Tax Housing vs. Tax Free Housing

Within the world of church finances, housing allowances are understood by many to be a benefit for employment. With that understanding, there is a lot of confusion on whether housing provided as a part of compensation qualifies as a tax-free benefit. Many churches believe that their clergy’s housing or housing allowance is a tax-free benefit. But what is the truth?

The truth is that housing is a benefit that can be provided to employees of a church. Whether it is a tax-free benefit, or a taxable benefit depends on who is receiving the benefit and why the benefit is being received. Let us take a look:

Clergy Housing

The benefit of housing provided for a clergy employee is not a tax-free benefit. Clergy housing is a distinction written into the Internal Revenue Code that allows for a portion of clergy compensation to be classified for either for the rental value of his/her home or as an allowance based on rental value of the home paid to him/her as part of their compensation.  Clergy housing (cash or in-kind) is not included in the minister’s gross income for income tax purposes but is taxable for self-employment tax. This allocation of compensation from salary to housing is a tax-advantaged way of planning a minister’s income. There are two types of clergy housing compensation: cash housing and in-kind (parsonage) housing.

Cash housing: Cash compensation received either with or in the place of salary provided to the clergy employee. Cash housing enables clergy to pay for housing related expenses out of pocket such as rent/mortgage, utilities, furnishings, etc.

In-Kind (Parsonage) Housing: When housing (owned by the employer) is included as a benefit of “employment” but no cash exchanges hands (does not increase the amount of cash received by the clergy) this is considered in-kind housing. Just like Cash Housing, In-Kind housing is still considered taxable compensation for SECA (Self Employment Contributions Act) purposes.

For more information on clergy housing, check out this blog post: https://www.wisdomoverwealth.com/blog-posts/2021/housing-allowance

Non-Clergy Housing

If a housing benefit is provided to an employee and they are not clergy, they would not fall under the clergy housing compensation listed above. For those non-clergy employees, there are three specific circumstances in which the IRS (Internal Revenue Service) allows employers to provide housing tax-free:

1.       Housing is located on the business premises. This housing would be at the main business location and is not applicable for business-owned property outside the main business location.

2.       Housing is offered for the employer’s convenience. An employer must have a substantial business reason for providing housing to the employee such as 24/7 access for the employee to business premises, etc.

3.       Employees must accept housing as a condition of employment. The employer would have to require the employee to accept housing to properly perform their work duties.

If housing provided does not meet one of the specific circumstances listed above, it is taxable income and should be included on the employee’s W2 within boxes 1, 3 and 5 with adequate taxes withheld for income tax and FICA.

If the housing does meet the specific circumstances listed above, it is considered a tax-free benefit.

If you are offering housing to your employees and wonder if you are handling it correctly within payroll, contact Wisdom here and let us take a look.

Do You Qualify for the Ministers’ Exemption from Self-Employment Tax ?

Untangling the web of how ministers are taxed can be daunting, especially for new ministers or those entering a new church or housing allowance agreement.

To understand the exemption, you need to know that clergy are dual status taxpayers. That means that they are considered employees of the church regarding income tax, but they are considered self-employed regarding Social Security, Medicare, FICA, and SECA.

What is the Exemption?

As a minister, you are taxed on self-employment for both your salary and housing allowance amounts. This exemption would remove self-employment tax for your ministry income from your personal return each year.

The IRS’ Form 4361  is the “Application for Exemption for Self-Employment Tax for Use by Ministers…”  If you qualify, apply, and are approved by the IRS for this exemption, you would be granted an exemption from paying Self-Employment tax on your ministry income.

What are the Requirements?

The most basic requirement is proving to the IRS that you are clergy. You must be an ordained, commissioned or licensed as a minister of a church. You will need to provide the date of that ordination/commission/license as well as the address. You will need to prove that the church is exempt from federal income tax.

What Should I Consider Before Applying?

This exemption does come with a cost. If you are not paying into social security, you do not get those benefits back from that income when you draw from social security. This is a decision that each individual minister needs to make for themselves and their family.

