Minister SE Tax

I have a new client who is a minister and he received a W2 from the church with no SS/Med withheld and an amount being shown in box 14 clergy housing. The total Wages were $31k and housing shown in box 14 was $24k. My initial assumptions are:
1. SE taxes are due on the $31k of wages plus the $24k for housing, which would not have been included in box 1 because it's not subject to income tax.
2. To file for an exemption and to avoid having to pay the SE taxes, what I've read in Pub 517 seems to suggest that he would have needed to file for an exemption by the second year in which the net SE earnings was at least $400, and that would have been many years ago for this client. The other automatic exemption would be if there is a vow of poverty, but I don't believe that applies here. So, seems like he would owe SE taxes.
I received several years of prior tax returns from the old preparer, and no SE taxes were ever calculated/paid, but I confirmed with them that no 4361 was ever filed.
So, this obviously makes a big difference on getting a nice refund or likely owing. Anything I'm missing or things I should be aware of to help this client? What about the prior years, if indeed there was SE taxes due? I don't deal with many clergy-related returns, so any guidance would be appreciated.

Very few pastors actually qualify to apply for the SE exemption. If they read the instructions and the jurat they are signing carefully, they may realize this.

I have seen some who have applied anyway, and the application was approved, but they have been surprised to find out they now don't qualify for SS disability insurance. Why would you say you were opposed to receiving public insurance based on religious principles or conscientiously opposed to receiving it based on your minister's wages, then balk when you indeed now don't qualify to get SS disability based on your minister's wages?

But that is not what you asked. Most pastors who have applied and are approved for the exemption have the exemption letter. It is actually the 4361 marked approved. The 4361 would have been filed in triplicate, and the pastor receives back one copy marked "Approved." Ask this pastor again, then again, if he filed the 4361 when he first became a pastor. Most remember this as it is a conscientious decision to do this. Or perhaps he elected back in in 2000/2001 when it literally took an act of Congress to allow those who had mistakenly applied for exemption to opt back into the SS program. Otherwise, the choice is irrevocable.

Have the minister contact SSA to see if they have a 4361 on file for him. If so, have them send a copy. IRS should also have a copy. You want to be sure he checks this thoroughly and is comfortable with the findings because if there is one filed somewhere and he starts paying into the SS system, they can later deny him benefits based on his minister's wages. I would want it in writing that neither SSA nor IRS has a record of him ever submitting the 4361, or that he elected to revoke the exemption under one of the few years Congress allowed it. (There are also some very odd situations where the 4361 can revoked, but there s/be a record somewhere if this is the case.)

Just so you understand, the $24,000 housing allowance is NOT automatically "not taxed". You have to prepare a schedule of allowed housing expenses. Then the actual housing deduction is the smaller of (1) FMV of rent, (2) the actual allowed housing expenses, or (3) the housing allowance.

Your minister client may also have some other Sch C income (ex: fees for baptism, wedding, funerals, etc.) and expenses that may come into play on the return. You should read up on preparation of clergy returns.

You need to find out if they're in the system or out. Get prior returns. It's a confusing area and if you don't know what you're doing, DON'T! Pastor's returns are some of the trickiest because of special rules.

Contrary to YD's assertion, most pastors DO qualify as long as they truly believe that the church should be the safety net and not the gov't. Most folks would agree....the fact that the church often fails to do be what it should is another message....

The W2 is correct.
Wages and housing are separate issues. You need to know if they covered the housing. And you need to know if they're exempt or not. And if they made estimated payments.
And if they are exempt, insist strongly that they fund retirement plans to the max with the SS/SE savings they would have paid anyway.

Thanks for the suggestions. Leaning towards telling this client about the complications and recommending he find a tax preparer that is more familiar with this area. Especially given that it doesn't appear from what I've seen that these issues have been handled correctly on past returns.

They often aren't, which can confuse the heck out of you. I've done maybe hundreds and a couple years back grabbed up a pastor who was new to me, and saw that in previous years, I kid you not, his tax guy just picked a number out of the sky to assess the SE tax on! Not the wages, not the housing, not the combination....in between. Pastor had no clue where it came from but was rather unhappy to learn that he owed SE on ALL of it in his case...and doubted me until he checked. For a while, I doubted myself!

