt a budget and compensation amounts after the current year has already begun.
Another lesson from the Rogers case is to save the documents, evidence of the agreement as well as the records of the expenditures relating to the home.
This is another illustration of tax law complications that should be changed. Most ministers are now compensated much better than what was done 40 years ago.
Did you hear? “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” — Winston Churchill.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Co. CPAs.
