With the New Year come some compliance housekeeping duties, among which are your church’s adoption of minister’s housing allowance and accountable reimbursement plan resolutions.
Some churches resolve these by placing line items in their budgets, but even so, the church board or members should adopt two formal resolutions approving the separate concepts (not necessarily specific dollar amounts). Churches and pastors often misunderstand and miscalculate housing allowances, so let’s try to straighten out some of the misinformation.
The housing allowance permits ministers to receive compensation “excluded from income” to cover the cost of their place of residence, which could be a parsonage, a home owned or being purchased, or a rental home or apartment. Although the allowance amount is excluded from income, it is not exempt from the 15.3 percent SECA payment (the self-employed version of FICA). The allowance is not limited to a certain percentage of a minister’s total compensation, but it is limitedtothe lesser of actual expenses or the fair rental value of the minister’s home.
Thus, a minister whose total compensation is equal to or less than his cost of home ownership could exclude all of his housing allowance from income, paying only the 15.3 percent SECA contributions for Social Security and Medicare. The rental value of a parsonage provided by the church, while not taxed as income, remains taxable for SECA.
Housing allowance expenses include rent or mortgage payments, property taxes, homeowner’s or renter’s insurance, utilities, maintenance and even an amount for furniture replacement. Personal expenses such as food and clothing cannot be claimed. Some churches choose to add compensation to cover SECA contributions, but this counts as taxable income and is itself subject to the SECA contribution.
The question most often asked is, “How do I determine the fair rental value of my home?” The simplest answer is to speak with a local real estate agent or use a valuation site such as Zillow.com or Trulia.com. While not perfect, their values are reasonably reliable.
There is no “formula” or “percentage” rule — the allowance can be up to 100 percent of reasonable compensation for services provided. The most important thing to know is that housing allowance is always prospective. It may be increased or decreased throughout the year, but cannot be claimed in arrears. A minister cannot wait until the end of the year to decide how much to claim as an allowance. If the full allowance is not claimed by the end of the year, the unclaimed portion is forfeited. If too much was claimed, the excess is simply added to taxable income.
The allowance amount is not reported in Box 1 of Form W-2, but may be reported in Box 14 so the minister knows the correct amount to report on Form SE.
Similarly, none of an employee’s accountable reimbursements for receipted expenses are reportable as income or reported anywhere else on Form W-2.
We’ll explore accountable reimbursement plans in next month’s Compliance Corner.