Housing Allowance Policy
Background
Note: For this policy, the terms minister and pastor are interchangeable.
Ministers have a unique dual tax status. That means you’re taxed as a W-2 employee of the church for Federal and State, and you’re taxed as a self-employed person for Social Security and Medicare.
For tax purposes, you’re considered a minister if you are ordained, commissioned, or licensed.
The Housing Allowance is a benefit available to ministers as an offset to the additional SECA (Social Security and Medicare) tax, as wages paid as Housing are not subject to Federal and State tax. Under Section 107 of the Internal Revenue Tax Code, a portion of a minister’s compensation may be excluded from federal income tax when designated as a housing allowance.
Specifically:
- The rental value of a home furnished as part of compensation, or
- A housing allowance paid as part of compensation, may be excluded, provided the allowance is actually used to pay housing expenses and does not exceed the fair rental value of the home (furnished, plus utilities).
Key Points
- There is no cap on the percentage of compensation that can be designated as “Housing,” as long as regular wages cover all taxes and benefit deductions.
- The IRS requires the housing allowance to be designated prospectively. Retroactive designations are not allowed.
Housing Designation Process
Each qualified minister must complete an annual housing allowance worksheet to estimate housing expenses. The Church will not designate a housing allowance until this worksheet is submitted to HR.
Housing allowance designations are on-going until an updated request is submitted. It is recommended that ministers review and update their housing requests annually.
Housing Allowance Expense FormEmployee Responsibilities
- If your housing expenses are anticipated to change significantly during the year, notify HR to update your Housing Allowance. This can be done at any point during the year.
- Maintain personal records of housing expense receipts.
- Account for the accuracy of your designated housing allowance when filing taxes.
- Consult with a qualified tax professional for guidance, as HR can only provide general information.