All ordained, licensed or commissioned, whether the minister is living in a parsonage, a rental home, or a home they have purchased. This allowance is subject to SECA tax but is excluded from federal income tax.
ned ministers serving the church are eligible to designate a portion of their salary as a housing allowance in order to exclude that portion of their income for federal tax purposes. This is true w
This housing allowance actually excluded by the minister on their tax return from income tax MUST be the lesser of:
- Actual housing expenses as documented by the pastor, or
- The fair rental value of a similar home in his area that is furnished and utilities paid, or
- The official amount designated by the church as housing allowance.
Any excess housing allowance paid during the year that exceeds the LESSER of one of the above must be added back by the minister to taxable wages when they prepare their tax return.
A cash housing allowance (i.e. a salary reduction paid as housing allowance) is only excludable from federal income tax under the following parameters:
- The allowance MUST be OFFICIALLY designated by the church. This designation should be in writing, preferably by a resolution of the leadership, or in an employment contract or at a minimum as a line item in the church-approved budget.
- The housing allowance MUST be designated PRIOR to any payments of the housing allowance. Payments made pre-designation are taxable income.
- Only actual housing expenses paid during the calendar year can be excluded from income.
- The housing allowance may be paid monthly but actual housing expenses are compared to the annual housing allowance paid.
- The housing allowance claimed by the minister cannot exceed the fair market rental value of a similar furnished house plus utilities OR the amount designated by the church.
The IRS does not place a limit on how much of the minister’s wages may be designated as a housing allowance by the church. Be reasonable, justify the rate on anticipated expenses and it is generally inadvisable to exclude 100% of compensation.
It is, however, best for the church to “overdesignate” the housing allowance by perhaps 10% as you do not want to limit the allowance below what is actual. Remember, it is the pastor’s responsibility to justify the amount reported on their IRS Form 1040 and it is their responsibility to add any excess housing allowance paid during the year on Line 1 of Form 1040 with the notation of “Excess Housing Allowance.”
See suggested wording for a Housing Allowance Resolution here.