IRS Tax Code Section 107: The Minister’s Housing Allowance
IRS Section 107 allows ministers to exclude housing costs from income. Learn how this amount is determined and its distinct treatment for self-employment tax purposes.
A tax benefit is available to qualifying religious leaders under Section 107 of the Internal Revenue Code. This provision, called the “minister’s housing allowance” or “parsonage allowance,” allows a minister to exclude a portion of their compensation from gross income for federal income tax purposes. The allowance can cover costs associated with renting or owning a home.
This tax benefit is an exclusion that reduces the amount of income subject to tax from the start, not a deduction. The allowance can be a cash payment designated for housing or the provision of a home itself, known as a “parsonage.” This treatment applies only to compensation for ministerial services.
Who Qualifies as a Minister for Tax Purposes
To be eligible for the housing allowance, an individual must meet the IRS definition of a “minister of the gospel.” This determination depends on an individual’s duties and role within the religious organization, not their job title. The IRS uses a five-factor test to assess whether an individual qualifies.
A primary requirement is that the individual must be ordained, licensed, or commissioned by a church or denomination. Other factors consider the functions the person performs, including whether the individual administers sacraments or ordinances and conducts religious worship services.
The IRS also looks at whether the person holds a management or leadership role within the church and is considered a religious leader by their denomination. An individual does not need to satisfy all five factors, as the IRS uses a balancing approach.
Calculating the Housing Allowance Exclusion
The amount a minister can exclude from their taxable income is limited and must be calculated each year. The excludable portion is the lowest of three specific figures. Any designated allowance that exceeds the calculated limit must be reported as taxable income.
The first limit is the amount officially designated in advance by the employing church as a housing allowance. This designation must be made in writing before the compensation is paid. The second limit is the minister’s actual housing expenses for the year, which requires keeping detailed records.
The third limit is the fair rental value of the home, including furnishings and utilities. For example, if a church designates $30,000 as a housing allowance, the minister’s actual expenses are $28,000, and the home’s fair rental value is $32,000, the excludable amount is limited to $28,000. The remaining $2,000 of the designated allowance would be reported as taxable income.
Defining Actual Housing Expenses
Actual housing expenses are the costs associated with maintaining a primary residence. The allowance applies only to a principal residence and cannot be used for vacation homes or other properties.
For ministers who own their homes, qualifying expenses can include:
- Mortgage payments, including principal and interest
- Real estate taxes and property insurance
- Utilities like electricity, gas, water, and trash removal
- Repairs, maintenance, and home improvements
- The cost of purchasing or renting furniture and appliances
- Pest control and homeowners’ association dues
However, expenses for food, cleaning services, or domestic help are not eligible.
Impact on Income and Self-Employment Taxes
The minister’s housing allowance is treated differently for federal income tax versus self-employment taxes. While the allowance is excluded from gross income for federal income tax purposes, it is not excluded when calculating earnings for self-employment tax.
Ministers are considered “dual-status” employees: employees for income tax reporting but self-employed for Social Security and Medicare tax purposes. This means they pay into these systems through the Self-Employment Contributions Act (SECA), not the Federal Insurance Contributions Act (FICA).
When completing their tax return, a minister must add the housing allowance back to their salary to determine net earnings from self-employment on Schedule SE. For example, if a minister has a $60,000 salary and a $20,000 housing allowance, their income for federal income tax is $40,000, but their earnings subject to SECA tax are $80,000. The fair rental value of a church-provided parsonage is also included for SECA tax calculations.