Does Clergy Housing Allowance Count as Income?

A clergy housing allowance, sometimes referred to as a parsonage allowance or rental allowance, represents a specific portion of a minister’s compensation. This allowance helps ministers cover their housing costs, whether they own or rent a home. For federal income tax purposes, this designated amount is generally excluded from gross income.

While it offers income tax benefits, the housing allowance is subject to self-employment tax. This dual treatment reflects the unique tax status of many clergy members. The allowance serves to reduce a minister’s taxable income for federal income tax calculations, potentially leading to tax savings.

Understanding the Housing Allowance Exclusion

The legal basis for the clergy housing allowance exclusion is found in Internal Revenue Code Section 107. This section allows ministers of the gospel to exclude from their gross income either the fair rental value of a home provided to them as compensation or a housing allowance paid to them.

To qualify for this exclusion, an individual must meet the Internal Revenue Service (IRS) definition of a “minister of the gospel.” This means being ordained, licensed, or commissioned by a church or religious body. The services performed must be those ordinarily carried out by a minister, such as administering sacraments, conducting religious worship, or having management responsibilities within a religious organization.

The housing allowance must be officially designated as such by the church or organization before the services are performed. This designation can be documented in various ways, including an employment contract, church minutes, or the church budget. The amount designated must also be considered reasonable pay for the ministerial services provided.

Expenses covered by the housing allowance relate directly to providing a home. These include:

• Rent or mortgage payments (principal and interest)
• Real estate taxes
• Property insurance
• Utilities like gas, electricity, water, and basic telephone service
• Appliances, furniture (purchase or rental and repairs)
• Remodeling
• Homeowners’ association dues
• Pest control

The allowance is specifically for a principal residence and does not apply to second homes or vacation properties.

Determining Your Excludable Amount

When calculating the amount of housing allowance that can be excluded from gross income, ministers must determine the lowest of three specific figures. The exclusion is limited to the smallest of the amount officially designated by the church as housing allowance, the actual housing expenses incurred by the minister, or the fair rental value of the home, including furnishings and utilities. Any portion of the designated allowance that exceeds actual expenses or fair rental value must be included in gross income.

To determine the amount officially designated, ministers should refer to the documentation provided by their church or religious organization, such as an employment contract or official church minutes. This figure represents the maximum amount the organization has set aside for housing.

Calculating actual housing expenses involves totaling all eligible costs incurred for the year. This includes mortgage payments, rent, real estate taxes, property insurance, and all utility costs. It also encompasses expenses for repairs, maintenance, and the purchase or rental of furnishings.

Estimating the fair rental value of the home, including furnishings and utilities, requires considering what a similar property would rent for in the local market. This can be determined by researching comparable rental listings in the area or by seeking an opinion from a local real estate professional. Some ministers may even obtain a formal letter from a realtor to substantiate this value.

Self-Employment Tax Considerations

The housing allowance has a distinct treatment for self-employment (SE) tax purposes. While excluded from gross income for federal income tax, it is fully included in net earnings from self-employment for SE tax. This means the housing allowance, along with other earnings, is subject to Social Security and Medicare taxes.

This difference arises because many clergy members are considered self-employed for Social Security purposes, even if they receive a Form W-2 from their employer. The housing allowance is viewed as part of their compensation that contributes to their Social Security and Medicare benefits. Ministers are responsible for paying the full amount of SE tax, which is currently 15.3% on net earnings from self-employment up to the Social Security wage base, and 2.9% for Medicare tax on all net earnings.

The inclusion of the housing allowance for SE tax purposes impacts a minister’s overall tax liability. While they may experience income tax savings due to the exclusion, they still contribute to Social Security and Medicare based on their entire ministerial income, including the housing allowance.

Tax Reporting for Clergy

Reporting the clergy housing allowance on tax forms involves specific steps. For federal income tax purposes, the housing allowance is not reported in Box 1 of Form W-2. The church or organization communicates the designated housing allowance amount to the minister through a separate statement or by noting it in Box 14 of Form W-2.

On Form 1040, U.S. Individual Income Tax Return, the housing allowance is initially included in total income. The excludable portion is then subtracted as an adjustment. Any amount of the designated allowance that exceeds the excludable limit must be included as taxable wages on Form 1040, Line 1h.

For self-employment tax, the housing allowance is added back to other ministerial earnings to calculate net earnings from self-employment on Schedule SE (Form 1040, Schedule SE). This amount is entered on Schedule SE, Line 2, for the computation of self-employment tax. While the housing allowance reduces income for federal income tax, it does not reduce the income subject to self-employment tax.