Learn How Ministers Can Save Thousands on Taxes

Written by Laura Archambault on Mar 15, 2022 in Pastoral Helps

Hey, Pastor. How much is your time worth?

When I was first married, I tried couponing for months. I finally realized that I was spending 1-2 hours a week researching coupons, then driving all over town to save $5. Couponing is lucrative for some people, but $5 was not worth my time.

What about you? Is $2500 worth your time? Today, we’re going to talk about setting up a housing allowance. I ran a quick calculation pretending I was a minister with a 2-income household using this tax benefit for ministers, and it looks like my household would save about $2500 on federal taxes. I know that’d be worth my time!

So how does it work?

What is a Minister’s Housing Allowance?

The term “housing allowance” is not the same as an “allowance” you give your children. It’s actually the portion of your income that you are “allowed” to exclude from your income tax- and it’s a benefit specifically for ministers. So if you were picturing a housing stipend, it’d probably be better to picture a housing exemption: if you are a minister as defined in IRS Publication 517, the portion of your income used for housing is excluded from the gross income and is considered tax-free. 

For example, if:

  1. you set up a housing allowance ahead of time
  2. your employing church pays you $60,000 and
  3. $18,000 of this was spent on housing

Then you are allowed to exclude $18,000 from your gross income. You will only pay taxes on the remaining $42,000.

Important things you MUST know:

  1. You must properly set up the housing allowance before you get paid
  2. You must properly report your income including the housing allowance
  3. Unless you have filed for self-employment tax exemption, your full income ($60,000 in our example) is still taxable for self-employment tax purposes*.

How do you properly set up a Housing Allowance?

1. You must be an employee, not self-employed

This benefit is only for clergy who fit the IRS-defined description of ministers AND are defined and reported as employees of a congregation, church, or some other entity, such as a denomination. You can find all of these descriptions and explanations in IRS Publication 517.

Also, the housing allowance permits you to reduce your taxable gross income for federal income taxes, but the benefit does not apply to the social security and Medicare taxes. You must report your full income, including the housing allowance (or the value of any provided parsonage), as self-employed earnings for Social Security coverage*.

2. Your housing allowance must be pre-approved

The church or organization that employs you must approve your housing allowance before payment is made. No housing allowance designations approved after you receive your paycheck can be excluded from your taxable income. Whoever directly employs you, whether a congregation or national agency, must officially designate your housing allowance and document it in board meeting minutes, and in the employment contract.

3. You must properly calculate your expenses

There are multiple calculations to make when determining the allowable exclusion, but the allowable amount will be the LESSER of the following:

  • the estimated cost of maintaining your home;
  • the actual amount used to provide or rent a home; or
  • the fair market rental value of the home (including furnishings, utilities, garage, etc.).

Please note that you can only deduct the portion of your actual spending towards the home. The rest should be allocated to taxable wages.
Just because you have been approved for a certain amount doesn't mean you can take it all if you don't have the documentation to prove that it was all used.

Here's an example: If you were approved for $75,000 in housing allowance but only had documentation that the actual spending was $45,000, the other $30,000 does get allocated to taxable wages.

Your time is valuable

The time it takes you to set up your housing allowance is well worth it if you save $1,000 or more on your taxes.

But tax rules are not the easiest, and we understand that. That’s why we’re here- we’re passionate about making ministry easier. You’ve made great sacrifices and you deserve someone in your corner, making sure you get the best tax benefits available.

So if you want to take advantage of the housing allowance but don’t have time to set it up by yourself, give us a call today at (844) 857-6023. Let us do the heavy lifting so you can save $1,000 or more year after year.

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*You may have noticed that the housing allowance is an exemption for W2 ministers, and you may be wondering how the self-employment tax is relevant for W2 employees. IRS Publication 517 explains that there are 3 federal taxes: income tax, social security tax, and Medicare tax, and your same ministerial earnings can be treated as wages for one tax and self-employed income for another. Regarding Social Security coverage, it states, “If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE [self employment] tax, even if you perform these services as an employee of that church. …Even though all of your income from performing ministerial services is subject to self-employment tax for social security tax purposes, you may be an employee for income tax or retirement plan purposes in performing those same services. For income tax or retirement plan purposes, your income earned as an employee will be considered wages.”

Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Blessings,
Raul Rivera


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