Clergy Housing Allowance

[prjay20]

I have a $25,000 housing allowance from the hospital where I serve as a chaplain.  My W2 for 2023 was for $28,000.  I should be able to cancel $25,000 of the $28,000.  If I do that, I have a good refund.  If I enter the W2 amount and then enter the housing allowance of $25,000 there is a huge difference in taxes.  So, can I just show my hospital income as $3,000, provide a copy of the W2 and signed housing allowance from the hospital?  That gives me what appears to be the right numbers.  Otherwise the software has a problem.  

[DMarkM1]

What is happening is the income in box 1, 3 and 5 of your W2 is being taxed as an employee (income tax and employee portions of social security and medicare taxes).  Then when you enter your housing allowance in the supplemental clergy interview, it is taxed for self-employment taxes only, but not income tax.  This is all proper.   

A clergy W2 would not include housing allowance in boxes 1, 3 or 5.  The amount would be stated in box 14 on your W2.  In this way your housing allowance is not subject to income tax.  Then when you enter the box 14 amount in the Clergy interview it is subjected to self-employment taxes only.

If your W2 pay is supposed to be $3000 wages and $25,000 housing allowance, you may need a corrected W2 issued by your employer. 

[Opus 17]

It's not entirely clear to me that a chaplain can even have a housing allowance.  The answer is yes if you work for your denomination and are assigned to the hospital by your denomination.  (For example, you are a Catholic priest and your bishop assigns you to work at the hospital.) However, if you are an employee of the hospital, I am not sure you can legally have a housing allowance.  This would require more research, and you may need to discuss with an accountant who specializes in clergy tax issues.  (yes, they are rare, but you might find one by asking local churches who they use.)

In any event, if your W-2 box 1 salary is reported as $28,000, but is supposed to be a $25,000 housing allowance, then your W-2 is wrong.  There is no way to fix this on your tax return that won't trigger an angry letter from the IRS.  You need a corrected W-2 from the employer.  

If the employer refuses to issue a corrected W-2, you can file using form 4852 "substitute W-2."  You would report $3000 in box 1 and all other numbers the same.  ($3000 also in box 16, unless you live in a state without income tax--leave it blank--or you live in a state that taxes your housing allowance--enter $28,000.). Then enter the housing allowance separately--remember this is still subject to self-employment tax.  But you should give the employer a fair chance to correct the W-2, and keep your correspondence, because using form 4852 may trigger a letter from the IRS. Don't send documents or explanations when you file, but keep all your documents in case of getting that letter.

Also remember that boxes 3-6 should be blank, if you have social security and medicare withholding, then your employer is taxing you wrong in that area as well, and you need to make further adjustments on your tax return.