Convert Honorariums Into Housing Allowance in 5 Easy Steps
By Raul Rivera
The ride home from the airport felt unusually short. So short, that I could not even recall the journey. I had been too engrossed in my thoughts. Thankfully, the all-too-familiar trip from Miami International Airport back to home had been uneventful...except for the progression of thoughts racing through my mind. Autopilot kicked in while I developed the idea in my head. How could a minister pay the absolute lowest amount of tax on an honorarium? I knew the answer was in the housing allowance.
I received an honorarium
It all began as I contemplated an honorarium I had received from a church in Puerto Rico. I knew I would have to report it on Schedule C and pay regular income tax, but the question came to me, "Does the law allow for a better way?" The answer was, "Yes."
I teach this at all of our Ultimate Church Structure Conferences. Today, I will break it down into 5 easy steps to follow so that in the future, any honorarium you receive can be converted into housing allowance.
How to do it
1. Make sure the church has designated a housing allowance: First and foremost, without any regard to whether or not you receive a salary, have the church designate a housing allowance. Under section 107 of the Internal Revenue Code, the housing allowance is really an exclusion of income more than an actual paycheck. What I mean is that the code allows a minister to exclude from taxable income up to 100% of the compensation he/she receives from the church, equal to his/her qualifying home expenses. Therefore, the church needs to designate a housing allowance (the StartCHURCH way). Setting it up the StartCHURCH way makes sure that any unexpected love offerings, honorariums, and other remunerations you receive through your church are covered by the housing allowance.
2. Create a compensation agreement: Many churches make efforts to be in compliance with the law concerning compensation but often fail to include a line item for honorariums. Treasury Regulation 53.4958-4(a)(3)(ii) states that a compensation agreement must be a fixed amount, which makes it difficult since often times you have no idea if a love offering or honorarium will come your way. In order to solve this problem you will need to rely on data from previous years and "guesstimate" (high) what you believe you will receive. Then use that figure as a line item in your compensation agreement. If there is no history, then any reasonable good faith guess will suffice.
3. Create board meeting minutes to designate you as a church representative while on speaking engagements: One important step is for the board of directors/elders/deacons to conduct a board meeting in which they pass a resolution to designate you as a church representative while on speaking engagements. This is a seemingly small step that goes a long way in case of an audit. Perfect documentation is the best preparation.
4. Travel to each church with a prefilled W-9 form containing the church's information, and check the exempt box: Whenever one preaches at a church, that church is supposed to ask you to fill out a W-9 form. The form is used to send the IRS and you a tax informational return called a 1099-Misc. You then use the 1099-Misc. form to prepare your tax return. Since the W-9 form has the church's information, the church you spoke at will make the honorarium check payable to your church. This also saves them from having to handle your personal data, which can be compromised.
5. The church deposits the check and then pays it to you: Here is where the fun begins. When I returned home from the trip to Puerto Rico, I turned over the check to my treasurer who then deposited it into our church checking account. The very next Friday when my treasurer prepared my weekly paycheck, the check was larger by the amount of the honorarium; all of which I was then able to exclude from my income because of the housing allowance.
Where do I report the housing allowance?
Remember, in order for the honorarium to be reported as housing allowance, the minister must substantiate his/her qualifying home expenses by preparing a statement of home expenses. Up to 100% of the grand total of that statement can be reported on line 14 of the minister's W2 form. Any dollar amount that is reported is exempted from Federal Income Tax. There is more to learn on this topic. Though it is exempt from Federal Income Tax, it is not exempt from Self Employment Tax. I will teach you at our conference how to make it exempt from that tax, too.
Let us teach you how
I love to teach! Anyone who has ever attended one of our conferences can testify to one thing: I have a strong passion and love for taking complex tax and church administrative issues and breaking them down to into simple and easy-to-understand steps. It is what keeps me working long hours studying to stay ahead of the curve so that I can ensure you never miss out on the latest and best strategies for your church. Consider registering to one of our conferences. It will change your whole view on how to do church.