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Housing allowance - pastor getting a 1099 MISC

Forum|Forum|7 years ago
June 5, 2019
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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?

TurboTax Deluxe Windows

Best answer by DianeW777

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.

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

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DianeW777Answer

Level 15

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.

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

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

P

paulnue

Level 2

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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Opus 17

Level 15

@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?

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

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Opus 17

Level 15

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.

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DianeW777

Level 15

@Opus 17 Thank you for the additional information.

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K

kedwards1076

Level 2

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:

Operates without the control or guidance of the hiring organization.
Performs services unrelated to the hiring company’s core business.
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.

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Msrain28

Level 2

I would also like the answer to that question

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Opus 17

Level 15

@Msrain28 wrote:

I would also like the answer to that question

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-or-employee

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.