Manse Allowance

Ministers Are W2 Employees

Ministers hired to serve a church are W2 employees. IRS has not sanctioned church ministers to be hired as outside contractors since the 1990’s when there was a court case with a Methodist minister who was receiving a 1099.  Ministers who have alternative ministries are self-employed and are 1099 reporters. Alternative ministers do not qualify for housing allowance; however, they may claim office in home and Schedule C deductions.

Manse (Housing Allowance)

Ministers  may choose to have their compensation split between salary and housing allowance.  The housing allowance may not exceed the actual expenses for their home.  The Board of Trustees needs to approve the housing allowance amount each year at the January Board meeting and record it in the minutes. 

Taxes

Minister salaries and housing allowance are both subject to Social Security and Medicare tax. This is paid by the minister at the time they file their personal tax returns.  The church does not withhold Social Security and Medicare; however, the minister can elect to have federal and state income tax withheld from their compensation. The income tax  withholding is based on the amount the minister has submitted on IRS Form W-4.  Turbo Tax calculates the Social Security and Medicare owed, as do most other tax software programs and CPA firms.  Housing allowance is not subject to either federal or state income taxes.

Reporting 941

When the church files their quarterly Form 941, the salary is reported along with other employees on line 1.  The housing allowance is not reported on IRS Form 941 or State quarterly returns.  Housing allowance is reported for Workmen’s Compensation.  Churches are not subject to FUTA, federal unemployment tax and our exempt from filing IRS Form 940.  They are not subject to state unemployment tax or state disability tax.

Reporting W3

When the church bookkeeper files Form W-3 with IRS and the State the minister salary is reported like other employees in box 1 on the W2.  The income tax withheld is in box 2.  Lines 3 and 5 only report other employees’ salary the minister salary is excluded. The numbers on all lines of the W2 must equal the amounts reported on the total of the 941 quarterly reports.

Reporting W2

The housing allowance is identified along with the amount paid in Box 14 on the W-2.

Opting Out of FICA

During the first year as a minister, the minister may opt out of paying Social Security and Medicare by filing Form 4361 with IRS.  If they do this, it is suggested that they pay into another retirement program.

IRS Publication 517

Clergy IRS information is found in IRS Publication 517.

Information provided by Rev. Sharon Bush