- A clergy housing allowance lets qualifying ministers exclude part of their compensation from federal income tax, up to certain limits.
- The church or organization must officially designate the allowance in advance.
- The excludable amount is the lowest of 1) The amount officially designated as housing allowance, 2) The minister’s actual housing expenses, or 3) The fair market rental value of the home.
- The allowance is still subject to self-employment (SECA) tax for most ministers, even if excluded from income tax.
- Ministers are responsible for their own tax returns.
What is a housing allowance for pastors?
A housing allowance for pastors (also called a clergy housing allowance, parsonage allowance, or rental allowance) is a portion of a minister’s compensation that a church or qualifying religious organization designates to help pay for housing costs.
The minister can exclude some or all of the allowance from federal income tax. However, the allowance is generally still subject to self-employment tax (unless the minister has an approved exemption).
If you want to exclude the housing allowance from federal income tax, the:
- Church or organization must formally designate the payment as a housing allowance before making the payment.
- Church or organization must designate a definite amount.
- Designation must be in writing (e.g., board minutes, employment contract, budget, or other official action).
- Minister must actually spend the allowance on eligible housing expenses.
Any unused housing allowance portion, or an amount above limits, is taxable income.
Who qualifies for a clergy housing allowance?
According to the IRS, a licensed, commissioned, or ordained minister performing ministerial services as an employee of the church, denomination, sect, or organization can claim the clergy housing allowance.
Examples include ministers, priests, and rabbis.
“Ministerial services” include:
- Conducting worship services
- Administering sacraments or ordinances
- Controlling, conducting, and maintaining religious organizations
Housing allowance basics: What it can and can’t do
| What a Housing Allowance Can Do | What a Housing Allowance Can’t Do |
|---|---|
| Let the minister exclude up to a certain amount from federal income tax | Be designated after the income is earned or paid |
| Cover housing expenses for owned or rented homes | Exceed the lowest of the minister’s reasonable salary, the fair rental value of the home plus utilities, or the amount actually used to provide a home |
| Cover the fair rental value of the home, including furnishings and utilities | Automatically eliminate self-employment tax |
Step-by-step: How to calculate a clergy housing allowance
Use the following steps to get started calculating housing allowances.
How to calculate a clergy housing allowance:
- Identify the minister and their role
Before anything else, confirm the person is ordained, commissioned, or licensed, and they perform ministerial services for your church or organization.
- Estimate annual housing expenses
Work with the minister to estimate their eligible housing costs for the upcoming year. These may include:
– Rent or mortgage payments (principal and interest)
– Property taxes
– Homeowners insurance (including liability coverage on the home)
– Utilities: electricity, gas, water, trash, sewer, and possibly internet if required for living in the home
– Furnishings and appliances
– Repairs and maintenance (e.g., roof repair, painting, plumbing, lawn care)
Have the minister create a written estimate of their total housing costs for the year. - Estimate the home’s fair rental value (FRV)
The fair rental value (FRV) is what the home would rent for in the current market, furnished and including utilities.
This number becomes one of the three caps on the excludable housing allowance. - Decide on a designated housing allowance amount
The church or organization decides how much of the minister’s pay to designate as housing allowance for the upcoming year.
Typically, the church or organization factors in the minister’s estimated housing expenses, overall compensation package, and budget constraints. - Officially designate the allowance in advance
The church or organization must formally designate the housing allowance in writing before the minister earns the income. It should clearly state the amount of the housing allowance and the time period.
Keep this resolution in your official records. - Pay the allowance as part of compensation
The housing allowance is usually paid as part of the minister’s regular paycheck. Designate which portion of the minister’s pay is housing allowance vs. salary. Do not withhold federal income tax from the housing allowance.
- The minister tracks their actual housing expenses during the year
Throughout the year, the minister should keep receipts, invoices, and statements for all housing expenses and maintain a running total of housing costs.
At tax time, the minister calculates how much of the housing allowance can be excluded from federal income tax.
Common mistakes when calculating clergy housing allowances
Want to make sure you set up clergy housing allowances correctly? Avoid the following common errors:
- Designating after the fact: Trying to label past payments as “housing allowance” retroactively.
- No written documentation: Verbal agreements are not enough. You need written resolutions or contracts.
- Ignoring the threshold: Ministers sometimes only look at expenses and forget the fair rental value limit.
- Not tracking expenses: Without records, the minister may lose the exclusion in an audit.
- Assuming no self-employment tax: Many ministers are surprised that the allowance is still subject to self-employment tax.
- Mixing personal and church records: The church should track what it paid; the minister tracks how it was spent.
How to support accurate housing allowances
You cannot prepare the minister’s personal tax return, but you can make their life easier by:
- Providing written documentation: Share copies of resolutions, contracts, and pay statements that show the housing allowance.
- Offering annual planning: Each year, ask the minister to update their housing expense estimates.
- Encouraging recordkeeping: Remind ministers to keep receipts and track expenses.
- Recommending professional help: Encourage them to work with a tax professional who understands clergy rules.
Simple housing allowance planning checklist
| Task | Who Does It | When It’s Done |
|---|---|---|
| Confirm minister’s status and duties | Church leadership | Before year starts |
| Estimate annual housing expenses | Minister | Before designation |
| Estimate fair rental value (FRV) | Minister | Before designation |
| Decide designated allowance amount | Church leadership | Before benefit starts |
| Approve written resolution or contract | Board/committee | Before first paycheck |
| Track housing allowance payments | Church | Throughout the year |
| Track actual housing expenses | Minister | Throughout the year |
| Calculate excludable amount | Minister | At tax time |
Frequently asked questions
A housing allowance for pastors is a portion of a minister’s compensation that a church or qualifying religious organization designates to cover housing costs.
When properly designated and documented, the minister can exclude some or all of that amount from federal income tax.
For federal income tax, a properly designated housing allowance can be excluded up to the lowest of:
– The designated allowance,
– Actual housing expenses, OR
– Fair rental value (furnished, plus utilities).
Any amount above the threshold is taxable income. Most ministers must include the full housing allowance in self-employment tax income unless they have an approved exemption.
No. The IRS requires that you designate a housing allowance in advance, before the minister earns the income.
Eligible expenses typically include:
– Rent or mortgage payments,
– Property taxes and homeowners insurance,
– Utilities (electricity, gas, water, trash, sewer),
– Repairs and maintenance,
– Furnishings and appliances, and
– HOA dues and some security costs.
Personal expenses like groceries, clothing, car payments, and vacations usually do not qualify.
Yes, if you want to save time and reduce headaches. Use church payroll software that lets you easily set up and manage housing allowances for clergy members.
