Discussion:Minister: Employee W-2 vs. 1099
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Discussion Forum Index --> Tax Questions --> Minister: Employee W-2 vs. 1099
| 15 November 2008 | |
| New client (small church) paid minister with W-2 for 4 months, then "accountant" had him switched over to 1099. Now main body of Church has sent memo telling everyone that the minister is supposed to be a W-2 employee.
Minister will receive both 1099 and W-2 for same tax year. Should I do anything to "convert all his earnings to wages? Should I switch him over to W-2 (which I assume is the correct treatment) and just move forward. I fail to see any economic advantage to either. | |
| 15 November 2008 | |
| Yes, he should be on a W-2 and yes, his business expenses are deductible on Sch A, subject to the 2% limit. | |
| 15 November 2008 | |
| Lots of confusion on this topic, be careful. See Discussion:Can_you_treat_a_minister_as_an_employee? and Minister_/_Clergy_Taxation for more info.
Also, I recommend Church and Clergy Tax Guide, available from [1]. You'll pay a few bucks, but it will save you many hours of time if you work in this area. | |
| November 15, 2008 | |
| He knows the right way to treat it, that's not the question. The question is whether it's ok to send both a W2 AND a 1099 for the same service in the same year. My answer is that since the W2 has no withholding or SS on it, usually, then, sure, why not just convert the 1099 services to W2 now, report in the 4th Qtr...and be on to the next problem. | |
ReadMyLips (talk|edits) said: | 15 November 2008 |
| Are there parsonage expenses excluded from income tax (other than SS) that would be impacted by 1099 treatment rather than W2? | |
| 15 November 2008 | |
| As I recall, if a portion of his wages have been designated as housing allowance, any deductible expenses must be reduced by the exempt portion of his wages. | |
| 15 November 2008 | |
| Jdugan, yes, the IRS does take the position that 265 applies to the parsonage allowance. Not sure that this is correct since 265 says the disallowance applies to income that is totally exempt from subtitle A taxes. Parsonage allowances are subject to Subtitle A taxes under 1402. | |
CarlLaFong (talk|edits) said: | 17 November 2008 |
| A minister employed by a church and receiving a parsonage allowance cannot possibly be an independent contractor. | |
| November 17, 2008 | |
| Treatment's the same either way since W2 is dual status for his tax filing. Since it's the correct treatment and no withholding, no need to have a 1099 issue. | |
CarlLaFong (talk|edits) said: | 18 November 2008 |
| If he goes on a W-2, then he is subject to income tax withholding - which of course would be proper. | |
| 18 November 2008 | |
| Withholding from wages paid to clergy is voluntary, not mandatory, even if the minister is considered a W-2 employee. From IRS Pub 517, page 10:
Income Tax Withholding and Estimated Tax The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her wages or salary. However, your salary generally is not subject to federal income tax withholding if both of the following conditions apply. You are a duly ordained, commissioned, or licensed minister, a member of a religious order (who has not taken a vow of poverty), or a Christian Science practitioner. Your salary is for qualified services (see Qualified Services, earlier). | |
| 26 December 2008 | |
| New facts to add (after asking many questions):
Minister was paid improperly as W-2 with taxes and FICA withheld during the first 4 months of year. Any suggestions on how to treat these withholdings on the 1040? Treat as estimated payments? I am converting his 1099 earnings to W-2 wages in 4th Qtr. as JR1 suggests. | |
| 27 December 2008 | |
| Refund the FICA. The FWT should be treated as voluntary withholding. | |
| 28 December 2008 | |
| Or, rather than refunding the FICA, reclassify it as FWT. | |
| 28 December 2008 | |
| Jim,
Is this something I would handle by amending the relevant 941s? | |
| 9 February 2009 | |
| I can think of a situation where a minister/priest would file a schedule C as well as receiving a W-2 from the church. There are occasions where the minister/priest will receive money directly from parishioners for blessing houses, baptisms, etc. In that case, that income(which the church would not be aware of) would be reported on a Schedule C, along with any expenses associated with earning that particular income. | |
| 22 March 2009 | |
| Regarding refunding and/or reclassifying the FICA withholdings, what is the mechanism for this? What if the church refuses to cooperate? | |
| 22 March 2009 | |
| Churches and ministers can opt out of paying Fica/ medicare tax. The minister is still responsible for income taxes. | |
| 23 March 2009 | |
| I'm aware of that. The problem I have is that I have a priest who received three W-2s this year, two of which treated him as an employee even for FICA and Medicare. They withheld his half of the taxes and paid the other half. The church insists that they've handled it right, but they obviously haven't. How can I rectify the situation? Do I just force it to come out in the wash on the 1040, is there a separate form I need to file, do I have to get the W-2 amended? I'm not the accountant for the parish or the school, just the priest. | |
