Housing allowance - pastor getting a 1099 MISC

[mteverest]

I am a pastor, but my church does not want to hire me. Instead, we have a contract and I receive a 1099 MISC.  How do we handle "housing allowance?"  What should enter in Box 7 of 1099 MISC?  How should the church report the two separate numbers when they file taxes?

[DianeW · Accepted solution]

When you receive a Form 1099-MISC Box 7 and not a W-2, Enter the 1099-MISC as business income. For the principal business code, use 813000 (religious organization). After you enter that business code you will get a screen about clergy income. Select "I Need to Pay Self-Employment Tax on This Income." The next screen will ask you to enter the amount of your housing allowance. Continue through the business interview and enter your 1099-MISC.

You can go directly to the area to begin to enter your income and expense for your pastoral self employment.

1. Select the Federal taxes tab (Business tab in Self Employed Online or TurboTax Home & Biz Desktop)
2. Select Wages & Income 
3. Scroll to Business Income
4. Start or Update 
5. Use the information above to complete your return. (see image attached).

[Opus 17]

First, read this. http://www.ecfa.org/PDF/2016-Preparing-Tax-Returns-For-Clergy.pdf

Second, if you act under the control of the church or denomination (directly or via a board of elders, etc) then you are a common law employee.  What you are saying is that they don't want to do the paperwork to employ you properly.  Time for a sermon on stewardship.

The church can designate part or all of your pay as a housing allowance.  The housing allowance is subject to self-employment tax but not income tax.  The designation must be in advance and in writing (such as in the board minutes, a resolution, or your contract.)

The housing allowance is not reported to the IRS by the church in any format.  Your wages, if they are paying you as an independent contractor, should be reported in box 7 of a 1099-MISC form, with a copy to you and a copy to the IRS.

You then report self-employment income in turbotax.  Use job code 813000. This will bring up a question about self employment tax (pay on both) and a question for the amount of your housing allowance.  You self-report the housing allowance.

Note that if you have work-related expenses such as mileage or supplies, you have to adjust your deduction by the percentage of income that is non-taxable housing allowance.  If 40% of your income is non-taxable housing allowance, then 40% of your work expenses are not deductible (you would only list the other 60%). This is known as the Deason rule, and to properly comply you would need to print your return, attach a statement showing how you calculated the deductible part of your expenses, and file by mail.

[DianeW]

@Opus 17 Thank you for the additional information.

[SteveCDA]

If you are still out there, I would like a point of clarification. It seems when I fill out my 1099misc with box 7 having my housing allowance amount and fill out the housing allowance after following the steps included I am taxed twice. Do I leave box 7 on the 1099 MISC blank and only report the housing allowance in the field generated when I state that I am a "813000" type of business?

[Opus 17]

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@SteveCDA wrote:

If you are still out there, I would like a point of clarification. It seems when I fill out my 1099misc with box 7 having my housing allowance amount and fill out the housing allowance after following the steps included I am taxed twice. Do I leave box 7 on the 1099 MISC blank and only report the housing allowance in the field generated when I state that I am a "813000" type of business?

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Your housing allowance is not reported on any tax document.  If your housing allowance is reported in box 7, the church needs to issue a corrected 1099-MISC.  The 1099-MISC should only report your taxable wages not including the housing allowance. 

[SteveCDA]

Thank you for your help and your fast reply. God Bless

[paulnue]

I'd like to anticipate this same situation as a clergy under contract for 2020. I've looked at the 1099-MISC for 2020, and there is not no longer a line 7 for nonemployee compensation. Will the church use line 3 for "Other income"? And will it report base salary only? No reporting of Housing Allowance at all?

[Opus 17]

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@paulnue wrote:

I'd like to anticipate this same situation as a clergy under contract for 2020. I've looked at the 1099-MISC for 2020, and there is not no longer a line 7 for nonemployee compensation. Will the church use line 3 for "Other income"? And will it report base salary only? No reporting of Housing Allowance at all?

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For 2020, the IRS has created a new form called 1099-NEC, specifically for non-employee compensation (compensation for work performed when the worker is not an employee).   Non-employee compensation will be in box 1 of form 1099-NEC.  1099-MISC will only be used for other kinds of taxable payments (royalties, prizes, etc.)

My previous comments still hold: most pastors are not 1099 contractors.  If your position is under the control of the church or denomination (directly or via a board of elders; they hired you, set your hours, and can fire you or "revoke your call") then you are a common law employee and must be given a W-2, even though you are considered self-employed for some income tax purposes.  You might legitimately be a contract pastor if you are a vacation fill-in or something like that, but probably not if you are the regular pastor.

A housing allowance must be approved in advance and in writing by the church (or their designated board of elders, etc.)  Therefore, it is not clear to me that it is even legal to be a "self-employed" 1099 pastor and receive a housing allowance--how can you be self-employed but still have a board that can legally vote a housing allowance--but I haven't seen any Tax Court cases denying it.  Once the housing allowance is approved in advance and in writing, it is not reported on any tax forms, it should not be included in your 1099-NEC box 1 compensation.  The church should report it separately in a letter or memo from the finance committee or treasurer.  You are required to voluntarily report the housing allowance on your tax return.  The housing allowance is subject to self-employment tax but not income tax.

As stated above, if you are paid on a 1099-NEC, you will need the self-employed version of Turbotax.  Start the business section and use code 813000. This will trigger a question about your housing allowance.  Most of the time you will check the box for "pay SE tax on both compensation and housing" and you enter the amount of your housing allowance and the amount of your qualified expenses. (Your qualified expenses can't be more than the housing allowance.  If the expenses are less than the housing allowance, the difference is added to your taxable income as well.)

