How do I prepare my pastor’s W-2?

I’m not trying to dissuade you from having a tax professional prepare your W-2’s, but, if you are up to the challenge, here’s how to do it. This is mainly aimed at clergy in the Dakotas UMC, but I bet you could translate this into Lutheran or Presbyterian or Baptist or even Non-Denominational.

Here’s the confusing thing: a Pastor is an Employee according to the IRS and Self-Employed according to the Social Security Administration. That means you leave the social security and medicare parts blank. You also have to treat housing exclusions and housing allowances differently as the IRS doesn’t consider that to be taxable…although the SSA does.

Check out the video below:


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Housing Allowance vs Housing Exclusion

This is always a difficult thing to explain…and keep straight after it’s been explained. The Designated Housing Exclusion is basically a tax loophole. It allows pastors to reduce their tax bill by having a part of their salary designated for housing. It doesn’t cost the church anything. If it’s not done, it will cost your pastor to pay more than their “fair share” of taxes.

The Cash Housing Allowance is an extra amount paid to the pastor in lieu of a parsonage. When a parsonage isn’t provided, the church can provide money over and above the salary to help the pastor cover their housing costs. This does cost the church something. If the Cash Housing Allowance will not cover all the pastor’s housing costs, the pastor can have more designated from their salary to cover the extra costs.

“Exclusion is what you claim. Allowance is what you get.”

Roy Caudill

Check out the video below:


Useful Links