Minister's W2 not reflecting correct MHA amount on line 1 and Social Security and Medicare tax withholdings shown on lines 4 and 6

[Mintipine]

Hello all, I am a minister who is receiving Minister's Housing Allowance and I have moved to a different ministry in the last quarter of 2020 so I have two separate W2's from two different ministries.  

On the W2 reflecting January - August, MHA amount shown on line 14 is properly deducted on line 1, and line 2 has withholding amounts shown and lines 4 and 6 for social security and Medicare taxes are blank.

However, the second W2 from the new ministry reflecting September - December shows two "MHA" amounts on line 14, where only the lesser of the two MHA's got applied onto the line 1 of W2.  Also, this second W2 has line 4 "Social Security tax withheld" and line 6 "Medicare tax withheld" filled out.  My understanding was that if I receive Minister's Housing Allowance I am supposed to follow SECA in filing for Social Security and Medicare taxes so lines 4 and 6 are supposed to be blank?

So my questions are these:

1. Can I put down different number on TurboTax than what is written on line 1 of my W2 to reflect correct amount of MHA subtraction?  Or having a different number than what is written on W2 raises a red flag on IRS's end? Should I ask my ministry to correct the W2?

2. Should I not mind about the fact that lines 4 and 6 are filled on my W2 and go ahead with the Self Employment filing for the Social Security and Medicare taxes? Or should I contact my ministry to ask them to fix the W2 before going any further?

Hope this makes sense.  Thank you all for reading and I would appreciate your valuable feedbacks!

[Opus 17 · Accepted solution]

Box 14 is basically a memo field, information does not carry over to your tax return, you have to enter the housing allowance separately even if it is in box 14.

Turbotax appears to handle your situation correctly.  For ministry #1, you will enter the W-2 and check the box marked "religious wages" on the page of uncommon situations.  Answer that you were clergy, enter your housing allowance and qualifying expenses (up to but not more than the housing allowance), and check the box for "pay SE tax on wages plus housing allowance."

For ministry 2, ignore box 14.  The question is, what is your actual housing allowance as designated in advance and in writing by your ministry. If your box 1 taxable wages are wrong, you need a corrected W-2, and should not file until you get it straightened out.  If your box 1 taxable wages are correct, then enter the W-2, check the box for religious wages, and enter your correct housing allowance in the next box.  On the next page, check the box for "Pay SE tax on housing allowance only."

Your second ministry is paying you incorrectly, as a minister (regardless of whether you have a housing allowance or not), you are exempt from social security and medicare tax and pay self-employment tax instead.  The ministry should have time to get this fixed for 2021--they should refund you any SS and medicare taxes withheld so far in 2021 and they should correct their form 941 filings with the IRS.  It's probably too much to expect them to correct the situation for 2020, and the choice in Turbotax for "pay SE tax on housing allowance only" was put in place for this kind of situation; even though it is technically incorrect, you already paid SS and medicare tax on the wages, so you only owe SE tax on the housing allowance, and this choice in Turbotax allows the program to handle that kind of situation.

If the wages you report on your tax return don't match your W-2, you WILL get an audit letter and a tax assessment.  Your W-2 from ministry #2 should show that your box 1 taxable wages are whatever you agreed in your contract negotiations--presumably you agreed on a total compensation package which included a housing allowance, so box 1 should reflect the compensation minus the housing allowance.  If the W-2 is wrong, the ministry needs to correct it.  Correcting the box 1 wages in the W-2 is fairly simple.  Correcting the social security and medicare withholding is much more complicated and requires amended at least 4 quarterly reports to the IRS plus refunding you the money, and as I said, Turbotax includes the "pay SE tax on housing alone" as a way to work around the ministry's mistake.  But they should try and fix it for 2021 before they get in any deeper than the already are.  

Make sure you and the ministry are aware that the housing allowance must be designated in advance and in writing by the appropriate authority (finance committee, board of deacons, or whatever).  "In writing" can mean in a contract or a memo or the minutes of a meeting, but it must be in writing and the tax-free housing allowance can't be retroactive.

Also be aware that you are only entitled to a housing allowance if you are performing the duties of clergy.  An ordained clergy person who is not performing religious duties is not eligible for the housing allowance and must be paid and taxed like any other secular or lay employee.  For example, a pastor hired to manage the office or teach Sunday school and who plays no role in planning worship services or administering sacraments is not clergy for tax purposes, at least not in that position.  If you are not actually in a religious role at ministry #2, they must withhold SS and medicare tax like a regular employee and they can't offer a tax-free housing allowance.

Generally read this, and see page 8 for the definition of clergy who are eligible for this tax treatment.

