How a Housing Allowance Is Reported on a W-2
Understand how the tax treatment of a housing allowance directly governs how the amount is presented on an employee's annual W-2 statement.
A housing allowance is a payment an employer provides to an employee to help cover housing costs. The tax treatment of this allowance, and its reporting on the year-end Form W-2, is governed by specific rules that depend on the employee’s job. Understanding these distinctions is important for both employers and employees, as it directly impacts taxable income.
Determining the Taxability of a Housing Allowance
The Internal Revenue Service (IRS) considers payments from an employer for housing expenses to be a taxable fringe benefit. This means the amount is treated as additional wages, subject to federal income tax, Social Security, and Medicare taxes. For housing allowances, tax exclusions are narrow and apply only to particular situations.
One of the most well-known exceptions applies to ministers. Under Section 107 of the Internal Revenue Code, a minister can exclude a housing allowance from their gross income for income tax purposes. This benefit, often called a parsonage allowance, cannot exceed the fair rental value of the home, including furnishings and utilities, or the actual amount the minister spends on housing, whichever is less. Any allowance paid that is greater than the amount spent becomes taxable income.
Another exception relates to employees on temporary work assignments away from their primary tax home. If an employer provides a housing allowance to cover duplicate living expenses under an “accountable plan,” the payments can be excluded from the employee’s income. An accountable plan requires that the expenses have a business connection and that the employee adequately accounts for them to the employer. A temporary assignment is one that is expected to last for one year or less.
Military personnel receive a non-taxable housing benefit known as the Basic Allowance for Housing (BAH). This allowance is provided to service members to cover housing costs when government quarters are not provided. The amount is determined by rank, dependency status, and geographic location, and it is exempt from federal income tax.
How Housing Allowances Appear on Form W-2
How a housing allowance is reported on Form W-2 depends on whether it is taxable or non-taxable. For a taxable allowance, the total amount is added to regular pay and included in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips).
When an allowance qualifies as non-taxable, the amount is not included in the taxable wage boxes of 1, 3, and 5. An employer may report the non-taxable amount in Box 14, labeled “Other,” for informational purposes. The employer will often add a descriptive label like “Housing Allowance” or “Parsonage” to identify the payment.
A unique reporting situation exists for ministers. While their housing allowance is excluded from gross income for federal income tax, it is not excluded for self-employment tax purposes. This means the allowance is not part of the Box 1 wage total. Because ministers are considered self-employed for Social Security and Medicare purposes, Boxes 3 and 5 of the W-2 are left blank. The minister is responsible for paying Self-Employment Contributions Act (SECA) taxes on this income.
Employer Record-Keeping and Employee Tax Filing
Employers must maintain documentation to justify the tax treatment of any housing allowance. For a minister’s housing allowance, this includes official church documents showing the allowance was formally designated before it was paid. For an accountable plan, the employer must keep expense reports and receipts that substantiate the business nature of the costs and show that the employee returned any excess reimbursement.
For employees, the information on Form W-2 is transferred to their annual income tax return. If a housing allowance was taxable, it is already included in the Box 1 wages, and no further action is needed. If an employee believes their allowance was incorrectly reported as taxable, they should contact their employer to request a corrected Form W-2c.
Ministers have an additional step when filing and must calculate their self-employment tax on Schedule SE. To do this, they start with their taxable wages from Box 1 of the W-2 and add their non-taxable housing allowance to determine their net earnings from self-employment. This combined amount is then used to compute the SECA tax owed.