As a Pastor filing as a contractor, is my mileage to be under Personal Deduction & credits tab or Business expenses? I have no 1099. my income is Housing Allowance only

[Movie1]

Because I received no W2, nor 1099 - due to my income only being a small Housing Allowance I was prompted to place my mi under the personal deductions & credits tab, should I leave it there? My fed return is complete. Is it worth it to go back & change it? I have just started on my state return

[ErnieS0]

If you are reporting this amount as a housing allowance as awesome Tax Expert Alumni @DianeW explained in Housing allowance - pastor getting a 1099 MISC, then the amount would be entered as an adjustment to self-employment tax and will reduce your SECA liability.

1. Go to Other Tax Situations tab
2. Select Business Taxes
3. Select Self-Employment tax
4. Click Make Adjustments on Self-Employment Taz
5. Enter your mileage deduction as Ministerial Business Expenses

[Opus 17 · Accepted solution]

This is a complicated situation.

First, not all of your mileage is deductible, as discussed at your other post.

Second, if you are a common-law employee, even if you did not get a W-2 because all your income was housing allowance, you can't deduct any mileage because of the changes in the tax reform law of 2018.  The fact that you have to tell turbotax you are self-employed in order to trigger the housing allowance question when you did not get a W-2 does not actually make you self-employed.  Most pastors are common-law employees and are subject to all the laws and rules for W-2 employees even if they don't get a W-2 because all their compensation is declared as a housing allowance.  Your status as employee or independent contractor is determined by your relationship to the church.  In brief, if you answer to a body of any kind that can set your working conditions or fire you (such as by church vote, or by a board of elders, decons, a staff-parish committee, finance committee, etc.) then you are an employee.

Third, because all your income is housing allowance and you have no taxable income, you can't deduct any work-related expenses even if you were an independent contractor and even if the tax reform law of 2018 did not happen, because of the Deason rule.   The Deason rule is an adjustment to your work-related expenses, whether you are a contractor or employee.  You can only deduct the percentage of your expenses that is related to taxable income.  For example, if you received a $10,000 housing allowance and a $20,000 salary, then 33% of your income is non-taxable housing allowance, and that means that you can only deduct 67% of your work-related expenses.  If your compensation is entirely a non-taxable housing allowance, then 0% of your income is subject to income tax and therefore under the Deason rule, 0% of your expenses are deductible.

Fourth and finally, even if you are an employee and even if your compensation is all housing allowance, you can deduct your mileage from your income subject to self-employment tax, and this is not subject to the Deason rule.  For example, if you received a $10,000 housing allowance and a $20,000 salary, you will have a Schedule SE that calculates and pays self-employment tax on your entire compensation of $30,000.  Suppose you had 100 miles, worth $57.50 for 2020.  You could only deduct 66% of that, or $38.52, from your income subject to income tax, but you can deduct the entire $57.50 from your income subject to self-employment tax.    

However, this requires making a manual adjustment on the schedule SE worksheet that can only be done using the Turbotax Desktop version and not the online version.  In the desktop version, you click the Forms icon to change to Forms mode, then locate the Schedule SE Adjustment Worksheet, and enter your work-related expenses on Part II, line 5c "clergy business deductions."  You will have to determine the value of your expenses yourself (mileage at 57.5 cents per mile, books or other supplies, other unreimbursed expenses.). Remember not all miles are allowable business expenses, review publication 463.    Also note, making any manual entries voids the accuracy guarantee.  And lastly, note that the IRS instructions say that in this case, you should file by mail and attach a written statement listing your work-related expenses and describing your Schedule SE adjustments.  (You don't attach proof, just the statement, but keep proof for at least 3 years.). If you e-file without the written explanation of the adjustment, the IRS may send you a letter asking for more details.

You should read this

https://go.efca.org/resources/document/preparing-tax-returns-clergy

So you need to go back and remove all your expense deductions from the personal deduction section because of the Deason rule and the fact that all your compensation is housing allowance.  Then, you may need to switch to Turbotax installed on your own computer if you want to make the adjustments to schedule SE.  you can buy a CD or download directly from Intuit or from many other reputable retailers.  Once you have installed Turbotax on your own computer, use this procedure to download your data file and transfer it from the web site to the desktop application.

https://ttlc.intuit.com/community/choosing-a-product/help/how-do-i-switch-from-turbotax-online-to-th...

