Our pastor's Housing Allowance is insufficient in our small, rural church. So, several church members want to increase his 2010 Allowance by donating the total amount of the increase to the church, designating the sum as a "Supplemental" to the church's Pastor Housing Allowance.
Is this legal? Would be any adverse effects to our church or our Pastor? Also, legally, could our church pay the taxes on this amount since they pay the taxes on the other portion of his Housing Allowance?
First of all, you should not be withholding or paying any taxes on his housing allowance. A housing allowance is exempt from federal income tax. It is counted in regards to the minister’s self-employment tax; however, since the church is not allowed to hold out Social security and Medicare taxes (FICA)…you would not withhold anything on his housing allowance.
I would not label this supplemental housing allowance. I would get a board approved raise in his housing allowance and count it as one.
Also, if your members are donating this extra amount to the church with no restrictions to it, it would be a tax donation for them, but if they are giving it as a pass through it would not be tax deductible to them.
A pass through transaction happens when a donation is earmarked for an individual. These designated donations do not qualify for a charitable deduction. “To be deductible, the charity must have discretion and control over the contribution without any obligation to benefit a designated individual.” Taken from Zondervan 2010 Church and Nonprofit Tax and Financial Guide.
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