Housing allowance - pastor getting a 1099 MISC

[Opus 17]

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@ConradM wrote:

We have both W-2 employees and 1099 contractors, and for our W-2 employees, their gross pay is reported to both Pennsylvania and Maryland, but for the federal pay, the housing allowance is deducted.  So I would assume the same differences would be reported for 1099 workers, if they had a Housing Allowance.  We have a 1099 contractor who would like to have a Housing Allowance, but I didn't know if it was possible.

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Pennsylvania rules look like a mess.  Occupancy of a parsonage is tax-free, and if the church pays the pastor's mortgage directly it's tax-free, but if the church pays a housing allowance, it seems to be subject to state income tax (but not local income taxes).

https://www.revenue.pa.gov/FormsandPublications/PAPersonalIncomeTaxGuide/Pages/Gross-Compensation.as...

I haven't checked Maryland rules.

Remember that a 1099 is a federal reporting document.  If you have someone who qualifies as an independent contractor (not a common law employee) and who is in a pastoral or ministerial position (meets the 4 factor test for being a minister and performing minister duties) then you only report their taxable compensation on the 1099-NEC because that follows federal reporting requirements.  It would be up to the minister to declare the housing allowance as additional taxable compensation on their state income taxes (just as it it up to the minister to declare their housing allowance for self-employment tax on their federal return).

Whether any particular person qualifies for the special tax rules for ministers, including the housing allowance, depends both on their qualifications and their actual duties, as discussed on pages 7-10 here.

https://go.efca.org/sites/default/files/resources/docs/2020/01/c_inetpub_wwwroot_ecfa_pdf_ministers_...

[ConradM]

That link to ECFA article is really helpful, thanks.

[DW2005]

@ToddL99 , you are a lifesaver.

I got a 1099 from a church network. I repeatedly told them I shouldn't get any documentation, as my income was entirely housing allowance, but they insisted that I was going to get a 1099. I've spent hours trying to figure out how to actually enter it while still getting the right tax situation due to it being housing allowance. You provided the right answer it appears. Thanks!

[bchris79]

@Opus 17 

I'm the senior pastor and only person receiving monetary compensation. I don't received much. The amount I got approved for housing allowance is 100% what I get every year. I don't get a w-2. May I declare 100% housing allowance on a schedule C in Turbo Tax? and May I declare "business expenses" on that same Sch C? or where do I report my unreimbursed expenses? 

[DianeW777]

No.  As indicated by @opus_17 the tax free portion of your compensation (the housing allowance) must be used to prorate the allowable expenses.  In your case you have no other income that is taxable for personal income tax and therefore those expenses cannot be used to offset the amount of housing allowance for self-employment tax or the self-employment contributions act (SECA). The example presented is posted here for your convenience.

• 'Generally speaking, a pastor who is paid via 1099-NEC and files a schedule C can deduct work-related expenses according to the same rules as other self-employed persons.  However, if part of the pastor's compensation is a non-taxable housing allowance, the business expense deduction must be reduced by the non-taxable part of their compensation.  For example, if a pastor receives a cash salary of $25,000, but $10,000 is designated as a housing allowance and only $15,000 is reported on the 1099-NEC, then the pastor can only deduct 60% of their work expenses, because only 60% of their income is subject to income tax.  TurboTax does not do this calculation, you must do it yourself.  Technically, you are required to file by mail and attach a worksheet that documents your calculations.  If you e-file, make sure you save your calculations in case of audit.'

A suggestion is to have your expenses reimbursed by submitting documentation for the expense which would create an accountable plan for the church. This means that you can be reimbursed and there is no income to report as long as the rules are followed. More information can be found about accountable plans in IRS Publication 517 (currently in draft for 2021, but changes will be minimal).

[Opus 17]

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@bchris79 wrote:

@Opus 17 

I'm the senior pastor and only person receiving monetary compensation. I don't received much. The amount I got approved for housing allowance is 100% what I get every year. I don't get a w-2. May I declare 100% housing allowance on a schedule C in Turbo Tax? and May I declare "business expenses" on that same Sch C? or where do I report my unreimbursed expenses? 

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You can't deduct business expenses on schedule C if your only compensation is a housing allowance.  You can't deduct business expenses because of the Deason rule--if your income is not subject to income tax, you can't reduce your income with work-related expenses.

However, you can use your unreimbursed expenses to reduce your income subject to self-employment tax on schedule SE.   This is separate from work-related expenses on schedule C. 