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

[Mintipine]

Thank you so much for your reply!  It cleared up a lot of questions 🙂

As far as MHA amount goes for ministry #2, I was told that I am being recognized as minister of this ministry and MHA amount was communicated to the finance director via email and I was told that it would get brought up to the Board of Directors for the approval. And I started seeing it on my paystubs so I assumed that it got approved.  I hope it is considered to be designated in advance and in writing.  I am going to contact the finance department again to confirm about this and reflect correct MHA amounts on my W2 before filing.

And thank you for the suggestion on "pay SE tax on housing allowance only." to remedy withheld situation of lines 4 and 6 on W2. That makes perfect sense.  But I do have one follow up question: based on my calculations, it seems that what they have withheld on lines 4 and 6 are 7.65% which indicates to me that they followed FICA standard.  But my question is, can someone be receiving MHA as a minister and follow FICA standard as well? What happens if my organization made a mistake and reported my W2 under FICA standard when in turn it was supposed to follow SECA? 

I am going to double check whether my organization reported me as a clergy or a non-clergy employee and whether they are covering other 7.65% of FICA, but if you could share some of your insight on religious wages and SECA/FICA, I would appreciate it!  Thank you so much! 

[Opus 17]

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@Mintipine wrote:

Thank you so much for your reply!  It cleared up a lot of questions 🙂

As far as MHA amount goes for ministry #2, I was told that I am being recognized as minister of this ministry and MHA amount was communicated to the finance director via email and I was told that it would get brought up to the Board of Directors for the approval. And I started seeing it on my paystubs so I assumed that it got approved.  I hope it is considered to be designated in advance and in writing.  I am going to contact the finance department again to confirm about this and reflect correct MHA amounts on my W2 before filing.

And thank you for the suggestion on "pay SE tax on housing allowance only." to remedy withheld situation of lines 4 and 6 on W2. That makes perfect sense.  But I do have one follow up question: based on my calculations, it seems that what they have withheld on lines 4 and 6 are 7.65% which indicates to me that they followed FICA standard.  But my question is, can someone be receiving MHA as a minister and follow FICA standard as well? What happens if my organization made a mistake and reported my W2 under FICA standard when in turn it was supposed to follow SECA? 

I am going to double check whether my organization reported me as a clergy or a non-clergy employee and whether they are covering other 7.65% of FICA, but if you could share some of your insight on religious wages and SECA/FICA, I would appreciate it!  Thank you so much! 

---

If the ministry withheld social security and medicare tax, they could only do that by withholding the 7.65% employee's share and matching it with the 7.65% employer's share on their quarterly form 941 filings and tax remittances to the IRS.  Their forms wouldn't balance otherwise.  Technically, they are in non-compliance with IRS regulations regarding clergy, but I doubt there would be any serious repercussions if the ministry was audited, because the right amount of tax got paid in the end.

"Designated in advance and in writing" would seem in your case to mean approval from the board of directors.  Assuming they did approve and it's in their minutes, then your compensation paid after that date would be a valid housing allowance.  If your W-2 reflects that you were paid as a lay person (your box 1, box 3 and box 5 all show your full wages and you have taxes in box 2, 4, and 6) then you should definitely clarify if your housing allowance was approved (and payroll didn't make the adjustment) or if something unexpected happened with your employment situation. 

[Mintipine]

Thank you once again for your answer!

I contacted my Finance Department and they told me that they made a mistake on W2 and did not to fully reflect MHA amount.  They told me that corrected W2 will be sent out within 4-6 weeks.

In this case, should I just go ahead and file the tax with current W2 and file for the amendment later when I receive the corrected W2?  Or should I ask for extension and file with the corrected W2 later?  But I hear that even if I ask for extensions I have to pay the tax that is due or I will be facing penalties and fees?

Thank you again for your insight! 

[Opus 17]

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@Mintipine wrote:

Thank you once again for your answer!

I contacted my Finance Department and they told me that they made a mistake on W2 and did not to fully reflect MHA amount.  They told me that corrected W2 will be sent out within 4-6 weeks.

In this case, should I just go ahead and file the tax with current W2 and file for the amendment later when I receive the corrected W2?  Or should I ask for extension and file with the corrected W2 later?  But I hear that even if I ask for extensions I have to pay the tax that is due or I will be facing penalties and fees?

Thank you again for your insight! 

---

There is both a late filing penalty and a late payment penalty.  Because of the very long delays in IRS processing amended returns, I would file the extension now, and file a single correct return when you have the correct information.  However, you should pay as much (or more) as you expect to owe, no later than May 17, to avoid the late payment penalty.  If you overpay, you will get the difference back as a refund when you file.