You will want to review the tax resources at ECFA.org, your denomination may be a member allowing you free or discount access.  

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

https://www.ecfa.church/Content/2020-Zondervan

[fct Jenn]

I have a client who is ordained, performing ministerial duties as a pastor for a parachurch organization. He will receive a 1099NEC and they plan to designate a housing allowance. I have not run into this before with all the pastor taxes we do here. I wasn't even sure it was legal. I see the answer you gave about churches issuing 1099's but in this case it is a parachurch organization so I guess their board will vote on the housing allowance amount.

[Opus 17]

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@fct Jenn wrote:

I have a client who is ordained, performing ministerial duties as a pastor for a parachurch organization. He will receive a 1099NEC and they plan to designate a housing allowance. I have not run into this before with all the pastor taxes we do here. I wasn't even sure it was legal. I see the answer you gave about churches issuing 1099's but in this case it is a parachurch organization so I guess their board will vote on the housing allowance amount.

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I want to emphasize I am not an attorney.  I just have a decent amount of experience as a church treasurer and amateur tax person.  

As I noted, it seems to me that anyone who is subject to a board that has authority to vote on an housing allowance, must therefore be a common law employee.  However, your client would not be the first to have a housing allowance and be paid on a 1099 instead of a W-2.  The organization may be avoiding unemployment tax and worker's comp premiums, depending on the state, or they may just be ignorant.   The real question would be whether the pastor is harmed in any way by being treated as an independent contractor. The answer is much less clear cut than the case of other workers who might be denied state-required benefits and the employer half of the employment taxes.  It would be up to the minister to complain to their state board of labor if they thought it was a problem.  

[MW1013]

I need help. My husband and I were both hired at a church (he was worship pastor, and I was Children's Pastor). We each received a 1099-NEC. The total in box 1 also included our housing allowing (pre-determined and in writing already). Can I enter a lower amount for box 1 when I enter my 1099 information and then enter the appropriate amount in the housing allowance box? I am so confused. We have already received W2s at our prior church and this makes no sense. 

[ToddL99]

Enter the 1099-NECs exactly as you received them - the IRS got a copy of the form that you received and will be expecting you to report the same figures on your return.

The amount reported in Box 1 of the 1099-NEC will be subject to income tax and self-employment tax.   See How do i enter my Minister's Housing Allowance that is associated with a 1099 Misc

Since the housing allowance is exempt from income tax (not employment tax), you'll have to make an adjusting entry to remove the housing amount from your taxable income.

To enter the adjustment:   

• Go to Less Common Income, Miscellaneous Income and Other reportable income. Enter "Lawsuit settlement" in the Search Box and Select "Jump to lawsuit settlement" "to get to this screen ("Lawsuit settlement" is just an effective search term to get to this interview screen) 

• Continue to the screen "Other Taxable Income". Enter the description as "Housing Allowance Reported Elsewhere" and the amount as a negative number. Entering "-$ XXXX" here will offset the housing allowance amount included on the Form 1099-NEC. 

• A corresponding negative amount will be entered on line 8 of Schedule 1.

[Nwasher1]

My ordained clergy husband was employed by 2 501c Ministries in 2020 and both gave us a housing allowance for clergy employment. One sent us a W-2 with Salary in box 1 and housing in box 14. The other ministry sent us a W-2 with box 1 blank and housing allowance in box 14. The problem is we can't efile now cause the box 1 is blank on that w-2. Was that ministry required to file a w-2 since no salary? Could we ask them to somehow amend so we don't have a w-2 and report the housing ourselves? My husband also has a form 4361 for clergy exemption on clergy employment for SE taxes. We only use the lesser of Fair Market Value or what we actually spent on housing expense. But we always estimate high then what we don't use goes back into our income. Just don't know how to efile now so any advice would be helpful! Thank you!

[Cynthiad66]

You can remove that second W-2 and just report the housing allowance.  First delete the W-2 then follow these instructions.

If you're not already on the W-2 entry screen, open your return. (To do this, sign in to TurboTax and open or continue your return) Then search for W-2 and select the Jump to link in the search results. Follow the instructions to import or manually enter your W-2.

1. When you get to Box 14, enter Clergy Housing in the Description box, followed by the amount. (The amount might be reported to you in a letter from the church or in your employment contract if not on your W2.) We’ll automatically classify the allowance as Other - not on the list above. Select Continue.
2. If you get additional screens, answer those questions.
3. When you reach the Let's check for uncommon situations screen, check the box for Religious employment, then select Continue.
4. On the following screen, choose You earned this income for clergy employment and select Continue.
5. Enter your allowance on the Tell Us About your Clergy Housing screen. For Qualifying Expenses, enter the lesser of:
   • Your qualified housing expenses
   • The fair rental value of your housing expenses
   • Your housing or parsonage allowance
6. Select Continue, and on the Clergy Self-Employment Tax screen, choose the appropriate option and Continue again.

When you see the Your W-2 info so far screen, select Edit to view your W-2 information. If the Box 1 amount hasn't been adjusted for your housing allowance, enter a Line 21 adjustment to income. Here's how:

1. Search for other reportable income and select the Jump to link in the search results.
2. Answer No to Did you receive any other wages? and Continue.
3. Scroll to the bottom of the Miscellaneous Income screen and choose Start next to Other reportable income.
4. Answer Yes, and on the Other Taxable Income screen, type Clergy Housing Allowance in the description and enter it as a negative number (precede it with a minus sign, for example -10,000).