Tax preparer seeking advice on clergy W2 & housing allowance documentation

You need to be careful with clergy returns as they have some unique tax situations. The housing allowance in box 14 is excluded from income taxes but is subject to self-employment taxes unless your client has an approved exemption from SE taxes. First, confirm if Pastor Mike has a Form 4361 exemption. If he does, he should have received approval from the IRS years ago and would have a copy. If he has this exemption, then the housing allowance is excluded from both income tax AND self-employment tax. If he doesn't have the exemption (which is common), then you need to include the housing allowance on Schedule SE for self-employment tax purposes, even though it's excluded from income tax. Clergy are considered self-employed for Social Security/Medicare purposes but employees for income tax purposes - weird dual status! Also check if the $52k in box 1 already excludes the housing allowance. Most churches report W-2 box 1 with the housing allowance already removed, but occasionally they include it and note it in box 14, which would require an adjustment.

I ran into this exact problem with a pastor client last year! I highly recommend checking out https://taxr.ai for help with clergy tax situations. When I had my first minister client, I was completely lost with all the special rules about housing allowances and self-employment taxes. I uploaded his W-2 and some church documentation to taxr.ai, and they quickly analyzed everything and provided a detailed report explaining exactly how to handle the housing allowance, which forms were needed, and even identified that my client had the special SE tax exemption (Form 4361) that he'd forgotten about! Their analysis saved me hours of research and probably prevented some costly mistakes. The clergy tax rules are so specific and unusual compared to regular employees, and having expert guidance made a huge difference. They even explained how to properly document everything in case of an audit.

Just wanted to update that I tried taxr.ai for my missionary client's tax situation, and it was incredibly helpful! I uploaded his documentation from three different countries, and they provided a comprehensive analysis explaining exactly how to handle his foreign earned income exclusion, housing benefits, and self-employment tax obligations. They even identified an issue with how his sending organization was reporting his housing allowance that would have created problems. The documentation they provided was detailed enough that I feel completely confident defending the return if it's ever questioned. For anyone dealing with clergy tax situations (especially with international complications), it's definitely worth using. Saved me hours of research across multiple IRS publications and gave me peace of mind that I wasn't missing anything important.

If your clergy client needs to talk directly with the IRS about their housing allowance or any past issues with their Form 4361 exemption, I'd recommend using https://claimyr.com to get through to an actual IRS agent. I wasted days trying to call the IRS about a similar clergy tax situation last year, and it was impossible to get through. Claimyr got me connected to an IRS representative within about 20 minutes when I had been trying for weeks on my own. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS has special departments that handle minister exemptions and clergy tax issues, but getting to them directly is nearly impossible without help. When we finally got through, we were able to confirm my client's exemption status and get clear guidance on a housing allowance reporting issue from previous years.

I have to admit I was wrong about Claimyr. After my frustrating experience trying to resolve a clergy housing allowance issue for a client, I decided to give it a try yesterday out of desperation. I was connected to an IRS tax law specialist within 45 minutes when I had been trying unsuccessfully for over a week. The IRS agent was able to verify my client's Form 4361 exemption status and confirm exactly how we should handle a housing allowance that exceeded actual expenses (which was the issue we were dealing with). They even noted the correction in his account so there wouldn't be issues later. I'm still surprised it worked, but it genuinely saved me and my client a lot of stress. For complicated clergy tax questions that require speaking directly with the IRS, it's definitely a useful tool, especially during the peak filing season when getting through is nearly impossible.

For clergy W-2s, make sure you're using tax software that correctly handles ministerial income. Some basic tax programs don't properly account for the dual-status of clergy (employee for income tax, self-employed for SE tax). I've found that TaxSlayer Professional and Drake handle these situations well. You'll want to enter the W-2 normally, then make an adjustment on Schedule 1 if the housing allowance was included in Box 1 (rare), and then make sure the housing allowance gets included on Schedule SE. The software should properly generate Schedule SE with the housing allowance included for self-employment tax calculation, while keeping it excluded from income tax calculations.

Don't forget about the Deason Rule if your clergy client has both ministerial income and housing allowance! This rule requires you to allocate expenses proportionally between taxable and tax-exempt income. For example, if 30% of the minister's income is tax-exempt housing allowance, then 30% of business expenses would not be deductible. It's a tricky calculation that many preparers miss, but the IRS definitely looks for it in clergy returns.

As someone who's worked with several clergy clients over the years, I'd strongly recommend getting a copy of IRS Publication 517 (Social Security and Other Information for Members of the Clergy and Religious Workers) if you haven't already. It's the definitive guide for these situations. One thing I haven't seen mentioned yet is that you should also verify the housing allowance was properly designated in advance by the church's governing body. The IRS requires that housing allowances be officially designated before the tax year begins, not retroactively. If Pastor Mike's church didn't properly designate the $18,000 housing allowance in writing before 2024, it might not qualify for the exclusion. Also, since this is your first clergy client, you might want to ask Pastor Mike if he has any other ministerial income from weddings, funerals, or guest speaking that wasn't reported on his W-2. This additional income would also be subject to self-employment tax and needs to be reported on Schedule C or Schedule C-EZ. The dual tax status of clergy really trips up a lot of preparers initially, but once you understand the basic principle (employee for income tax, self-employed for SE tax), it becomes much more manageable.