If you are using the Desktop version of Turbo Tax, Turbo Tax tends to leave 1099 - Independent Contractor Ministers out in the wind. Its "Step-by-Step" process doesn't account for how to manage this problem well.
First, you need to calculate what portions of your income are not housing allowance. This can be done with the following equation:
- TOTAL INCOME FROM CHURCH - (minus) DESIGNATED HOUSING ALLOWANCE = (equals) REPORTABLE "BUSINESS INCOME" FOR SCHEDULE C.
Reportable "Business Income" for Schedule C is the portion of your pay that is subject to Federal, State, and Self-Employment tax. Designated Housing Allowance is the portion of your income that is subject to just Self-Employment tax.
As a minister, Reportable Business Income for Schedule C may have been supllied to you in one of two ways:
- You may have received a 1099-NEC; or
- You may not been supplied anything at all (but you know you still need to report it as income--as its a crime not to report all your income from all sources)!
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In Turbo Tax Desktop version, after you have created the business profile, you will want to go into the Business Income Section. Once in the Business Income section, if you received a 1099-NEC, pick "1099-NEC Income." Box 1 should be filled in with JUST the Reportable "Business Income" for Schedule C (that you calculated above). Do not put your Total Income (including your housing allowance) in this box! It will result in you being double taxed. If Box 1 on your 1099-NEC does not reflect the Reportable Business Income for Schedule C that you calculated, you should contact whomever generated it; ask them to correct it; and have them issue a new 1099-NEC. Additionally, you should ask the religious insitution to issue a housing allowance letter reflecting the amount of designated housing allowance. See additional notes at the end regarding housing allowance concerns. (Once complete, skip the next paragraph's instructions.)
If you weren't supplied a 1099-NEC or other documentation noting how much you were paid, you should select "General Income" in the "Business Income" Section. On the resulting page, you should note "Minister" (or some similar applicable title) under the Description. For the Amount, enter the Reportable "Business Income" for Schedule C (that you calculated above). Do not put your Total Income (including your housing allowance) in this box! It will result in you being double taxed. If you don't have one already, you should ask the religious insitution to issue a housing allowance letter reflecting the amount of designated housing allowance. See additional notes at the end regarding housing allowance concerns.
Next, a 1099 contractor minister needs to click "View" at the very top of the Desktop application and then select Forms (from the drop down box). In the box to your left (with "Forms in My Return" at the top), you will want to scroll down to find "SE Adj Wks." Click on it, and it will load up the "Schedule SE Adjustments Worksheet."
On the Worksheet, go to line 5b (about halfway down the page). Place your cursor in the box next to line 5b ("clergy housing allowance"). You will want to either: (1) Right-click in the box, then selecting Override or (2) hit Ctrl + D at the same time on your keyboard. You should now be able to enter amounts into the line 5b box. Here, you will want to enter the amount of your Designated Housing Allowance.
This process makes the entire income of a 1099 contractor minsiter reportable. Before leaving, double check that your entire TOTAL INCOME FROM CHURCH (less any deductions that the business is making) is represented on line 8 of the Schedule SE Adjustments Worksheets.
Next, click the "Explain" button below line 5c. An Explanation Sheet will pop up. On this sheet, click into the box with 5c. We will again Override this box (Ctrl + D, or right-click and select "Override") and change the text to "5b". Next, click on the box that says, "Clergy Unreimbursed Business Expenses." We are going to Override this cell too--changing the text to "Clergy Housing Allowance." Then clicking into the cells below the "Explanation of:" line, add the following text:
"TurboTax does not allow automatically ministerial housing allowance to be designated as Schedule C income; instead, its software only allows this information to be reported in conjunction with "W-2, Ministerial employee income." As a contractor of the religious body, the taxpayer is reporting their housing allowance as taxable for Self-Employment taxation purposes. There is no supporting W-2, as Taxpayer is not an employee."
At this point, you can switch back to "Step-by-Step" mode (clicking View then Step-by-Step) and resume using Turbo Tax like normal.
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Four final points:
(1) If you your REPORTABLE "BUSINESS INCOME" FOR SCHEDULE C is $0, you should verify that line 1a of Schedule SE Adjustments Worksheet is $0 (or a negative number, if you are claiming other deductions).
(2) Turbo Tax Desktop version will not like that you overrode the software. When you go to "review" at the end, you need to make sure that Turbo Tax doesn't mess up the prior entries that you made. Also, your projected "audit risk" at the end is also likely to be higher.
(3) The above procedure presumes that the church (used generally and as used in IRC and not necessarily connoting a particular faith) has pre-supplied the minister a housing allowance letter with proper documentation. The minister is not the one to designate a housing allowance--a disinterested portion of the Board should do so. Housing allowance designated after the new year may be set aside by the IRS. If you have questions about housing allowance. I recommend you check out the "Church and Clergy Tax Guide" by Richard Hammer and/or talk with a tax attorney.
(4) This process assumes that you have not filed a Form 4361 for exemption from self-employement tax.
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Lastly, as anyone should say as they try to leave help here: "The above is not tax advice. Please talk with a trained professional if you have any questions or concerns.
