Disallowed Housing Allowance

by Anonymous
(KENT, WA)

Our church had an audit completed last year due to the embezzlement of funds.

During the audit, it was discovered that the Pastor had directed the former financial secretary to claim a housing allowance for half of his salary without proper approval.

The audit noted that the appropriate resolution was not provided nor any information substantiating the Pastor's housing expenses.

The audit also discovered several 1099s that were not paid to persons that received over $600 from the church.

The church filed corrected W-2s disallowing the housing allowance and the 1099s based on the recommendation of the auditors.

The pastor has now come back and asked the church to assist with payment of the additional taxes. He currently remains the pastor.

Is the church liable for the additional tax? Can the church legally pay his taxes? If the church does pay, wouldn't it be considered income and he'd have to pay additional taxes on the funds provided by the church?

Would we also be liable to pay the taxes for persons that received the 1099s?

Please help!

Comments for Disallowed Housing Allowance

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help me undertand housing allowance
by: Anonymous

does there have to be a salary for the pastor to claim a housing allowance. i was told I could claim an allowance. I rent an apt , so does this mean if I paid my rent I can or can not claim housing.
Up to 100% of Compensation Designated as Housing Allowance
by: Vickey

You are correct in that a housing allowance must be designated in advance by the church's governing body. A minister CANNOT designate and approve his own housing allowance.

A resolution could designate up to 100% of the minister's compensation be used as a housing allowance. (For example you could set the minister's compensation at $50,000, including salary and love offerings, of which up to 100% could be used as housing allowance.)

Then at the end of the year the minister would need to complete and sign a housing allowance statement with all 3 amounts the IRS asks for (see the housing allowance page for those 3 scenarios) and his/her W-2 could be filled out accordingly.
Disallowed Housing Allowance
by: Anonymous in NC

The Housing Allowance doesn't have to be in writing, but it is best if it is. In our church (a Methodist church, our Trustee Committee recommends to the Administrative Board, so the Admin. Brd. must do the final approval of all actions, including the Housing Allowance.

Our written documentation of our housing allowance is in our Clergy Compensation Report which is signed by an Admin. Board Member.

The approved allowance must be done in the year before the year it is applied, or if it is done during the year, it can be applied only to housing expenses incurred from that point in time thru Dec. 31.

The Housing allowance is a major tax benefit to the pastor if done correctly. The pastor must request a specific amount and the Admin. Board approves it or adjusts in collaboration.

Good luck with all this.
Additional information-Disallowed Housing Allowance
by: Anonymous

Thanks so much for your response!! It really cleared things up.

During a recent meeting it was determined that the housing allowance was established by the pastor without approval from the Trustee board.

Also, there is no resolution in writing and/or signed by the trustees agreeing to a housing allowance. The pastor has hired an accountant to refile his taxes. However, she indicated that the church only has to have the resolution in writing and the resolution does not have to designate an amount.

However, all of the information I've reviewed including the IRS publication indicates that an amount must be "officially designated" in advance by the local congregation or board (and not solely by the pastor).

Let me know if that is correct. Again, thanks so much
Disallowed Housing Allowance
by: Anonymous in NC

You didn't provide enough facts for an outsider to judge accurately the reason the housing allowance was disallowed and/or not set up properly to begin with.

Though it is not a good idea for churches to base pastor housing allowances on percentage of his/her salary, it is possible that a 50% or even higher could be legal if the salary is relatively low.

An accurate housing allowance should be arrived at with timely cooperation between the pastor and the administrative board of the church based on an accurate estimate of actual housing expenses.

Who dropped the ball here? Was it the pastor or the Board, or a combination of both? If the pastor (as was stated) took it upon him/herself to designate his/her own housing allowance, then that was clearly illegal.

When IRS receives the new paper work, I will say that the pastor and the church will be assessed separately. He/She will have to pay his/her own back taxes and penalties, and the church may be assessed some fines and penalties that they will have to pay.

If the church Board does decide to take some of the blame here and share in the expense to the minister, then yes, it will have to be reported as income on the next year's W-2 form to the pastor.

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