Housing Allowance is a substantial tax benefit provided by Section 107 of the Internal Revenue Code to qualifying ministers. Ministers can exclude the fair market rental value of their home from gross income for income tax purposes. This includes furnishings, utilities, and other items needed to maintain the home.
This privilege has been challenged a great deal over the past few years. The Freedom From Religion Foundation (FFRF), a secular non-profit organization has led a charge to abolish housing allowance for ministers over the past few years, winning some key decisions in lower courts. Yet, the 7th US. Circuit Court overturned the decision of the lower court.
Ultimately the FFRF chose not to appeal to the Supreme Court, citing the current makeup of the court no being favorable. They plan to monitor the makeup of the court and challenge it further in the future when the makeup of the court is more favorable. Other groups are also seeking to challenge this tax benefit to ministers. The Humanist Society of Greater Phoenix is the latest group to voice an intent to challenge it.
As 2019 quickly comes to a close, it is time to ensure your pastor doesn’t lose this privilege for 2020. All too often, as we conduct our Financial Policies and Procedures Audits, we find that church leadership has failed to complete their part in ensuring ministers qualify for housing allowance. The Internal Revenue Code requires that the governing body designate the housing allowance to be excluded from federal income taxes.
The designation of Housing Allowance must be done officially and recorded in the minutes of your governing body. It must be done prior to the first payment of the housing allowance. Without this action of the governing body of your church, your ministers cannot legally take advantage of this tax benefit. See this Sample Housing Allowance Resolution.
How much housing allowance should be approved? This should be determined by the minister. The governing body does not have an obligation to prove the amount is accurate or allowable. The governing body is simply establishing an upper limit that can be claimed by the minister. The minister can only claim the lower of what the governing body establishes and their actual qualifying housing expenses. It is the ministers responsibility to demonstrate this to the Internal Revenue Service. If their qualifying expenses allow, the minister can claim 100% of their salary as housing allowance.
Housing Allowance is taxable for Social Security and Medicare taxes. While Housing Allowance is excluded from taxable income for income tax purposes, it is used in the calculation of social security and medicare taxes. Most of us think of this tax as FICA (from the Federal Insurance Contributions Act). However, it is important to note that ministers do not pay FICA. Withholding and paying FICA for your ministers is not in compliance with the law and can negatively impact your minister: It can cause errors in the social security administration records, impacting future benefits. It can also jeopardize the claim to Housing Allowance.
Ministers are subject to SECA (from the Self Employed Contributions Act). While ministers should usually be classified as employees, they are treated as self-employed for Social Security purposes. This often causes confusion in churches. This does not mean the pastor is self-employed or should receive a 1099. In fact, issuing them a 1099 could jeopardize fringe benefits and cause violation of employment laws. Ministers should usually be classified as employees. Yet, IRS rules require them to pay SECA instead of FICA. The church cannot pay this on their behalf.
What About Social Security Offsets? Many churches choose to pay a social security offset to the ministers. This is intended to help pay what would be the employer portion of the amount of Social Security and Medicare taxes if the church could pay them as they do so for other employees. This offset is additional compensation and must be reported as compensation. It is a great benefit to those pastors who receive it, but for tax purposes, it is simply an increase in their pay.
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If you would like to have Church Training Center provide your church a Financial Policies & Procedures Audit to ensure you are securing your congregation’s resources, contact us to schedule today. (626) 657-0146 or Keith@ChurchTrainingCenter.com