You still need to use Turbotax self-employed if you are filing online.  Start by creating a business, and using occupation code 813000.  This is the clergy code and will trigger a question about your housing allowance, which will be put on schedule SE but not schedule C.  You won't actually have any income or expenses on schedule C, although the program will probably create one with all zeros.  

You can reduce your housing allowance by your unreimbursed expenses.  If you are using TT online, there may be a new question to allow this in the interview (there didn't used to be).  Or you can use the desktop program and make a direct entry on line 5c of the Schedule SE Adjustment Worksheet.  And I really think you can just reduce the amount of housing allowance you enter the first time, since the IRS only gets the final number.

However, the IRS says that if you reduce your SE income by your expenses, you must file by mail and attach a statement showing your expenses and the calculation.  Since mail filing is such a mess lately, you will probably be better off e-filing, but you will need to keep all your documentation for at least 3 years (6 is better) in case the IRS asks for the details of your housing allowance and your expenses.  

[bchris79]

@Opus 17 
I didn't received a w-2 (never have) but I've received clergy income as of 2021.
Since is too late to even request a w-2. May I declare that income on Sch C (line 1) and then go "additional income" Sch 1 (line 8-z other income) and enter a negative number and enter description as housing allowance. Thank you!

[Opus 17]

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@bchris79 wrote:

@Opus 17 
I didn't received a w-2 (never have) but I've received clergy income as of 2021.
Since is too late to even request a w-2. May I declare that income on Sch C (line 1) and then go "additional income" Sch 1 (line 8-z other income) and enter a negative number and enter description as housing allowance. Thank you!

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No, I already gave you the steps.  Your housing allowance is not income on schedule C, it is only income on schedule SE.  

Using Turbotax Online, go to the "Business" tab and create a business.  When the program asks for a job code, enter 813000.  This will trigger questions about your housing allowance.  Then, the program will ask you about 1099-NEC forms, other business income, and business expenses.  Don't enter any business income or expenses.

Separately, if you answer to the church in your employment (they set your hours, approve vacations, and so on) then you are a common law employee, and you should get a W-2, even though you are considered self-employed for limited tax purposes. Even though you are not subject to tax withholding, as a common law employee, you may be subject to state and federal laws relating to employees, such as wage-and-hour laws, working conditions, and so on.   You and your church have a stewardship responsibility to do this correctly.  

Register for this web site and download the minister's tax guide for more information.

https://www.ecfa.org/FileAccess.aspx?file=2020MinTaxes&source=NPO

[kedwards1076]

There have been recent changes to the definition of who can be classified as a 1099 employee.  

Depending on where you pastor for your church, this could impact how your church should handle your particular situation.  I recommend reviewing your state's rules, on properly classifying an individual as an employee or independent contractor.  Churches and nonprofits, have been greatly impacted by the new ABC test established by California.  The following are the 3 classifications that must be met:

1. Operates without the control or guidance of the hiring organization.
2. Performs services unrelated to the hiring company’s core business. 
3. Works independently in an established trade, occupation, or business that exists separately from the hiring business.

Item 1 & Item 2 are the big deal breaker for most churches and nonprofits.  As a result these organization located in California will need to reclassify these individuals and also obtain workers' compensation insurance for their church or nonprofit.  They will also need to pay payroll taxes and typically hire a payroll company to process checks.  

[Msrain28]

I would also like the answer to that question 

[Opus 17]

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@Msrain28 wrote:

I would also like the answer to that question 

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Nothing has changed regarding federal tax law.  I am not an expert on California state tax law.  With respect to federal tax law, the information on whether a person is a contractor or employee can be found here.

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-o...

With respect to pastors, under federal law a pastor is not a contractor if the pastor is under the supervision of the church (via a board of elders, deacons, administrative council, staff-parish committee, and so on.)  If the church can determine how many vacation days the pastor gets, sets the number of services per week and the hours (1 service at 10am, two services at 9am and 10:30, and so on) or directs the activities of the pastor in other ways, then the pastor is a common-law employee and should get a W-2, even though they are considered self-employed for limited tax purposes related to withholding and social security tax.

The relationship between the church and other staff (cleaners, secretary, choir leader, Sunday school teachers, etc) really hasn't changed.  California's AB5 doesn't really apply, as the old rules were more than enough.  In most cases, church staff will be employees unless they have a great deal of independence in how they do their work.