Our senior clergy is bi-vocational. The congregation is only able to provide $15,000 of cash compensation which goes toward clergy-owned housing (the total of the clergy-owned housing exceeds $15,000). We have been providing a housing allowance designation of $15,000, which covers our entire cash payment to the clergy. Since we do not withhold any income taxes from the payments, we do not issue a Form W-2. A new board member has challenged our practice. Are we handling these issues appropriately?
Yes. In this situation, the congregation may appropriately designate 100 percent of the cash compensation as a housing allowance, and there is no requirement to prepare and file a Form W-2. However, it may be poor tax planning to prioritize the housing allowance because the entire $15,000 is subject to self-employment Social Security tax (the only exception is if the clergy has a basis—and few clergy have a basis—for opting out of Social Security and has done so). If the clergy has business expenses, such as auto mileage, it would be better to reimburse all of the business expenses under an accountable expense reimbursement plan and let the residual of the cash compensation be excluded by the clergy as a housing allowance.
Dan Busby is a certified public accountant, president of the Evangelical Council for Financial Accountability (ECFA), and the author of the Zondervan Clergy Tax & Financial Guide.