If you take a housing allowance, you may owe a lot more money to IRS than you think.If you take a housing allowance, you may owe a lot more money to IRS than you think. https://theprovisumgroup.com/wp-content/uploads/2020/11/TaxBill-1024x532.jpg 1024 532 The Provisum Group The Provisum Group https://theprovisumgroup.com/wp-content/uploads/2020/11/TaxBill-1024x532.jpg
If you are reading this, there is a good chance that you are a pastor or a leader at a church that is led by a pastor. One thing that most pastors know is that, as a minister, you are authorized to take a tax-free housing allowance. Seems easy right? Unfortunately, the IRS requires that you follow an inflexible process. If you deviate from it, you may be under-reporting your income and owe thousands in taxes, fines, and penalties.
A few years ago, The Provisum Group took on a client running a ministry that was on fire for God. This church was growing weekly with new members and it was becoming more than the staff could handle. His church engaged us to help him manage the books and payroll for his rapidly growing church as the church’s growth had outpaced his volunteer bookkeeper’s ability.
We began onboarding the church and setting up their payroll. We noticed that the pastor was being treated on their payroll as an employee of the church. He was also receiving a housing allowance. Obviously, this is allowed, but the problem was that the church was paying the employer’s portion of his Social Security. If you do not see how this is a problem, you may want to pay close attention to this next part.
Social Security and Clergy Housing Allowance
Clergy can opt-out of Social Security within the first 24 months of ministerial employment. All the minister must do is submit an IRS form 4361. Whether you opt-out of Social Security or not, pastors who take a housing allowance are classified by the IRS as a self-employed individual. This means you must comply with the requirements of the Self-Employed Contributions Act. What does that mean?
If you are a pastor receiving a housing allowance and are planning on receiving Social Security (meaning you did not opt-out in the first 24 months of ministry) when you retire, you MUST pay both the individual AND employer portions of the FICA tax. There is no flexibility in this. If you are receiving a housing allowance and your church is paying the employer’s portion of your FICA tax, the ministry’s payment of the employer portion of FICA is legally income to you and you must report it as such and pay the taxes accordingly.
Unfortunately, for this pastor, he did not report the employer’s portion of his Social Security (paid by the church) as income. This means he had been unknowingly under-reporting his income to the IRS since he became pastor of that church. Our calculations showed he owed Tens of THOUSANDS of dollars in taxes, fines, and penalties for the past seven years. The only thing that he could do was self-report this to the IRS and pray for leniency. Fortunately, he received a friendly and understanding agent who worked with him to waive the fines and penalties. The agent also helped set up a very manageable repayment plan. The pastor still had to pay the full amount in taxes on 7 years of the unreported income.
What do I do?
In 35 years of leading people and organizations, one thing I have learned is there is what you know and what you should know. Clergy compensation regulations are something every pastor or ministry leader who takes a housing allowance should know. This means some of you may need to swallow hard and review your tax filings. You may, unfortunately, be surprised by what you find.
If you need help with reviewing your forms or if you do not even know where to begin, give us a call at The Provisum Group. We can assist you with this process and can even help you with your books going forward. Click the link below to start the conversation.
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