Written by: Melissa Nestor, Tax Manager, Nisivoccia LLP
For many religious organizations, the primary focus is creating a community for members with similar beliefs and to help those in need. While we know the importance of these missions, it is also imperative that organizations hold reviews of accounting procedures and internal control policies. By doing so, your clergy can help prevent future risk of fraud, and continue to run a successful community organization.
The most important form for Members of the Clergy to focus on is the W-2 form.
For members of the clergy who receive compensation for services performed in the exercise of ministry, they are considered employees for income tax purposes, but self-employed for Social Security purposes. Due to this, wages reported on a W-2 form should be documented on line 7 of the 1040, but a Schedule SE must also be prepared.
Another part of being a part of the Clergy is often receiving a Housing Allowance. The Housing Allowance is the most important tax benefit available to Clergy. The amount of the Housing Allowance must be designated in advance. The amount can be amended during the year if the clergy member’s expenses are more than expected. However, the amount cannot be changed retroactively, only on a going forward basis.
Below are key facts to keep in mind when dealing with Housing Allowances:
Some Members of the Clergy are provided with housing owned by the Religious Organization. In this case, the fair rental value of the housing, plus utilities paid, plus any additional Housing Allowance used for housing expenses is taxable for Social Security but exempt from income tax. A Member of the Clergy may contribute to a tax-sheltered annuity (403(B)) plan. These contributions are excluded from Federal taxable income, but distributions from the plan will be taxed.
A Religious Organization may have an accountable plan for reimbursement of business expenses. If business expenses are more than the reimbursement, unreimbursed expenses may be deducted for income tax purposes and for self-employment tax purposes. The full amount may be deducted for self-employment tax purposes, but the amount deducted for income tax purposes is limited to the percentage of total income that was taxable. The amount deductible must be reduced by the amount allocable to any tax-free Housing Allowance. Unreimbursed expenses should be reported on Form 2106.
A retired Member of the Clergy often receives a pension from their affiliated Religious Organization. Pension benefits from that Organization may be designated as Housing Allowance. Amounts received that are used for housing expenses for the clergy member’s principal residence may be excluded from income tax subject to the same limitations as Housing Allowance received. These pension benefits are not subject to Social Security tax.
It is extremely important for a Member of the Clergy to review his or her W-2 form. There should be an amount in Box 1, Wages, that does not include the Housing Allowance. There should be no amount in Box 3, Social Security wages and Box 5, Medicare wages. No Social Security tax or Medicare tax should be withheld from their pay.
At Nisivoccia LLP, we know that keeping up with your financials can be overwhelming. That’s why we are here to help your religious organization. If your organization needs help, please call us at (973) 328-1825 or email Melissa Nestor at firstname.lastname@example.org.