Turn Honorariums into Tax-Free Housing Allowance

By Raul Rivera

This post aims to provide insights into converting honorariums into a tax-free housing allowance. This is particularly beneficial for pastors who do not receive a full salary from their church. This is also relevant for those earning a part-time salary and even for those with a full-time salary, although the latter may see a smaller benefit.

To illustrate, let's consider Pastor XYZ's situation. He is the lead pastor of Church ABC, which is in its third year and home to 75 members.  Pastor XYZ receives a part-time salary of $1,200 per month and an annual sum of $14,400. To make sure they were compliant with Section 4953, Church ABC engaged our Compensation Agreement services to document the pastor's remuneration meticulously. In addition to his duties at Church ABC, Pastor XYZ is regularly invited to speak at other churches and conferences, accepting such engagements six times a year. These invitations often come with an honorarium, each potentially as much as $1,500, contributing to an annual total of $7,300 from honorariums in the previous year.

The additional earnings were not exempt from federal income tax, prompting Pastor XYZ to ponder if these honorariums could be structured differently to reduce his tax burden. We now delve into strategies that could enable a minister like Pastor XYZ to mitigate his tax obligations while remaining within the bounds of the law.

I Received an Honorarium

The contemplation of optimizing tax benefits for honorariums first occurred to me years ago, following an invitation to address a congregation in Puerto Rico. At the time, I was aware that honorarium income would have to be reported on Schedule C, subjecting it to Federal Income Tax.¹ However, this prompted me to consider whether tax law (Section 107) offered a more favorable alternative. Indeed, I discovered there was a permissible strategy. Following are 5 steps you can take to convert honorariums into housing allowance, reducing and perhaps eliminating Federal Income Tax in its entirety.

How to do it

1. Make sure your church has designated a housing allowance:  First and foremost, without regard to whether you receive a salary, have the church designate a housing allowance.  Under section 107 of the Internal Revenue Code, the housing allowance is an exclusion of income that is more than an actual paycheck.  What I mean is that the code allows ministers to exclude from taxable income up to 100% of the compensation he receives from the church equal to his qualifying home expenses.  Let me explain. Section 107(2) states the following:
   
   In the case of a minister of the gospel, gross income does not include— the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home, and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.
   
   According to the law, a minister's qualifying income designated as housing expenses is not required to be reported as wages or compensation on Line 1 of the W-2 form to the Internal Revenue Service.
   
   To ensure compliance, it is essential for the church to properly designate a housing allowance exclusion, as recommended by StartCHURCH. By following the StartCHURCH guidelines, the church can guarantee that all forms of income, including unexpected love offerings, honorariums, and other income the minister receives through the church, are appropriately accounted for within the housing allowance.
   
   
2. Develop a Compensation Agreement: Numerous churches strive to adhere to legal requirements regarding compensation but frequently overlook incorporating honorariums as a specific budget item. According to Treasury Regulation 53.4958-4(a)(3)(ii), compensation agreements must stipulate a predetermined sum. This presents a challenge, as it's often uncertain whether one will receive a love offering or honorarium. To address this issue, it is advisable to analyze historical data and make an informed estimation—erring on the higher side—of potential honorariums and love offerings. This estimated amount should then be incorporated as a distinct item within your compensation agreement. In instances lacking prior records, a well-reasoned and honest estimate will be adequate.
   
   
3. Board meeting minutes to designate you as a church representative while on speaking engagements:  A crucial procedure involves the board of directors, elders, or deacons convening a formal meeting to adopt a resolution that officially designates you as a representative of the church for all speaking engagements. Although it may appear to be a minor detail, this step is significant in establishing clear authorization, which can prove invaluable in the event of a financial audit. Impeccable documentation is key to ensuring proper compliance. You can find a sample copy HERE. 
   
   
4. Travel to each church with a prefilled W-9 form:  Make it a standard practice to carry a pre-completed W-9 form, including your church's details, for use when invited to speak at other churches. Churches are typically required to request a W-9 form to facilitate issuing a 1099-MISC tax informational return, both to the IRS and to you, which is subsequently used to prepare your tax returns. By providing a W-9 form that already contains your church’s information, the hosting church will issue the honorarium check to your church and not to you. A further advantage of this approach is that it eliminates the need to disclose your personal information each time you deliver sermons beyond your home church.
   
   
5. Processing Honorarium Checks through the Church Account: The procedure becomes particularly engaging at this stage. Upon my return from a speaking engagement, such as the one in Puerto Rico, I handed the honorarium check to my church treasurer, who then deposited it into the church’s checking account. The following Friday, when my weekly paycheck was issued, it included the additional amount of the honorarium. Due to the housing allowance provisions, I was able to exempt this amount from my reported income.

Where do I report the housing allowance?

To ensure that an honorarium is classified as a housing allowance, the minister is required to document their eligible housing expenses by creating a detailed home expense report. Up to the entire sum of this report may be indicated on line 14 of the minister’s W-2 form, which then qualifies as exempt from federal income tax. Further insights on this matter are available; notably, while the housing allowance is exempt from federal income tax, it remains subject to self-employment tax unless a minister files form 4361 to become exempt.²

Let us teach you how

Teaching is our passion, especially when it involves demystifying the intricate aspects of tax and church administration by distilling them into clear, manageable steps. This zeal is what drives us at StartCHURCH to invest extended hours in research to remain at the forefront of emerging trends. Our goal is to equip churches and ministers with the most up-to-date and effective strategies for success; contact us today at 770-638-3444 to learn more!

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1. All honorarium income received must be declared on a minister's tax return. Any honorarium amount provided by a church must be reported by the minister. Furthermore, if the total honorariums from a church amount to $600.00 or more, the church will furnish you with a Form 1099-NEC and also forward a copy to the IRS. Adhering to the guidelines outlined in this article can facilitate avoiding receiving 1099-NEC forms and reporting income on Schedule C.
   

2. I have authored numerous articles discussing how ministers can obtain exemption from self-employment tax. I suggest reviewing this article to understand better the advantages of securing an exemption from self-employment tax. 3 Must-Know Tax Benefits for Pastors and Ministers.

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