V11 Payroll W2 issue

[tborgal]

Just loaded V11 on my computer at home to go thru the setup before I load it at church and go live and found the following problem. The Housing Allowance does not show up as FICA or Medicare income on the W2. If you select more options in the Maintain Item Description window it shows that both FICA and Medicare are selected, but does not show up as income for them until you uncheck the Housing Allowance option. Wiped out my beta version so I don't know if the same problem existed there. Just made another check and found that the 941 get calculated wrong for FICA and Medicare as well.

[wellspring]

Housing Allowance should only be recorded on the W-2 in Box 14 and labeled "Housing Allowance". It should not be included as Wages in Box 1 or Social Security Wages Box 3 or Medicare Wages Tips Box 7 or State Wages Box 16. This also applies when filing the quarterly 941.

[tborgal]

The housing allowance is only exempt from income tax and is subject to FICA and Medicare taxes, and calculates as such in withholding when generating payroll. Therefore in order for the calculation to be correct on the 941 form this amount must be included as income in boxes 5a and 5c. If it is not included the calculated tax would not match what was actually withheld and paid to the IRS. Because it is subject to FICA and Medicare tax it must also be included on the W2 as such.

I reloaded the last beta and both the W2 and 941 included the housing allowance in all of the above mentioned boxes.

[Jeff]

All the examples I have seen show the FICA and Medicare boxes blank and the housing amount shown only in box 14. Pastors typically don't pay FICA and Medicare, they pay self-employment tax themselves directly. IRS pub 517 says that clergy is exempt from FICA but has to pay SECA if they have not filed to be exempt.

Take a look at: http://www.irs.gov/pub/irs-pdf/p517.pdf

Page 13 of this publication has an example W2 for clergy, it shows no entry in boxes 3 & 5.

What I have heard that some churches do is withhold extra federal income tax withholding from the pastor to cover the SS & Medicare amounts. But that is reported in box 2. Do you have documentation that shows anything different?

[tborgal]

Jeff,
So this is a change you have made since the final beta and by doing so you are now inconsistent with what you are calculating for FICA and Medicare since the Housing Allowance deducts both of these within the employee pay items.

I agree with what you are saying about SECA and what the IRS says about ministers. However we have been withholding from our current pastor both FICA and Medicare for several years now. It was not an issue with our previous pastor since he was exempt from both taxes. We started this inadvertently when we hired a Youth Pastor who is now our senior Pastor. I Became a little concerned when I found out about the SECA situation a couple of years ago and have made a couple of inquiries into this and have been told by more than one cpa to continue withholding the way we are doing it, one as recently as last December.

If you are going to leave the 941 and W2's the way they are you need to remove the withholding from the payroll or else many will be scrambling to resolve withholding discrepancies come there first 941 reporting period.

[NeilZ]

Jeff,
So this is a change you have made since the final beta and by doing so you are now inconsistent with what you are calculating for FICA and Medicare since the Housing Allowance deducts both of these within the employee pay items.

I agree with what you are saying about SECA and what the IRS says about ministers. However we have been withholding from our current pastor both FICA and Medicare for several years now. It was not an issue with our previous pastor since he was exempt from both taxes. We started this inadvertently when we hired a Youth Pastor who is now our senior Pastor. I Became a little concerned when I found out about the SECA situation a couple of years ago and have made a couple of inquiries into this and have been told by more than one cpa to continue withholding the way we are doing it, one as recently as last December.

If you are going to leave the 941 and W2's the way they are you need to remove the withholding from the payroll or else many will be scrambling to resolve withholding discrepancies come there first 941 reporting period.

Tom,

under Maintain Item Description for Payroll items, you have the Tax Options pull down. On that pulldown, you have a More Options selection. That will open another area that says: This income is taxable by what types of taxes. This area should list all the various taxes (Federal, State, Medicate, SS) and you can check what you want this income to be associated with.

That said, are you doing the withholding and filing of the Medicate and SS employer tax too ??

FWIW ... with my wife preparing to become Pastor at a church starting in Feb, we've been looking into this area, and while the church will be liable for the Federal and State withholding and payment, for SS and Medicare she will fall under the Self-Employment taxes. What we'll do is have extra taken out in the Federal Withholding to cover the SE tax, but the church is not liable to withhold for them.

UPDATE: I tested this, and when I set the Housing Allowance to be taxed in Fed, Medicate and SS, it showed up as taxible wages in boxes 1, 3, & 5. When I reset it to Housing Allowance type, it appeared in box 14 and not in the wage totals. Yes you have to uncheck the Housing Allowance block, but if its being taxed as taxable income, is that really a problem ??

Or is it that he then wants to deduct the Housing Allowance under deductions and as such needs to be shown??

[tborgal]

Neil,

The work around you mentioned by unchecking the Housing Allowance will work. The problem - if program is left in current configuration - is that under the individuals payroll items the housing allowance is treated the same as wages for FICA and Medicare purposes unless you go into the tax options pull down and other options and uncheck the FICA and Medicare. This could be a real problem for anyone not aware that selecting the item as Housing Allowance is going to withhold the two taxes. Come 941 time the withholding is not going to match what the 941 is reporting. Unless of course you have not selected either of these items in the individuals payroll items list.

[Jeff]

It has almost been a year since I was working in that area and my memory is fuzzy on what specifically is hapenning. But if i remember right, I Internally set the Housing Allowance to be taxable by Social Security & Medicare. I did this because I knew a lot of places were withholding this tax for their pastors and then giving the pastor the money quarterly to pay their taxes.

I need to double check what the 941 is doing to see if it is handling housing allowance correctly. It sounds like it is not pulling housing allowance income back out of Social Security and Medicare Income. I might need to rethink allowing this setup. It was just brought up here that they could now setup a regular deduction item and specify the percentage to withhold. This would accomplish the same thing and it would take it out of the tax area all togther.

[tborgal]

The way this is reported in the 941 and W2 has changed since the last beta release so someone has worked on this in the last month or so. I don't have any problem with the work around of setting this up with the housing allowance option unchecked and as I said in the previous post anyone who is not withholding FICA and Medicare would probably not have those two items listed in the payroll items.

[Jeff]

I have been working on this this morning and a change was made at the end of November as a result of internal testing. The change kept housing allowance from showing on the 941 or W2 even if you selected the more options and explicitly set that you want to include that income for Social Security & Medicare.

I have been looking at how this should work and have made the following changes:

When you mark an item as housing using the drop down menu:
It will be marked as non-taxable by all tax types. This will keep it from showing on the 941 and boxes 1 - 6 of the W2 by default.

I have also removed the override that kept housing income items from being included with Social Security & Medicare income totals.

Tom, in your case where you want housing to be taxable by Social Security & Medicare, you will select more options, and set the taxes you want and the housing check box. This income will be reported in the corresponding boxes on the W2 and included in the appropriate totals on the 941. It will be shown in Box14.

We are working on a new MR for version 11 now and I hope we can release it soon.

[tborgal]

You guys as usual are great. Thanks