Minister Housing Allowance Rules: A Practical Guide for Church Leaders
A Clear Path for Church Leaders, Accountants, and Bookkeepers
There are many unique complexities of church finance. Among the most discussed—and often most confusing—topics is the Ministerial Housing Allowance.
The regulations surrounding this benefit can feel overwhelming, filled with detailed rules, complex requirements, and the heavy risk of non-compliance. Sleepless nights spent deciphering IRS publications? Worrying about ensuring your ministers receive the full benefit they’re entitled to while adhering to the law? You’re not alone.
At Finch Accounting, we understand these pain points intimately. We work alongside churches every day, helping them streamline their financial processes and ensure compliance.
Today, we’re diving deep into the Ministerial Housing Allowance to provide you with a clear and comprehensive understanding of this aspect of church financial management.
What Exactly is the Ministerial Housing Allowance?
The Ministerial Housing Allowance, also known as parsonage allowance, is a significant tax benefit available to ordained, commissioned, or licensed ministers. It allows them to exclude from their gross income the fair rental value of a home (including utilities) furnished to them by the church as part of their compensation, or the amount they spend to provide a home if they rent or own one.
Who Qualifies as a “Minister” for Housing Allowance Purposes?
Not every employee of a church qualifies for the housing allowance. According to the Internal Revenue Code, a “minister” is an individual who is duly ordained, commissioned, or licensed by a church or denomination and who is performing ministerial functions. These functions typically include:
Conducting religious worship and ordinances.
Performing pastoral counseling and services.
Teaching religious doctrine.
Administrative duties directly related to religious activities.
The IRS provides further guidance in publications like Publication 517.
Social Security and Other Information for Members of the Clergy and Religious Workers, which clarifies the definition of ministerial functions. It’s crucial to evaluate each individual’s role and responsibilities to determine their eligibility.
Key Rules and Regulations Governing Housing Allowance
Several critical rules govern the proper implementation and documentation of the Ministerial Housing Allowance. These include:
,: The church’s governing body (e.g., board, council, congregation) must officially designate a specific amount as housing allowance in advance of the payment. This designation should be documented in the church’s official records, such as meeting minutes or the minister’s employment agreement.
Reasonable Amount: The designated amount must be reasonable and should not exceed the fair rental value of the home (including utilities) or the actual expenses incurred by the minister in providing housing. The IRS scrutinizes excessively high housing allowances.
Actual Expenses: If the minister owns or rents their home, the amount excluded cannot exceed the actual expenses they incur for housing. These expenses can include mortgage payments (including principal and interest), rent, utilities, property taxes, insurance, repairs, and furnishings.
Proper Documentation: Ministers should maintain detailed records of their housing expenses to support the amount excluded from their income. Churches should also keep thorough records of the housing allowance designation.
Reporting on Form W-2: The designated housing allowance should be reported in Box 14 of Form W-2 (Other Information) but is not included in Boxes 1, 3, or 5 (taxable wages).
Self-Employment Tax: While the housing allowance is exempt from federal income tax, it is not exempt from self-employment tax (Social Security and Medicare taxes). Ministers are considered self-employed for these purposes. Internal Revenue Code Section 1402(a)(8).
Let Finch Help Guide Your Church
Don’t let the intricacies of the Ministerial Housing Allowance and other financial regulations weigh you down. Connect with Finch Accounting
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Corey has 10 years of professional experience in financial planning and analysis. His previous areas of focus involved helping launch the Financial Services department of a large government contractor, where he developed the various reporting and budgeting systems.
Corey also actively manages Shorebird, a Registered Investment Advising firm that focuses on Financial Advising, Planning, and Investment Management for clients. He is also an adjunct finance professor at the University of California, Riverside for their graduate-level programs.
Corey received a B.A. in Business Administration at the California State University, San Bernardino; a Masters in Business Administration and a Masters in Finance from Indiana University’s Kelley School of Business.
Jonathan has more than 7 years of professional experience in corporate taxation and strategy with both public and private companies. His industry experience includes entertainment, church finances, medical device, and technology. Jonathan is also an adjunct professor at the University of California, Riverside (named a Best Business School by Princeton Review and named a Best Undergraduate Business School by Businessweek) and speaks at conferences on topics such as leadership and management.
Jonathan is a graduate of the University of California, Riverside and an MBA candidate at UCLA Anderson School of Management. He is a licensed Certified Public Accountant (CPA) in California.
Jonathan previously worked at PricewaterhouseCoopers, LLP where he specialized in corporate taxation.
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