In addition, you will need to certify the below statement directly from the Form 4361.

How Do I Apply for the Exemption?

On the second tax year that includes a $400+ housing allowance, the Form 4361 will need to be attached to the return. The IRS will then review the application, contact you to certify your decision, you will return the certification, then the IRS will determine if you will be approved. They will send you your complete Form 4361 marked “Approved.” Keep this in your permanent records for you tax advisor.

Once you are approved, you may be entitled for a refund of self-employment tax paid in earlier years, per the Form 4361 Instructions. 

Where Do I Go from Here?

A trusted tax advisor who specializes in clergy taxation is so important to help you navigate the rules of applying as well as making sure you are not taxed inappropriately. Wisdom has an excellent tax team who specializes in helping Clergy with their unique tax situation. Contact Us or Email Allison to have Wisdom’s expert tax team take care of your tax needs.

Honoring a Legacy: Celebrating the Life of Bill OConnell

Isaiah 40:31: "But those who hope in the Lord will renew their strength. They will soar on wings like eagles they will run and not grow weary they will walk and not be faint." 

Pictured above is Bill OConnell with his hearing dog, June.

It is with rejoicing and sadness that we announce the passing of Wisdom Over Wealth’s founder, Bill OConnell.  Bill was one who founded his hope in the Lord and throughout the trials and successes of life, experienced the Lord renewing his strength.  Although the employees and clients of Wisdom will experience the loss of Bill, we rejoice in his final healing. 

Much can be said about the impact Bill had on Wisdom as a business, in fact we wrote about that here for his retirement, but today we wanted to honor who Bill was.  And, as Bill was multi-faceted, it is only right that we share the thoughts from a few members of the Wisdom team on who Bill was and his impact on their life. 

“Bill was a renaissance man.  He knew a lot about a lot!  It was always fun chatting with him as he was such a great storyteller!  Bill has been more than a business colleague or a business partner - he has been more of a friend and father.  I am so grateful to have known him and look forward to seeing him again in Glory! “

Allison Michaud, Partner 

“Bill’s humor was one for the books. In any situation, no matter how stressed we were, I could count on Bill’s quick wit to bring out laughs. He was full of joy, integrity, and wisdom and brought that out in everyone he knew. I am so thankful for the years I got to learn, grow, and laugh with Bill. I am the person I am today because of Bill’s guidance and his trust in Jesus.  
‘See you again in eternity’. “ 

Krystal Steenbeke, Manager 

“Bill was the best boss and world class mentor I have ever had. In recent conversations he would, what I would call, eulogize himself. I loved and hated that. I hated it because in my selfishness I did not want to hear it. I loved it because it reminded me that Bill lived life abundantly and full. He knew earth was temporal and heaven is eternal. His sights were always set on Jesus in every aspect of his life.  Thank you for empowering, encouraging and championing me.  Well done, Bill. “ 

Meghan Hopkins, Manager 

“If I had to sum up Bill’s impact on my life, it would be to call out, equip and empower me to walk in all God has created and call me to.  My interview started with Bill telling me the things he had heard I was good at and that didn’t stop throughout our relationship.  Every step of the way, Bill’s intention in relationship was to allow the Kaitlin God had created me to be, to shine.  And I will forever be thankful for that.  And, thankful that Bill no longer has the need to remind himself:  illegitimi non carborundum.” 

Kaitlin Spalsbury, Partner  

“I had the joy of working with Bill for the past 16 years.  I have missed the daily talks, updates and true camaraderie we had while I worked with him in his home office. We have been through much growth, new staff and systems, and a lot of changes. He will always be remembered as one of the ‘White Hat Guys’ and a man of his word. Be at peace now, Bill. You will be greatly missed.” 

Marlene Simeone, Office Manager 

“Bill was a kind man with a heart for God in a way that it continues to show in this company he created.  We were all blessed and continue to be blessed by the legacy he founded.  I’m honored to continue being a part of that legacy. “

Kim Roina, Staff Accountant 

“Bill was a generous and kind man who was always around to chat whenever I needed. He always had words of wisdom and encouragement. He offered for me to join his work family 3 years ago and never did I imagine the work environment and work family I was joining. It was a true blessing to get this opportunity offered to me by Bill. He built a one-of-a-kind business that I will be forever grateful to be a part of. He will be missed, and I am continuing to pray for his family.” 

