PROBLEM: You currently pay pastor's housing through the Ledger & Payables system, not through the Payroll System. You'd like to add the Housing Allowances to the pastor's payroll checks and not include that amount on the W-2?
SOLUTION: Clergy income and housing can be confusing, particularly if you've heard different things from different organizations. Let's go to the source and read what the IRS has to say about it...
4.10 Interest/Dividends/Other Types of Income: Ministers' Compensation & Housing AllowanceA minister receives a salary plus a housing allowance. Is the housing allowance income? Where do the minister report it?
A minister's housing allowance, sometimes called a parsonage allowance or a rental allowance, is excludable from gross income for income tax purposes, but not for self-employment tax purposes.
If you are a minister and receive as part of your salary (as a minister) an amount officially designated as a rental allowance, you can exclude from gross income the amount that is used to provide or rent a home. However, the exclusion is limited to the lesser of the fair market rental value (including furnishing, utilities, garage, etc.) of the amount officially designated (in advance of payment) as a rental or housing allowance, or the actual amount used to provide a home, and cannot exceed what is reasonable pay for your services. The payments must be used in the year received.
If housing is furnished to you by your congregation as pay for your services as a minister, the exclusion cannot be more than what is reasonable pay for your services, and is limited to the fair market rental value (including furnishings, utilities, garage, etc.) of the home.
If you own your home and you receive a housing allowance as part of your pay, for your services as a minister, the exclusion cannot be more than the smaller of the following:
- the amount actually used to provide a home,
- the amount officially designated (in advance of payment) as a rental or housing allowance, or
- the fair market rental value of the home, including furnishings, utilities, garage, etc.
An amount which represents reasonable pay for your services as a minister.
For additional information on housing allowance, refer to Publication 517, Social Security and Other Information for the Members of the Clergy and Religious Workers. For information on earnings for clergy and reporting of self-employment tax, refer to Tax Topic 417, Earnings for clergy.
Go to the next available row under Pay Description and click the up arrow at Pay Description.
Scroll down the list and choose Housing, and verify that the Item Pay Type is set to Allowance and click Select.
You'll need to choose the appropriate Gross Pay Account for this Housing Allowance. In this example, we've chosen the Pastor's Salaries account. You may want to use the same expense account you had previously used to track the Pastor's Housing Allowance.
Pop in the Pay Period Amount for the housing allowance and confirm that the Annual Amount is correct. If the system didn't fill it in for you already, enter the shortcut number of the gross pay account for the Pastor's Salary or Housing Expense account.
Now, when he gets paid, he'll get his salary and housing allowance together!
And, when he receives his W-2, the Housing Allowance will be in the Box 14 reported as Other. It will be excluded from his gross income when paying income tax, but he will need to report it when submitting his self employment tax info.