Q&A: Housing Allowance Procedures for Hospital Chaplains

What is acceptable practice?

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?
A hospital chaplain is entitled to be treated as a minister for payroll tax purposes and is eligible to have a housing allowance designated by the hospital. (Rev. Rul. 71-258, 1971-1 C.B. 283.)
Regarding how this allowance is designated, let me comment on the three scenarios you have experienced:
1. The minister submits letter requesting an amount to be designated as a housing allowance. The hospital then gives the minister a letter acknowledging the designation. This hospital deducts payroll taxes from the chaplain’s pay and nothing changes after the designation is effective.
Response: The hospital is not treating the minister as a minister for payroll purposes. If it was treating the chaplain as a minister, then no payroll taxes would be deducted. The hospital should change its payroll system to reflect the proper treatment of its chaplains.
2. The hospital requested its chaplains to submit a itemized list of estimated housing expenses. The total housing expenses are treated as a housing allowance for payroll purposes, but it does not communicate the amount designated to the chaplain.
Response: This hospital is treating the chaplain properly for tax purposes.
3. The hospital requests the chaplain to tell it the amount the chaplain requests to be designated as housing allowance.
Response: No tax law requires the chaplain to request any specific amount to be designated as housing allowance by the hospital. Hospital requests the information as a courtesy and allows the minister some input into the process. No tax law requires the chaplain to prove the amount of housing expenses he incurred to the hospital. The only tax requirement is that the hospital designates the amount of housing allowance before it is paid to the chaplain.
Current as of November 26, 2009. Not legal advice, just legal information unless you paid for it.
Frank Sommerville is a both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

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