Any licensed or ordained minister in the U.S. who performs ministerial duties and who is employed by the church qualifies for a housing allowance which is a great tax benefit. Housing allowances are not taxable to federal or state income taxes, so a minister can save taxes by utilizing the housing allowance. In general the rules are as follows.
To have a housing allowance, you must have a resolution pre-authorizing the housing allowance. A pastor cannot designate his own housing. it must be done by either the church board or the church membership. The amount designated then goes to pay all housing expenses: rent or house payment, utilities, taxes, insurance, repairs & maintenance, upkeep, association dues, furnishing & appliances (purchase or repair). Any expenditure that is for the upkeep of the house you live in is included in the housing allowance.
The housing allowance is ONLY for your primary residence, not any other vacation home, etc. The allowance is paid by church funds as a portion of the overall compensation of the minister. The housing allowance used cannot exceed the actual expenses incurred for the housing expenses. The amount paid toward the house payment cannot exceed the fair rental value of the home.
While the housing allowance is NOT taxable to income taxes, it is subject to self-employment taxe (social security & medicare) unless the minister has been approved for social security exemption (an approved Form 4361). The housing allowance is not reported on a W-2 Form (other than for informational purposes) nor on a Form 1099. The minister will report the allowance on Schedule SE and pay the appropriate self-employment tax.
Please consult your tax preparer for particular details that may apply to your personal situation.
Aubrey L. Jayroe is an Accredited Tax Advisor; Accredited Tax Preparer; Licensed to Practice before the Internal Revenue Service; Certified Tax Return Preparer
For 40 years, Jayroe & Company has been providing quality, personalized financial guidance to churches, local individuals and businesses. Jayroe & Company’s expertise ranges from basic tax management and recordkeeping services to more in-depth services such as reviews, financial statements, and financial planning.