Laura Quiles, Staff Accountant 

To read more about Bill’s life, you can see his obituary here.  If you have stories you want to share about Bill, we would love to hear.  Please email partners@wisdomoverwealth.com with your stories! 

Updates on the Employee Retention Tax Credit (ERTC)

On August 8th, 2024 the IRS announced additional actions to continue processing Employee Retention Tax Credits (ERTC) while working to prevent improper payments to those not qualified.  This comes after the IRS issued a moratorium on additional processing of claims submitted after September 14, 2023.  Since the moratorium started the IRS digitized information to study a large group of ERTC claims, evaluated next steps and worked on rooting out fraud within the claims. 

A few other important parts of the IRS announcement: 

1. The IRS plans to pay out 50,000 low-risk ERC claims beginning in September 2024 for claims received prior to the moratorium.   

2. The IRS will also begin processing and paying out another large block of additional low-risk claims received prior to the moratorium. 

3. The IRS will begin processing claims filed between September 14, 2023, and January 31, 2024. 

Following this announcement the IRS also reopened the Voluntary Disclosure Program to help businesses who previously and incorrectly claimed and received the ERTC.  Through November 22, 2024, businesses who received an improper ERTC can file and pay back only 85% of the credit received without any penalty or interest. 

If you sent in a claim for the ERTC but have yet to hear from the IRS, here is what you should do: 

1. Watch for any notices or letters from the IRS.  If you receive a disallowance notice, you can appeal to the Office of Appeals.  Feel free to contact us for more information or to discuss your position. 

2. Verify your forms were received: 

   1. If you sent your 941x forms to the IRS using certified mail, check that the forms were delivered. 

   2. If you didn’t send your forms using certified mail, call the IRS’s business helpline to verify receipt. 

3. Once you have verified your forms were received, call the IRS for a status update: 

   1. Using the IRS’s business helpline, request a status update. 

   2. Have a copy of the forms available to provide proof of your Church Name, Address, EIN and form information. 

This step can be important as Wisdom has had a few clients who reached out to the IRS and received the answer that their claim was accepted, and funds had previously been sent but the check was returned, or the funds were never received.  Those churches were then able to work with the IRS to actually receive the funds. 

If you are unsure whether your claim was accurate, review the Voluntary Disclosure Program (here) and then reach out to talk with a member of our team. 

Want to discuss the ERTC more, contact Wisdom here and let's see how we can partner with you!

Is Your Church Payroll Done Correctly?

Consider the following scenarios:

• Pastors at Suburban USA Church are compensated with both a salary and a housing allowance.  Each payroll they have FICA calculated and withheld.  The employee and employer portions of FICA are sent to the IRS along with form 941 each quarter.

• Smalltown USA Church is a rather small church.  They are unable to put anyone on payroll right now, but they have a small house on the church grounds.  They allow the Pastor to live in the house rent free to “compensate” for the ministry done.

• InnerCity USA Church is just getting set up.  They are paying their Pastor but the whole amount of compensation is being claimed as a cash housing allowance.  The church is still calculating taxes for the cash housing allowance and the cash housing allowance is shown in boxes 1, 3 and 5 of the Pastor’s W2.

Do any of these scenario’s sound like your church?  If so, then your church payroll is done incorrectly.  Most church payrolls, including those whose payrolls are run with major payroll companies, are done incorrectly due to the complexity of clergy compensation. 

A few quick rules that most payroll companies are unaware of:

1.       Clergy are considered dual-status employees.  This means that for income tax purposes they are employees of the church but for Social Security and Medicare they are Self-Employed.  This means that although clergy should be paid as an employee and via a payroll system, they should not have FICA calculated and the church should not pay in FICA for them.  Instead, clergy must pay Self-Employment Tax (SECA) on their tax returns.