[Opus 17]

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@ErnieS0 wrote:

If you are reporting this amount as a housing allowance as awesome Tax Expert Alumni @DianeW explained in Housing allowance - pastor getting a 1099 MISC, then the amount would be entered as an adjustment to self-employment tax and will reduce your SECA liability.

1. Go to Other Tax Situations tab
2. Select Business Taxes
3. Select Self-Employment tax
4. Click Make Adjustments on Self-Employment Taz
5. Enter your mileage deduction as Ministerial Business Expenses

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@ErnieS0 in this case, the pastor is not allowed to deduct their mileage as a schedule C business expense because of the Deason rule.  They can deduct the mileage from Schedule SE but this requires manual entry.

(Also, if they are a common-law employee but don't receive a W-2 because all their income is designated as a housing allowance, the fact that they have to trick Turbotax to create a schedule SE for the housing allowance by claiming to be self-employed does not actually make them self-employed, and employee work expenses are still disallowed under the TCJA.  But that's a moot point in this case because of the Deason rule.)

Also note this person's prior questions about what kind of mileage is deductible in their contribution history. 

[ErnieS0 · Accepted solution]

Excellent answer @Opus17. The instructions provided by @DianeW will NOT put the clergy housing allowance into self-employment income. It will open a box to enter the housing allowance which will transfer directly to Schedule SE, not Schedule C.

At that point, you can make an adjustment in Other Tax Situations . Business Taxes and Deductions . Self-Employment tax. TurboTax will allow you to make an adjustment for ministerial business expenses.

Selecting Make Adjustments will allow you to enter Ministerial Business Expenses as a deduction against self-employment tax.

[Opus 17]

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@ErnieS0 wrote:

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That's a new step I haven't seen before, I always had to do it manually before, thanks! 😀

To clarify for the customer:

1. You may deduct your work-related expenses from schedule SE even if you are a common-law employee, and you don't have to make an adjustment for the Deason rule, but you have to calculate the expenses yourself, and you should keep records for at least 3 years in case of audit.

2. If you are a common-law employee, you can't deduct work-related expenses from your income subject to income tax.  If you are an independent contractor pastor filing a schedule C, you must reduce your claimed business expenses on Schedule C according to the Deason rule.

[Movie1]

Thanks! I just learned of this! So... Does Turbo Tax Factor it in?

[Movie1]

Thank You! Straight to the point!

Just Reduce the Tax! My Housing allowance from a small church is less than 4,000 and I was writing of mileage to meetings and funerals

[Opus 17 · Accepted solution]

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@Movie1 wrote:

Thanks! I just learned of this! So... Does Turbo Tax Factor it in?

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If you don't have a W-2, you need to enter your housing allowance as if you were self-employed.  You won't have a 1099-MISC or a 1099-NEC either.  You will need to create a self-employed business in Turbotax.  If using Turbotax Online, that means upgrading to the most expensive version (Turbotax Self-Employed).  If your total income is less than $39,000 you can use the Turbotax/IRS free-file version which will include a business without cost.

https://freefile.intuit.com

When you create the business, you will answer some questions like do you actively participate and is it an at-risk business (yes to both).  You will be asked for a job code, use 813000.  This will cause Turbotax to ask about your housing allowance, and you should see the screens that Ernie copied, that ask about your housing allowance and your schedule SE adjustments. 

However, since your entire income is housing allowance, you won't have business income or business expenses, just the schedule SE adjustments for mileage. 

[Movie1]

Thank you very much!

[Movie1]

Thank you for the heads up on the free filing. Thank you for the additional info. Once I learned that the IRS accepts a letter from the church defining the amount given for Housing Allowance, instead of a W2 - added with a possibility for a higher level of scrutiny from the IRS for a W2 with all zero's accept the box (13?) where the housing allowance would be noted, the safest course of action for all concerned - for such a small amount- seemed to be a Housing Allowance letter.  This year 2021 I will use the Home Office write off. I thought it was a hassle before, but my office- where I am right now is where I do the business of the church. The church building is primarily only for services  Thank you for your time and patience. God Bless You.

