Sense with Cents

My underlying philosophy is to not include anything in payroll processing that is not required for payroll reporting — my version of common sense. There is no reason to add more workload to payroll, nor give a tax agency more information than required. Clergy housing allowance is one of these items (and so is bonus pay, which is often overcomplicated).

The IRS does suggest reporting housing allowance on a W-2, but it does not require it. That suggestion leads some to want to run the amount through paychecks. I am firm in my position: do not. The mechanism for offering a housing allowance is clear. The church entity needs to authorize the housing allowance in advance, and the church is obligated to report the amount for the year. No specific reporting manner is noted.

Logically, this leads to a letter from the church — typically from the board of directors or a properly authorized person — at the end of the year summarizing the amount paid for the year ending (meeting reporting requirements) and authorizing the amount for the next year. The one difference is the first year, where the letter would have no prior year total.

By NOT including the amount on a W-2 — not even in Box 14 — there is zero chance anyone will confuse the amount as payroll wages. In the same manner, the payment to the clergy person for housing allowance should be done via your normal bill paying (accounts payable) process, not via your payroll process. Keep it separate. Keep it simple. (The same philosophy applies to S-Corp shareholder health insurance — though in that case the amount does belong in payroll, just handled properly.)