2.       Contrary to popular belief, Housing Allowances (Cash and Parsonage) are not tax free. Housing Allowances are excludable from gross income for income tax purposes but are still taxable for SECA unless an exemption has been made on your tax return within your first two years in ministry (see this blog post on Form 4361 we recently posted).  Housing allowance should either show up in Box 14 on a Clergy W2 or the Clergy should receive a letter listing the amount/value of their housing allowance.

If that all seems overly complex, Wisdom Over Wealth can help!  Wisdom is a quality conscious payroll service provider that advocates and partners with our church clients. With Wisdom Payroll, you have the benefit of working with a church payroll team member who has the experience and passion to do your payroll correctly. 

Interested in learning more?  Wisdom now provides a complementary review of your church’s payroll.  Simply send a pdf copy of your most recent payroll register, cash requirement journal and quarterly reports to payroll@wisdomoverwealth.com. Once we receive those reports our team will look over your reports and schedule a call to let you know what we find.

Is there a limit to Benevolence?

Imagine for a moment, your church had a pastor on staff for many years and the pastor passes away and leave behind him a widow.  The church desires to be benevolent in their care for her.  Is there a limit to Benevolence?  If this situation hits home, know that many have sat asking the same question.  One church asked the questions this way:

If we give regular payments to our late Pastor's wife, can we consider it benevolence? Is there a limit to the benevolence I can send without having to do a 1099?  I have read that benevolence does not have to be reported via 1099. 

Here’s how our founder, Bill OConnell CPA, answers that question:

I have spent some time researching your benevolence question.  The guiding principles include a couple of tax concepts.

1. First, the tax rules around gifts/benevolence that you mention.  The focus here is the individual’s current relationship to the organization and/or the circumstances that bring about the [continuing] payments.  But there is another…

2. The tax-exempt status of the church also comes into play. 

Benevolence and gifts indeed contemplate a one-time (or limited number of) asset transfer(s) to an individual.  Without this limitation, churches would be gifting money to their clergy and not paying taxable salaries, so they never paid any taxes.  In short, your payments to the former pastor’s widow do not qualify as tax-free gifts or benevolence.  More on the consequences of that treatment is below.

Further, making payments to the widow as housing has been litigated by the IRS and the churches involved lost the case defending that treatment.

The IRS will view these payments through the lens of your church as a tax-exempt charitable organization.  Seen this way, your donors are granted tax deductions for their contributions because of the charitable purpose of the charity/church.  The charity/church is given tax exempt status of that income because it prosecutes the publicly published purpose that is on file with the IRS. 

Redirection of tax-exempt donations for the personal benefit of an individual (other than employees and contractors working in the charitable purpose of the organization), are deemed to be a violation of the “covenant” with the government.  In short, tax-exempt funds are never to be used for the personal inurement or benefit of any individual.  In Richard Hammar’s view, this practice can jeopardize the tax-exempt status of the church/charity.

So, despite the honorable intent of the payments, the church leaders put the tax-exempt status of the church at risk by making the payments in the way you are contemplating.

Wisdom’s recommendation is as follows:

• Disclose the payments to your donors, so they understand that they are supporting an individual not in the employ of the church.

• Make the payments as taxable income by either using a 1099 NEC – or as taxable wages through the payroll.  It will not put her at risk in later years should her returns be audited, and she is assessed unpaid taxes.

If you find yourself asking questions like this, check out our Wisdom Advising service or reach out via our contact us page!

Quarter 3, 2024 Payroll Changes

With July quickly upon us, it is time to see what changes Quarter 3 has in store for payroll.  In addition to the changes to the Fair Labor Standards Act which we shared about in our last blog post, Q3 2024 includes some state specific changes.  Churches in Nevada, Oregon & Vermont should keep reading to see the changes affecting you!

