Housing Allowance - Proper Designation

Ministry organizations often give housing allowances to ministers to help pay for expenses related to their apartments, their own houses, or church parsonages. These allowances are exempt from federal income tax as long as the church correctly designates them as such.

To correctly make a designation, ministry leaders must enter the amount of the housing allowance into the minister’s employment contract or the board’s meeting minutes. This designation must be made before the allowance is paid, if the allowance is to be exempt from federal income tax. A good practice is to set the designation in November or December for the following year, or to specify that the designation applies until further notice.

The amount of the housing allowance that is exempt from federal income tax is the lowest of these three options:

  1. The total housing allowance, as designated by the church
  2. Actual housing expenses (including mortgage payments, utilities, insurance, improvements, furnishings, etc.)
  3. The fair rental value of the home (furnished, including utilities)

If the housing allowance is not the lowest total of the three, the minister must report the excess allowance as taxable income.

Housing allowances are not exempt from Social Security tax. Therefore, ministers need to enter their total income from ministerial services on their self-employment tax form (Form 1040, Schedule SE), including the sum of their salary and housing allowance.

Click here to see how a housing allowance should be reported on tax forms.

The information in this article is intended to be helpful, but it does not constitute legal advice and is not a substitute for the advice from a licensed attorney in your area. We strongly encourage you to regularly consult with a local attorney as part of your risk management program.

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Employee Retention Credit.

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