Q: As a hospital chaplain, I have received a housing allowance from each hospital and healthcare system where I have been employed, but each system has handled my housing allowance differently.
The first asked each eligible minister/chaplain to submit an amount for the upcoming tax year, and then issued a letter on the hospital letterhead stating that the submitted amount was considered a housing allowance.
All tax withholding and Social Security/Medicare continued as if regular pay.
The second system asked each eligible minister/chaplain to submit an itemized list with dollar figures for each category allowed under housing allowance.
The second system then differentiated the pay as salary with the usual deductions, and as a housing allowance with NO withholding of either federal or state tax, or SS/MC.
No letter was issued, and a copy of the submitted itemized list was kept by the chaplain/minister. In the third system, they want a written letter informing them of the dollar figure for housing allowance, and then I keep a copy of my letter. Are these all acceptable?
Are Hospital Chaplains Eligible for Housing Allowances?
Yes, hospital chaplains are entitled to be treated as ministers for payroll tax purposes and are eligible to have a housing allowance designated by their employing hospital or healthcare system. This is supported by Revenue Ruling 71-258, 1971-1 C.B. 283.
Evaluating Housing Allowance Procedures
Let’s examine the three scenarios described and determine their compliance with tax rules:
1. The Minister Submits a Letter, and the Hospital Acknowledges It
In this scenario, the hospital deducts payroll taxes (federal, state, Social Security, and Medicare) from the chaplain’s pay, and no changes are made after the designation is effective.
Response: This procedure is incorrect. If the hospital were treating the chaplain as a minister for payroll tax purposes, no payroll taxes would be withheld. Instead, the hospital should revise its payroll system to reflect the proper tax treatment of its chaplains.
2. The Hospital Requires an Itemized List of Housing Expenses
Here, chaplains submit an itemized list of estimated housing expenses, and the total amount is designated as a housing allowance for payroll purposes. However, the hospital does not communicate the designated amount to the chaplain.
Response: This approach aligns with proper tax treatment. The housing allowance is treated correctly for payroll purposes, even though the hospital does not explicitly share the designated amount with the chaplain.
3. The Chaplain Provides a Requested Housing Allowance Amount
The hospital asks chaplains to submit the amount they wish to be designated as a housing allowance and allows them to keep a copy of the request letter.
Response: While this procedure is acceptable, it is important to note that no tax law requires a chaplain to request a specific amount for designation. The hospital’s request is a courtesy, allowing the chaplain input into the process. Tax regulations only require the hospital to designate the housing allowance amount before it is paid, without needing proof of the chaplain’s actual housing expenses.
Best Practices for Housing Allowance Procedures
To ensure compliance and avoid confusion, hospitals and chaplains should follow these best practices:
- Designate housing allowances in writing and document the amount through official communication, such as a letter on hospital letterhead.
- Ensure that payroll systems treat chaplains as ministers for tax purposes, exempting them from Social Security and Medicare withholding.
- Chaplains should maintain detailed records of housing expenses for their tax filings.
FAQ: Housing Allowance Procedures for Hospital Chaplains
1. Are hospital chaplains eligible for housing allowances?
Yes, hospital chaplains are considered ministers for payroll tax purposes and are eligible for housing allowances under IRS rules.
2. Can housing allowances include payroll tax withholding?
No, housing allowances for ministers are exempt from Social Security and Medicare withholding. Hospitals should adjust their payroll systems accordingly.
3. Must chaplains prove housing expenses to their employer?
No, chaplains are not required to provide proof of their housing expenses to the hospital. The employer only needs to designate the housing allowance in advance.
4. What records should chaplains keep for their housing allowance?
Chaplains should maintain detailed records of their housing expenses, including receipts and documentation, for their personal tax filings.
For further guidance on housing allowance procedures, refer to IRS.gov or consult with a tax professional experienced in clergy tax matters.
Frank Sommerville is a both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.