[Opus 17]

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@Movie1 wrote:

Thank you for the heads up on the free filing. Thank you for the additional info. Once I learned that the IRS accepts a letter from the church defining the amount given for Housing Allowance, instead of a W2 - added with a possibility for a higher level of scrutiny from the IRS for a W2 with all zero's accept the box (13?) where the housing allowance would be noted, the safest course of action for all concerned - for such a small amount- seemed to be a Housing Allowance letter.  This year 2021 I will use the Home Office write off. I thought it was a hassle before, but my office- where I am right now is where I do the business of the church. The church building is primarily only for services  Thank you for your time and patience. God Bless You.

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So let me check a couple more things for you.

The housing allowance can either be reported in box 14 of the W-2, or in a separate memo.  The memo doesn't need to be sent to the IRS unless they ask.  Box 14 is basically a comment box, employers can put anything in that box and it has no official impact on your tax return.  If you had a W-2 with box 14 only, that's basically the same as not having a W-2 at all.  You can't e-file a return with a W-2 with nothing in box 1.  Even if the church issued a blank W-2 with box 14 only, you would still have to enter the housing allowance in turbotax using the self-employment path with code 813000.  

[Movie1]

Thank you for your quick reply. As it stands now, after I put in the Business Code and the Housing allowance the SE Tax, was applied. Then through  series of prompts for any business expense related to the Ministerial work, I placed my mileage to funerals, burials, picking up the church mail etc. It was placed in the personal deduction file. The Standard Federal Deduction was applied. The amount owed did not change after my mileage was given (It only changed after the stimulus credit was applied.)  Is it correct to leave the mileage as? Or do I enter the resulting mileage deduction amount as a Ministerial Business Expense, to reduce the SE Tax on my Housing Allowance, since there is no other income from my church. I ask for mercy if you have given me this answer. I have sleep deprivation, sometimes I must repeat things before my mind receives it. 

[Movie1]

Thank you! As it stands now, I put in the Business Code & the Housing allowance. The SE Tax, was applied. Then through  series of prompts for any business expense related to the Ministerial work, I placed my mileage to funerals, burials, picking up the church mail etc. It was placed in the personal deduction file. The Standard Federal Deduction was applied. The amount owed did not change after my mileage was given (It only changed after the stimulus credit was applied.)  Is my understanding correct that I leave the mileage as is, where it is and take the resulting $931 credit and place it in the Ministerial Business Expense box to reduce the SE Tax on my Housing Allowance? I ask for mercy as I seek clarity. I am a Vet with sleep deprivation, sometimes I must repeat things before my mind receives it. 

[Opus 17 · Accepted solution]

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@Movie1 wrote:

Thank you! As it stands now, I put in the Business Code & the Housing allowance. The SE Tax, was applied. Then through  series of prompts for any business expense related to the Ministerial work, I placed my mileage to funerals, burials, picking up the church mail etc. It was placed in the personal deduction file. The Standard Federal Deduction was applied. The amount owed did not change after my mileage was given (It only changed after the stimulus credit was applied.)  Is my understanding correct that I leave the mileage as is, where it is and take the resulting $931 credit and place it in the Ministerial Business Expense box to reduce the SE Tax on my Housing Allowance? I ask for mercy as I seek clarity. I am a Vet with sleep deprivation, sometimes I must repeat things before my mind receives it. 

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I'm at a bit of a disadvantage because I can't follow along in the program with you.

There are two places where most people will try to deduct mileage.  One is a personal deduction, if they are employees (this would go on form 2106 and be transferred to the schedule A itemized deductions).  The other is as a business deduction on schedule C, if they are self-employed.  You aren't allowed to use either method because of the Deason rule.  However, unless you have substantial other income from other jobs and substantial itemized deductions, you won't actually get a tax benefit for listing the mileage, so listing it improperly will do no harm and you don't need to remove it.  

There is a third place where ministers can deduct work-related expenses, and that is as an adjustment to self-employment tax using the method shown in the screenshots posted by Ernie.  You are allowed to use that method.