Pastor Housing Allowance: What It Is and How to Use It Correctly
By Brandon Williams, VP of Marketing
What Is a Housing Allowance?
Housing allowance, sometimes called a housing exclusion, is one of the most valuable tax benefits available to pastors and ministers. It allows a designated portion of a pastor’s salary to be excluded from federal income tax when used for housing expenses.
Although it is often referred to as an “allowance,” the term can be misleading. In reality, it is not an extra payment but an exclusion of certain income from tax. Understanding how to properly set it up, calculate it, and report it is essential to receiving the full benefit.
Three Things Every Pastor Should Know About the Housing Allowance
1. How to Set Up a Housing Allowance
A housing allowance must be designated in advance by the church board. This means the decision and documentation must occur before the income is paid to the minister. If the allowance is not officially designated, the IRS does not recognize it.
Insider’s Tip: There is no IRS limit on how much a church can designate as a housing allowance. However, the amount a pastor can actually exclude from taxable income is subject to IRS calculation rules.
2. How to Calculate Your Housing Allowance
When determining how much can be excluded from federal income tax, pastors must use the lowest of three amounts:
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The amount actually spent on housing
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The amount officially designated as housing allowance by the church
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The fair rental value of the home (including furnishings, utilities, and related expenses)
It is the pastor’s responsibility to calculate these amounts each year, even if the church board approves the designation.
Eligible housing expenses include:
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Mortgage or rent payments
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Real estate taxes and property insurance
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Utilities (electricity, water, gas, internet, phone, garbage, etc.)
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Repairs, maintenance, and home improvements
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Furnishings, appliances, and cleaning supplies
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Landscaping, fencing, and related outdoor expenses
Because this calculation can be complex, many pastors use specialized tools such as the StartCHURCH Compensation Suite and/or Housing Allowance Service.
3. How to Report Your Housing Allowance
The IRS does not require a housing allowance to be reported on a minister’s W-2. However, many churches choose to list it in Box 14 of the W-2 because it provides practical benefits:
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Loan Applications: Lenders want to see total income when pastors apply for mortgages or car loans. Reporting the allowance can strengthen approval chances.
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Self-Employment Taxes: While the housing allowance is exempt from federal income tax, it is still subject to self-employment tax unless the pastor has opted out. Listing it on the W-2 simplifies reporting on Schedule SE (Form 1040).
Why the Housing Allowance Matters
For pastors, the housing allowance is one of the most powerful tools for reducing taxable income and maximizing take-home pay. But it must be properly designated, carefully calculated, and accurately reported.
How StartCHURCH Can Help
At StartCHURCH, we help pastors and ministry leaders set up and manage their housing allowance correctly so they can take full advantage of this tax benefit.
Call 770-638-3444 to learn more about how we can help you establish, calculate, and report your housing allowance with confidence.
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