Good news is that clergy are rarely audited because IRS usually owes them money back...

Following up on Joan TB, the housing amount on the W-2 may or may not be correct as some churches use a percentage of the total income as the housing. The FMV of housing could actually be more or less than the allowance. If the FMV of the housing is more than the allowance, then there may be an adjustment/additional income to be picked up by the Pastor. Just imagine if the church provides a mansion but uses a $24K allowance, that wouldn't be right and that would be constructive income to the Pastor.
Make sure the board puts the allowance in writing too even if "wrong".

I think FullContactPrep is considering the situation where the housing is provided to the pastor, not that a portion of the wages paid to the pastor is considered a housing allowance. Totally different situation and handled differently on the return.

I do a lot of pastor's returns due to my affiliation with a local church. Seems every pastor there the last 40 years is a client. JR1 is correct, this is a tricky area of the code. Luckily for me, the local church is part of a state wide organization and they complete the housing allowance form and send to the pastor along with w-2. Makes it easy as the CPAs they have on staff are very knowledgeable in this area.

And contrary to FCP's assertion, I've NEVER seen or heard of a church allocating based on percentages. The requirement is that the pastor turn into the board the housing amount each year. Now, I've seen W2's messed up, 1099's issued in lieu, and all manner of other things....

Housing allowance has to be set at the BEGINNING of the year, before it is paid, in order to be properly designated as a housing allowance. In this case, the pastor reports housing expenses to the IRS to show the qualification for exempt from income tax. The board has nothing to approve after the fact.

Of course, when the housing is PROVIDED to the pastor (ie: the manse) then that is different. And yes, I have seen several where the housing allowance is deemed to be a percentage of the pay. As long as it is defined BEFORE PAYMENT (either flat amount or percentage of pay), I have not seen where that wouldn't be OK.

Joan TB: Yes my post was regarding housing provided by the Church. I don't prepare that many pastors so don't know what the "norm" is here or anywhere. The Pastors that receive an allowance do have housing on their W-2's. For the one Pastor that has housing provided, they have not had that information on the W-2 but do use a flat percentage on their "salary sheet". Since this is going to be the first full year for the Pastor here, I'm concerned that the percentage method is much lower than the FMV of the housing based on comparable rentals in the area. I'd appreciate your input on how you handle or would handle this type of situation.

Explain that that is NOT the method for determining housing. They turn in a dollar amount prior to the start of the year, based on what they reasonably expect to spend on housing, limited by FMV.

fullcontactprep: Just to get it straight about the situation you are questioning.
#1) The minister has housing provided (lives in the church's manse), so the FMV of that housing needs to be included as income
#2) a portion of the salary is designated as a housing allowance

I think JR1 is speaking to situation #2, but I thought you were asking about situation #1.

If he's given a parsonage....I'm not sure the rules would be any different. He may well be entitled to some housing for furnishings and the like....but again, it's a flat amount provided prior to the year. And if he doesn't cover, it's income.

Joan TB: Yes I'm asking about my one minister that is living in a church owned property. I guess I'm getting myself more confused with the allowance as the way this client's church handled the W-2. Based on the pay sheet, the salary is to be $50K with a caption that 20% housing which comes to $10K.

First issue I'm confused about is the W-2 taxable amount should be $40K? Then the $10K housing added for SE purposes?

Second issue is the FMV of a similar house in the area is $30K; so, is the $20K over the $10K designated by the Church picked up as additional taxable income plus subject to the SE tax?

Correct, the W2 Box 1 should show 40k, with 10k housing noted in box 14. And if they don't cover the 10k of add'l housing, your software will add that shortage to the Wages income line as excess housing.

I wouldn't worry about surrounding FMV since they're given the parsonage. It just doesn't enter into it. You only worry about FMV when the housing is PAID and gets to be beyond reasonable for the area....