Q: We have a part-time associate pastor who has asked the church to designate his entire salary as a housing allowance. Do we need to issue him a W-2 form at the end of the year reporting no income?
Understanding Housing Allowances for Part-Time Pastors
This is a surprisingly complex question. The issue stems from amendments to section 6051 of the federal tax code and how it applies to churches. Historically, churches were not required to issue W-2 forms to pastors because their wages are exempt from tax withholding. However, in 1974, Congress enacted the Employee Retirement Income Security Act (ERISA), which introduced new reporting requirements that apply to churches and their employees.
IRS Requirements for Housing Allowance Designations
The 1974 amendment to section 6051 of the tax code states: “Every employer engaged in a trade or business who pays remuneration for services performed by an employee, including noncash payments, must file a Form W-2 for each employee.” This language implies that churches must issue W-2 forms to ministers, even if all of their income is designated as a housing allowance and no taxes are withheld.
However, this requirement raises a practical question: What purpose does it serve to issue a blank W-2 form with no wages or withholdings reported? The W-2 form’s primary purpose is to report wages and withholdings to ensure accurate tax reporting. Submitting a blank form may not align with this purpose, but it does not necessarily relieve churches of the obligation to issue one.
IRS Guidance: Revenue Ruling 2000-6
In 2000, the IRS addressed a similar issue involving election workers. Election workers typically receive small fees for their services, and the IRS concluded that section 6051 does not require reporting compensation that is not subject to withholding for income tax or FICA taxes. The ruling stated:
“Section 6051 requires reporting of compensation subject to either FICA tax or income tax withholding. No reporting is required for items of income that are not subject to withholding of FICA tax or income tax.”
This ruling suggests that a church may not be required to issue a W-2 form to a part-time pastor whose entire income is designated as a housing allowance.
Best Practices for Churches
To ensure compliance and avoid confusion, churches should consider the following steps:
- Consult a tax professional or attorney familiar with clergy tax laws to confirm whether a W-2 form is necessary for a pastor with no taxable income.
- If issuing a W-2 form, include the pastor’s name and Social Security number but leave boxes for income and withholdings blank if the entire salary is designated as a housing allowance.
- Maintain clear documentation of the housing allowance designation in board minutes or a formal resolution.
- Contact the IRS for clarification on reporting requirements using their centralized call site at 1-866-455-7438, available Monday through Friday, 8:30 a.m. to 4:30 p.m. Eastern Time.
FAQ: Housing Allowances for Part-Time Pastors
1. Can a pastor’s entire salary be designated as a housing allowance?
Yes, as long as the designated amount does not exceed the pastor’s actual housing expenses or the fair rental value of the home, including utilities and furnishings.
2. Do churches need to issue a W-2 form if a pastor’s entire salary is a housing allowance?
The IRS may not require a W-2 form in this scenario, based on Revenue Ruling 2000-6. However, it’s advisable to consult with a tax professional to confirm.
3. What documentation should the church maintain for housing allowances?
Churches should record housing allowance designations in board meeting minutes or a formal resolution before the allowance is paid.
4. What happens if the pastor’s housing allowance exceeds actual expenses?
Any portion of the housing allowance that exceeds the pastor’s actual housing expenses must be reported as taxable income on their personal tax return.
For more information, visit IRS.gov or consult a tax advisor experienced in clergy tax matters.
