What Is the Clergy Tax Exemption for Housing?
Explore the tax rules for the clergy housing allowance. This provision can reduce income tax but has specific calculation and reporting requirements for SECA tax.
Ordained, licensed, or commissioned ministers in the United States may be eligible for a tax benefit known as the parsonage or housing allowance. This benefit allows clergy to exclude a portion of their income used for housing from federal income taxes. The provision, found in Section 107 of the Internal Revenue Code, recognizes the unique nature of a minister’s work and the frequent requirement for them to live in the community they serve. Understanding the rules that govern this allowance is important for any religious leader managing their compensation.
Qualifying for the Clergy Housing Allowance
To benefit from the housing allowance, an individual must be considered a “minister” for federal tax purposes. The Internal Revenue Service (IRS) evaluates this status based on the specific duties performed, not merely on a person’s title. The determination hinges on five factors related to the exercise of ministry.
These factors include the authority to administer sacraments, the regular conduct of religious worship, and management responsibility within the church. Further consideration is given to whether the individual is regarded as a religious leader by their church or denomination. The final factor is whether the minister has been officially ordained, commissioned, or licensed.
While no single factor is determinative, the IRS assesses the totality of the work performed. For example, a pastor who preaches, officiates weddings and funerals, and serves on the church’s governing board would likely meet the criteria. Individuals whose roles are primarily administrative or educational without these specific ministerial duties may not qualify, even if they are employed by a church.
Determining the Housing Allowance Amount
The amount of the housing allowance that can be excluded from income is subject to a three-part limit. A minister can only exclude the lowest of three figures calculated annually. The first is the amount officially designated in advance as a housing allowance by the employing church or organization.
The second figure is the total of the actual housing expenses the minister incurs during the year. Record-keeping of these costs is necessary, as the minister must be able to substantiate them. Qualifying expenses are broadly defined and can include:
- Rent or mortgage payments (principal and interest)
- Real estate taxes and property insurance
- Utilities such as electricity, gas, water, and trash service
- Expenses for repairs, maintenance, and improvements
- Furnishings and appliances
The third limiting figure is the fair rental value of the home, including furnishings, plus the cost of all utilities. This amount represents what it would cost to rent a similar property in the same area. After calculating these three amounts, the minister must use the smallest as their maximum exclusion. Any designated allowance received that exceeds this lowest figure must be reported as taxable income.
Tax Implications of the Housing Allowance
The clergy housing allowance has a “dual tax status.” For federal income tax purposes, the properly calculated housing allowance is excludable from gross income. This exclusion reduces the minister’s overall income tax liability for the year.
A different rule applies for self-employment taxes. Ministers are treated as self-employed for Social Security and Medicare taxes under the Self-Employment Contributions Act (SECA). The housing allowance is not excludable from the earnings base for SECA tax, so the minister must add the allowance back to their salary when calculating net earnings from self-employment.
This dual treatment means the income subject to SECA tax is often higher than the income subject to federal income tax. The 15.3% SECA tax rate consists of a 12.4% Social Security tax on earnings up to an annual limit ($176,100 in 2025), and a 2.9% Medicare tax that applies to all earnings with no limit.
Official Designation and Reporting Requirements
For the housing allowance to be valid, it must be officially designated by the employing church or religious organization in advance of payment. The designation should be made in writing and can be documented in an employment contract, church board meeting minutes, a formal resolution, or the annual budget.
When it comes to tax reporting, the process reflects the allowance’s dual status. The employing church reports the designated housing allowance in Box 14 of the minister’s Form W-2, but this amount is not included in the taxable wages reported in Box 1. This shows the amount is excluded for income tax purposes.
The minister must account for the allowance when calculating self-employment tax. On Schedule SE (Form 1040), Self-Employment Tax, the minister will add the non-taxable housing allowance to their reported wages to arrive at the net earnings from self-employment. Any portion of the allowance that was not used for housing expenses or exceeded the fair rental value must be reported as “Excess allowance” on Form 1040.