| 23 March 2009 | |
| Well, your first order of business is to provide sufficient information to the church person responsible for this that he is wrong and that the priest is not subject to FICA but is subject to SECA. IRS Pub 517 might help, It may be found here: http://www.irs.gov/pub/irs-pdf/p517.pdf
Also, several good clergy tax guides are available through Amazon or other sources: http://www.amazon.com/s/ref=nb_ss_gw_0_10?url=search-alias%3Daps&field-keywords=clergy+tax+guide+2009&sprefix=clergy+tax Once the church is convinced that you are correct, I would suggest amending the W-2 to gross up compensation to include the ERFICA paid erroneously on the priest behalf, then reclassify EE and ERFICA as FWT. Then, the W-2 will include Box 1 compensation, plus Box 2 withholding. Boxes 3, 4, 5 & 6 will all be zero. Amend the 941's to follow what you have done on the W-2. Since all taxes have been paid, and any taxes paid are being reclassified as FWT, no penalties will result and no refund of taxes will occur (in amending the 941, that is.) | |
| 23 March 2009 | |
| I know what the W-2 should look like (in fact, one of them is correct). I don't think that the church is going to listen to me no matter what I do. Can I fix it within the sphere of my control, i.e. my client's 1040? | |
| 28 May 2009 | |
| New question ... a Rabbi receiving a 1099 as a true independent contractor ... not the organization's regular employee ... is requesting that a portion of this 1099 be reported as parsonage. Does anyone know how this would be reported? | |
| 28 May 2009 | |
| Why would he get a parsonage allowance if he's not the regular employee? | |
| May 28, 2009 | |
| Yeah, I wonder as well if an org can designate housing on an independent pastor/rabbi. I have seen churches issue a 1099 for Housing and use box 3 for it. And never seen IRS mail. Box 7 would be trouble. If he's independent, I'd suspect that the best thing is that his own org. could and should designate housing allowance properly, and then would deduct that amount on the Sch. C and deal with SE as necessary. | |
| 28 May 2009 | |
| The designation of an amount as rental allowance may be evidenced in an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action. | |
| 28 May 2009 | |
| Theory would be that while he is providing services as a independent contractor there would be housing necessary because services are done while he is away from his primary residence and therefore the parsonage would relate to that housing costs. | |
| 28 May 2009 | |
| No, it is not really necessary to establish that he has away from home expenses. That is a totally different issue. All he needs is something written into his contract with the church that designates the rental allowance amount. | |
| 5 January 2010 | |
| How do you handle W2s when some of the ministers income is subject to SS tax and some is not? | |
| 5 January 2010 | |
| what do you mean 'some is not'?
you may mean something specifically, or you may just be using different words than I do. For instance, a minister who has filed the appropriate form to take the vow of poverty (and thus would not be subject to SS tax on his ministry earnings) would still have Social Security tax withheld from his part time job at the 7-11. (If he has taken a vow of poverty why does he need a part time job?) On the other hand you may be referring to a minister receiving various W-2s from various churches, some being incorrect (because the church treasurer doesn't understand the rules for ministers, for example). In that case, your job is to make it correct on the tax return. I assume you know how to use Schedule SE? | |
| 6 January 2010 | |
| Kevin, as I know that you know, ministers are not subject to FICA even if they have not opted out of SS, but are subject to SECA instead. Thus, a minister's W-2 would have $XXX in W2 Box 1 and $0 in Box 3 and Box 5. But what happens if a young pastor is hired by the church prior to becoming licensed or ordained and then becomes licensed or ordained mid-way through the year? In that instance, my guess is that some of their earnings would be subject to FICA (prior to being licensed or ordained) and some would not. That portion not subject to FICA would be subject to SE tax on their 1040.
Having said all that, I agree that the question is somewhat vague and ambiguous. | |
| 6 January 2010 | |
| I have seen the situation Jdugancpa refers to and the church issued 2 separate W-2's, one for the employment and the other for the ministerwhich also showed the housing allowance | |
| 7 January 2010 | |
| It depends on the contract the clergy has with the religious organization. Some clergy may be considered W-2, while others are considered 1099. The religious may even pay the fica/medicare tax. | |
| 1 February 2010 | |
| There's a minister at our church who was not a minister for the first half of the year, then became a minister, complete with housing allowance added to his salary. Should he be issued two W-2's, one for non clergy status and one for clergy status? | |
