13 Aug 2019

How a Housing Allowance Is NOT an Allowance

Bruce Wham

Ninja Turtles figurines—mostly variations of Michelangelo, like the one that could hide spare nunchucks and extra pizza in his openable plastic shell. That’s what I remember spending my allowance on as a kid. My parents would give me just enough weekly allowance so I could save up and go to Rose’s Department Store at the end of the month and pick out a new toy.

One of the biggest blessings an ordained minister can receive today is a housing allowance. And while the benefits of receiving housing allowance can evoke similar exuberance to the way I felt being paid $1.25 a week, it may surprise you to hear that the minister’s housing allowance functions nothing like a child’s weekly allowance.

Nearly everyone gets it wrong

Don’t feel bad if you haven’t been trained on the intricacies of nonprofit tax law; that’s what StartCHURCH is here to do! Nearly all ministers and pastors I speak with daily misunderstand the housing allowance. I often hear pastors tell me, “I don’t receive a salary, just a small housing allowance.” Then they go on to explain that they don't report this compensation on their taxes!  

Remember, all money a minister receives needs to be reported as income, whether it’s a love offering taken up at the end of a service, a stipend for guest speaking, or the surprise $20-handshake. In fact, any benefit rendered to a minister that has monetary value, such as paid-for lunches or the use of a church-owned vehicle, must be recorded as income! The IRS would even like to tax the benefit of someone mowing the pastor’s yard if that person owns a lawn care company!

As disheartening as that may initially sound, the benefit of having a housing allowance is that a minister’s board of directors can approve up to 100% of his or her salary (and benefits package, including all the above) under a non-taxable status on the pastor’s income taxes.

To clarify, the housing allowance is NOT money paid to a pastor in place or in addition to salary. Rather, it is a portion of the board-approved salary a minister is already receiving that is excluded from his or her taxable income. Correctly calculating the housing allowance itself is tricky, but the ministry MUST have two documents in place before this can even be written.

These prerequisites stump most ministries

Before setting up a housing allowance, a ministry MUST have the following for the minister in question:

  • Ordination certificate
  • Compensation agreement

In order to be eligible for a housing allowance, a minister must be ordained. It is best practice for the ministry or church that is paying the individual to also ordain them directly. Otherwise, it should be able to produce documentation that proves it recognizes the ordination the minister obtained elsewhere. This is true for both churches and ministries; many people are surprised when I tell them that their ministry can ordain people even though it is not a church! Likewise, many of the pastors I work with are surprised to hear that StartCHURCH can put the documentation together for them to be ordained under their ministry even though they are the founder and/or president of their board.

A nonprofit cannot simply pay people willy-nilly, but instead needs a contract indicating all salary and benefits for its employees. Any money a minister receives must first be approved by the board and must be considered “reasonable.”  

The best way to determine what might constitute a “reasonable” salary is to research comparable salaries of other ministers in the region doing similar work and having a similar set of credentials. Then, the board of directors must determine what is practical considering the overall budget of the church.

For example, it is reasonable that a pastor with 30 years of experience, a Ph.D., and a congregation of several thousand members be paid much more than a brand new pastor of a twenty-member church. However, the pastor’s salary of the smaller church might constitute a larger percentage of that church’s income than the salary of the mega-church pastor! That said, most of the ministers with whom I work are also eligible for a much higher salary than what they take.  

Once an official contract has been written up, the board of directors must vote to approve it. And if the minister is on the board, he or she must recuse himself or herself from that vote due to the obvious conflict of interest. Both the ordination certificate and compensation agreement should be recorded with a proper set of internally held board meeting minutes. StartCHURCH has a wealth of knowledge and experience in creating those minutes, ordination certificates, and compensation agreements. We would be happy to help you with all three of these.

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If you don’t eat it or wear it...

My clients are surprised to hear that there is a litany of items that can be calculated into their housing allowances as long as one doesn't eat it (food) or wear it (clothing). Beyond the rent or mortgage, the cost of the following expenses can be added into housing allowance:

  • utilities 
  • furnishings
  • toilet paper
  • draperies
  • picture frames
  • cleaning products
  • garden hose, etc.

A few years back, a pipe burst in my house, flooding the kitchen and causing damage worthy of an insurance claim. 

When we added up everything for a year, it’s amazing how high this number can be! However, that total must be compared to the fair market value of the minister’s home including utilities and furnishings. The lesser of the two yearly expenses is used to estimate the amount set aside for the coming year’s housing allowance. Again, the board must approve this number, having done due diligence to ensure accuracy to the best of their knowledge.

The housing allowance is not retroactive for the year and can only be calculated for the portion of the year that remains after the board approves it. For this reason, many ministry boards will set a meeting at the end of the year to approve all housing allowances for the upcoming year beginning in January.

It’s important to note that if the board approves an estimated housing allowance that is greater than the minister’s actual expenses turn out to be, the housing allowance must be amended before the minister completes his or her tax return. 

There are several worksheets available to help calculate your estimated housing expenses, but unless you have been trained beyond the depth of this blog, it might be prudent to get professional assistance coming up with your housing allowance. Again, StartCHURCH would be glad to answer any questions you may have regarding your specific situation.  

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So many benefits

Allow me to use myself as an example of how powerful the housing allowance can be.  I served on staff with a Metro-Atlanta ministry as a full-time evangelist for ten years. Because I have a family for whom to provide, I also worked part-time jobs on the side to make an extra $12,000. In 2016 I was approved by the board of my ministry for $29,000 housing allowance but was only paid $24,000 for the year. Thus, I showed no taxable income from my ministry salary. Without a housing allowance, I would have paid taxes on $36,000, but instead, I only paid taxes on $12,000 for that year.

But what if your income is greater than your housing allowance? Let’s look at another simple example.

In 2018, Minister Sheronda made $51,000 per year from her work with Abundant Grace Church of God In Christ and had no outside income. We helped her board approve her for a $41,000 per year housing allowance. A couple of months back during tax time, Sheronda was able to report all $51,000 so she can show a loan officer everything she makes and get financing on her car purchase coming up in August. However, she only showed $10,000 of taxable income for 2018. The result of this was two-fold:

First, the total amount of taxes taken from only ten grand was much less than the total amount of taxes that would have been taken from fifty-one grand. Secondly, Minister Sheronda moved from the 15% tax bracket down to the 10% tax bracket!  That means she paid a lower percentage of taxes on a significantly lower amount of her total income.

By the way, it would behoove you to have an expert in ministry tax law (like StartCHURCH) to help you come up with all the possible deductions for which you are eligible, including the housing allowance. Most CPAs just aren’t trained in the intricacies of church and ministry taxes.


Discover How to Maximize Your Housing Allowance Benefit

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Jesus said to be innocent as doves but as wise as serpents, and I consider it wise to take advantage of the tax benefits available to us even if you’re sacrificing for the Kingdom and are slightly underfunded like I was. 

It’s a joy for me to help people like you get the most out of their ministry pay, and I hope that you’ve gotten as excited about the housing allowance as I was about Ninja Turtles as a kid!

If you have questions about your housing allowance, or how you can take advantage of this incredible tax benefit, I encourage you to give us a call at 877-494-4655. Or click the button below to schedule a call. My fellow church planting specialists and I are ready to help you out in any way we can.

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Blessings,
Raul Rivera


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