Two States have Minimum Wages Increases:

-          Nevada minimum wage is increasing to $12.00 per hour

-          Oregon minimum wages is increasing:

o   Portland metro – to $15.95 per hour

o   Urban Counties – to $14.70 per hour

o   Rural Counties – to $13.70 per hour

Vermont: Childcare Contribution Tax

Act 76 of 2023 is an act for the state of Vermont related to childcare and early childhood education.  The act implements a new contribution tax of 0.44% on all covered wages.  The specifics are as follows:

• Covered Wages are all wages subject to Vermont Income Tax Withholding.

• Includes all wages paid on or after July 1, 2024

• Employer Payroll Tax of 0.44% but employer can decide to deduct up to one quarter of the contribution from employees (0.11%).

• Employers can decide to withhold different contributions from different employees, no more than 0.11% for all employees.

More information can be found from The Vermont Child Care Contribution Guide.

Have additional questions about something payroll related?  Let us know by filling out our contact form found here.   We would love to talk with you and see how Wisdom Over Wealth can partner with you!

Fair Labor Standards Act: Upcoming July 1 2024 Updates

You have made it halfway through 2024, congrats!

Now is a good time to consider payroll changes that could impact on your church come the start of Quarter three.  There are changes going into effect on both federal and state levels that may effect you!

Fair Labor Standards Act

Many are aware of the Fair Labor Standards Act (FLSA) but are not aware of how it started.  In 1938 the FLSA was passed to safeguard traveling salespeople. The effort was to ensure that those who were traveling across state lines for commerce were not underpaid. Any individual who was engaged in commerce (or in the production of goods for commerce), who was crossing state lines for engaged work and who did not fall under either the White-Collar Exemption or the Highly Compensated Employee exemption was expected to be paid time and a half for any hours over 40 they worked.

The FLSA has continued throughout the years with increases to the minimum salary basis for the two exemptions listed above. Now it is no different with an increase to the minimum salary threshold going into effect for July 1, 2024, again on January 1, 2025, and then every 3 years after (July 1, 2027).  These minimum salary threshold limits are adjusting as follows:

White-Collar Exemption

1.      July 1, 2024 - $844 per week ($43,888 annually)

2.      January 1st, 2025 - $1,128 per week ($58,656 annually)

3.      Auto update each 3 years, (July 1, 2027, to be published 150 days (about 5 months) prior)

Highly Compensated Individual Exemption

1.      July 1, 2024 - $132,964 per year annual compensation ($844 per week minimum)

2.      January 1, 2025 - $151,164 per year annual compensation ($1,128 per week minimum)

3.      Auto update each 3 years, (July 1, 2027, to be published 150 days (about 5 months) prior)

So how does this all apply to churches?

Clergy (licensed, commissioned, or ordained) in the service of a church are not subject to FLSA, so the above changes do not impact their compensation. However, the changes do apply to church employees.  Although there is much debate on if the work of church employees should be considered “engaged in commerce or in the production of goods for commerce” there have been many cases where individual employees employed by churches have been deemed as eligible under FLSA. 

It would benefit every church to explore if their non-clergy employees are engaged in commerce and should be paid overtime.  Our Wisdom Payroll team is available for Wisdom advising sessions to talk you through the particulars.

For many churches that we talk to, the question of how to deal with the implications of FLSA apply.  One answer is to implement a Fixed Salary for Flexible Hours (FSFH).  If these individuals though are hired for set hours they can be set up with a fixed salary for those flexible hours. This allows the individuals the freedom to be paid a set amount per week while also receiving any overtime they are owed.

The process is simple. For those who are not clergy, and the church wants to pay a salary, follow these simple instructions.

1. Identify the average number of hours within a pay period that they would work.

2. Calculate their salary based on those hours and the pay rate.

3. Keep a record of their hours per pay period:

a. Verify that, for the hours worked, minimum wage laws are never violated. If the pay rate ever drops below minimum wage the employee should be paid the difference between their pay and the minimum wage pay for their hours with their pay.

b. Verify if they are owed overtime for the hours worked. If overtime is due, the employee should receive the overtime pay in their next paycheck.

Wisdom Payroll is a great way to implement a FSFH arrangement.  Interested in learning more about FLSA, the July 1st updates or Wisdom Payroll?  Contact us here!