Church Tax Tips When Dealing with Housing Allowances
WatersEdge is dedicated to supporting local churches by providing expert guidance on tax-related issues and helping navigate the financial complexities of churches with ease. We currently serve more than 270 churches through our accounting, bookkeeping, payroll, and contribution tracking services.
This article is another in a series where we will share some of those frequently asked questions, followed by clear and practical answers to help you navigate the complexities of the financial questions your church might have. We hope these insights will be valuable in ensuring your church is adequately protected and well-prepared for the future.
Another common question is churches dealing with housing allowances. Here are a few we’ve received:
Q: We have an ordained minister working for our church. He designates a housing allowance for his primary residence. Additionally, the church provides an apartment on site that the minister uses to avoid the long commute every day. He uses the apartment 80% of the week. How does the [fair market rental value] of the apartment get reported? He already declares a housing allowance on his home that he owns.
A: In 2011, there was some reason to believe that a minister can have two “homes,” but in 2012, the courts made this clear that only the primary residence would count. When determining housing allowance, always keep these four things in mind:
- It is for pastors/ministers only.
- Pastors have the responsibility to know how much and what they can include in their housing allowance.
- The church has a responsibility to designate the housing allowance in writing before the first of the year.
- Housing allowances must still be declared as income for your self-employment income on your tax form.
So, anything provided beyond the housing allowance for the primary residence is taxable income. To calculate the taxable income of the parsonage, I would use the FMV of the apartment (and I would do the full FMRV and not a prorated 80% of the FMRV). Sometimes, just simple common sense is the right approach.
Q: After meeting with his CPA, our pastor wants to adjust his housing allowance. We had designated $40,000 of his pay as housing, but he is going to have $55,000 in expenses. He was advised to change his housing to $55,000, but I am not sure how to do that since QuickBooks has been using $40,000 all year.
A: As I understand your question, your pastor is making a mid-year change to his housing allowance because his expenses are more than he anticipated at the beginning of the year. You will need to make the adjustment in QuickBooks that increases his housing allowance by $15,000 over the remaining pay periods. For example, if you have 4 payroll periods left in the year, you would add $3,750 per pay period to the amount you already calculated as housing allowance. If he makes less than this, there’s no way to catch up this late in the year. You could just make 100% of his pay housing allowance and get as close as possible by year-end.
Q: I wanted to confirm my understanding on having a housing allowance for a licensed minister. Our board would need to obtain house rental comparable for houses in our area to substantiate our housing allowance being reasonable. We would also need to approve offering the housing allowance. Would the housing allowance be taxable to our minister?
A: A housing allowance provided to a minister is generally not taxable for federal income tax purposes, provided certain conditions are met; however, the housing allowance is still subject to self-employment taxes (Social Security and Medicare). Additionally, the housing allowance cannot exceed the fair rental value of the home, including utilities. It’s essential for the minister to keep good records of his housing expenses to substantiate the exclusion.
Q: We are about to bring on a new youth minister. He is neither licensed nor ordained at this time. Should his salary be structured as a W-2 employee or as clergy?
A: Anytime a minister does not have a license, commission, or ordination, you must keep them as a W-2 employee. Your church can certainly offer to license, ordain, or commission the young man if you see evidence of his calling and then change his status at that time.
WatersEdge monitors and responds to emails sent to [email protected] with questions just like these. If you have a lingering question your church needs help navigating, please send us a message. We also host an annual Church Finance Conference with in-person and virtual attendance options to go in-depth on a host of issues facing church staff related to insurance, tax filing, budgeting, and many other topics. Learn more about the Church Finance Conference 2025 at watersedge.com/cfc25