Ministers and taxes

A pastor called asking a question about his 1099.  I let him finish his question and then asked if the church had given him a 1099.  They had, and I had the unfortunate responsibility to explain to him that it is my understanding of the law that he must be given a W-2 to submit to the IRS.  This is a conversation I have just about every year about this time.  I am not a tax attorney nor am I an accountant, but it is my understanding that the IRS requires that ministers be given a W-2 and not a 1099.  Some churches still have not got that message.

Our conversation worsened when he began asking about his housing allowance.  I asked if his housing allowance was written down anywhere.  He responded that it was just a verbal agreement that so much of his salary would be considered housing allowance.  Sadly, I had to explain to him that a housing allowance must be designated in advance and recorded either in the clerk's report or by being a line item in the budget.  Since neither had been done I told this pastor that in all likelihood he would not receive a housing allowance for 2013 and would have to pay income tax on his entire salary.

These are laws that have been on the books for decades, but many churches and pastors still are not aware of how they work.  It is critical that both churches and clergy learn these laws because the last thing anyone wants is the IRS investigating possible misconduct in how the pastors were paid and how those earnings were reported.

Many years ago the church I pastored became aware of the requirement that their pastor be given a W-2.  Our treasurer was a kind farmer who had kept the financial records of the church for several years, but when we began to discuss the importance of following the IRS regulations, he resigned because he did not feel he could learn those regulations.  Fortunately, a very efficient individual accepted the position and went to a local CPA to ask about how to fill out a W-2 and what laws we needed to be especially careful about.  She never had any problem after that first year of getting me a very complete W-2.  If your financial person is squeamish about issuing a W-2 and other reporting requirements I would highly recommend he or she talk with an accountant who is knowledgeable about church and clergy taxes.

One other area I find a lot of smaller churches make mistakes in their pastoral compensation is in their reimbursement policy.  Too many churches still want to have an agreement with the pastor that a certain amount of his or her salary is considered as reimbursement for such things as mileage.  Any reimbursement policy that does not actually reimburse the minister for out-of-pocket expenses will result in that money being considered income by the IRS.  For instance, a church cannot state that the pastor's salary includes $500.00 for gasoline each month to reimburse the pastor for travel on behalf of the church.  No!  No!  No!  The pastor must actually turn in a mileage report and be reimbursed for the miles driven or that $500.00 is considered to be taxable income by the IRS.

I will repeat what I said earlier.  I am not an attorney nor an accountant, but these are the rules as I understand them.  Please check with one if you have any doubts or questions about what I'm posting in this article.   If anyone knows where I am wrong, please let us all know because it is important that churches understand and follow the tax laws.  It just prevents so many problems down the road.